FINANCIAL MARKETS MONTHLY : Waiting for You Know Who pot

FINANCIAL MARKETS MONTHLY
December 7, 2012
Waiting for You Know Who
Everyone is waiting for the US political actors to produce a credible and economically viable
fiscal policy compromise. Financial markets are trying to keep a stiff upper lip anticipating that
policymakers will not allow the US economy to slump back into recession. Economic data sug-
gest that businesses are not as confident about the outcome with investment spending slumping
in the third quarter of 2012 and starting the fourth quarter on shaky footing. To be sure, the ef-
fect of Hurricane Sandy also weighed on activity with a rebound likely in November and De-
cember. This pattern was evident in the US auto sales reports with a drop in late October result-
ing in monthly sales falling below September’s rate only to be followed by a 9% surge in No-
vember sales propping them up to the fastest pace since before the recession. The nervousness
about the US fiscal cliff was also responsible for some of the pullback in Canada with busi-

nesses reducing investment and exports dropping sharply in the third quarter. The persistently
weak data reported for the Euro area economies and the UK are setting these economies on
track to contract in the final quarter of the year thereby adding to the nervous tone.
US economy to ease out of 2012
US economic growth was revised higher for the third quarter of 2012 with the initial print of
2.0% boosted to 2.7% in the latest update. The biggest contributors to this increase were a larger
building of inventories and faster export growth. Conversely, the update showed a slower in-
crease in consumer spending and weaker business investment. Given that the upgrade to the
Inside

Overview
……………………………… page 1

Interest rate outlook
……………………………… page 5

Economic outlook
……………………………… page 6

Currency outlook
……………………………… page 7

Central bank watch
……………………………… page 8
What’s in store for 2013-
2014
……………………………… page 9

Dawn Desjardins
Assistant Chief Economist
416-974-6919


David Onyett-Jeffries, CFA
Economist
416-974-6525

Central bank near-term bias



Bias three-months out
The BoC left the overnight rate at 1.00% and maintained its
tightening bias in December. We expect the Bank to maintain
the current level of policy accommodation to insulate the econ-
omy from downside risks coming from abroad.
We expect that the Fed will maintain its current policy stance

with the fed funds target at 0% to 0.25% and purchases of
Treasury bonds and MBS continuing.
Skepticism about the effectiveness of additional asset pur-
chases and an unwillingness to reduce rates further means that
the Funding for Lending Scheme has become the MPC’s pre-
ferred policy tool. No further changes to policy are expected.
Recent political developments and earlier actions by the ECB
have helped diminish the downside risks to the outlook. We
expect that the ECB will maintain its current policy stance and
policy rates will remain on hold for the foreseeable future.
The RBA cut the OCR by 25bp to 3.00% in December. We
expect another 25bp cut in Q2/13, with the OCR then remain-

ing on hold at 2.75% for the rest of 2013.
The December RBNZ meeting resulted in no changes to pol-
icy, and our base case remains that the current 2.50% Official
Cash Rate will be maintained during 2013.


2



 Financial market volatility
spikes as investors worry

about the global recovery.
 Data reports have erred
on the weak side.
 However there were many
one-off factors that cur-
tailed activity.
 As these factors ease,
growth will accelerate.
 The US recession was
deeper than was previously
reported and GDP output
stands 0.4 pp below its pre-

recession peak.


Highlights
third-quarter 2012 growth rate was largely accounted for by the greater build in invento-
ries while domestic demand slowed, it is likely that inventories will be run down in the
fourth quarter. When the effect of Hurricane Sandy and the uncertainty about the fiscal
cliff are factored in, the US economy is likely to end 2012 growing at a sub-par 1.4%
annualized pace.
2013: a slow start.
We assume that US policymakers will be able to reach a compromise on fiscal policy
that limits the direct hit to the economy in 2013 to just over 1 percentage point, which is

much less than the potential damage that the current legislation implies. Having said
that, our forecast still builds in fiscal restraint with the biggest drag likely to occur early
in 2013 when payroll taxes and income taxes on high earners increase. Spending cuts
are likely to be spread out during 2013. The scenario suggests that consumer spending
will remain modest early next year due to the reduction in disposable income while
business investment picks up its pace given the reduced likelihood that the US economy
is heading back into recession. Our forecast is that the US economy will grow at a 2.0%
pace in the first quarter of 2013.
followed by sustained improvement
Aside from all the fears about the fiscal cliff, economic fundamentals are supportive for
the US economy to shift into a higher gear. Interest rates are low, and the Fed has clearly
stated its intention to provide ample stimulus to the economy for the foreseeable future.

Corporate balance sheets are healthy, households have made significant headway in put-
ting their financial houses in order, and the housing market has emerged from its six-year
slump. Senior loan officers at financial institutions, in a recent survey by the Federal Re-
serve, indicated that on balance lending conditions on loans to small and large companies
eased again. Demand for loans, outside of commercial real estate, conversely fell as corpo-
rations watched to see how the fiscal outlook would play out. Going forward, the in-
creased availability of funds and low borrowing costs, in our view, will provide a solid
boost to investment. Additionally, as the weight of uncertainty lifts, we expect that hiring
will accelerate therein providing a much-needed boost to consumption. Our forecast for
the US economy is for growth to accelerate steadily in 2013 with this momentum carrying
on in 2014. We project real GDP growth of 2.3% in 2013 and 3.1% in 2014.
Fed remains firmly committed to ‘low for long’

The US Federal Reserve continues to expand both its balance sheet and the set of tools
it is willing to use to foster stronger economic growth and a reduction in the unemploy-
ment rate. The combination of a commitment to keeping the fed funds target rate
‘exceptionally’ low and its open-ended asset purchase plan have contributed to main-
taining accommodative financial conditions. In the near term, financial markets will
focus on fiscal, rather than monetary, policy. Should the worst case scenario play out,
the Fed would likely become even more aggressive in pushing interest rates lower. That
being said, the more likely scenario of a benign fiscal policy outcome means that the
Fed will maintain its current policy stance at least until late 2013 when a stronger
growth backdrop is likely to see the Fed stop purchases of new securities although con-
tinuing to reinvest the proceeds of maturing securities. This will signal that the Fed is
looking to temper its ultra-easy policy stance.

The Fed’s commitment to the low for long interest rate policy will keep short-term rates
locked in a range in 2013. Longer-term rates will also remain historically low; however,
as the pace of US Treasury purchases slows in the second half of 2013 and the pace of
economic activity accelerates, 10-year and long-bond rates are forecasted to drift higher.



Markets waiting for US
government policymakers to
reach a deal that does not
derail the economy.
 Our forecast assumes that

the fiscal cliff is avoided and
the hit to the economy is
modest in 2013.
 Once the threat of a re-
turn to recession is extin-
guished, economic growth
will accelerate and be sup-
ported by easy financial con-
ditions.
 The Fed is committed to
keeping monetary policy suf-
ficiently easy to promote a

strengthening in economic
activity and drive the unem-
ployment rate lower.




3

 Canada’s economy put in
a disappointing performance
in the third quarter of 2012
with exports sagging and
businesses pulling back.
 Temporary disruptions in
some industries weighed on
exports and contributed to
the weakening.
 The end of these tempo-
rary shutdowns is teeing the
economy up for a firmer

fourth quarter.
 2013 is likely to see Can-
ada’s economy regain its
stride.
 The Bank of Canada has
maintained a 1.0% policy
rate for more than two years
and will keep policy accom-
modative until there is a
clearer trajectory for the
global economy.
Highlights

Canada: an unsatisfying third quarter
The economy grew at a paltry 0.6% annualized pace in the third quarter of 2012 as busi-
nesses pulled back and exports slumped. Some of the weakness was due to disruptions
in energy production that made its way into reduced exports. Additionally, the pall on
the US economy from the fiscal cliff reduced demand for Canadian exports while at the
same time led Canadian companies to stand back from investing lest the US economy
slide back into recession. Canadian consumer spending rose at a solid clip in the quarter
thereby preventing a more dramatic weakening with the consumption of services recov-
ering after a soft second quarter. Inventory levels rose to buttress the third quarter
growth rate at the expense of the fourth quarter when these stocks are likely to be
drawn down.
….and a soft hand off to the fourth quarter

The monthly GDP reports underlying the quarter were disappointing with activity fal-
ling in both August and September. In August, mining and energy sector output dropped
by 0.9% that reflected maintenance shutdowns. While these sectors saw output fall at a
slower pace in September, our expectation is that greater strength will emerge in the
fourth quarter of 2012 by boosting both output in the sector and reversing the drag on
growth from exports. The unchanged GDP in September set the fourth quarter on a
slower trajectory than we previously anticipated, yet an expected rebound in exports and
modestly faster business investment still point to the economy expanding at a 2.2% an-
nualized pace.
2013 prospects brighter
In 2013, Canada’s economy is forecasted to return to a firmer growth path with business
investment and exports getting a lift as the uncertainties associated with the US fiscal

cliff dissipate. Domestic financial conditions are supportive for business investment
while the persistent low interest rate environment will limit the correction in the housing
market. Consumer spending is also likely to remain solid given the healthy labour
market and the prospect of wage gains accelerating. Government restraint will be
limited compared to most other countries. After experiencing a volatile and highly
uncertain 2012, we expect Canada’s economy to grow by 2.4% in 2013 and 2.8% in
2014. This forecast implies that the output gap will be eliminated in early 2014.
1% and holding until the second half of 2013
The Bank of Canada left the overnight rate at 1.00% in early December, which is where
it has been since September 2010. The forward-looking guidance from the Bank
remained intact with a gradual withdrawal of stimulus still in the cards as the slack in
the economy is absorbed. The statement acknowledged that Canada’s near-term

economic momentum is slower than expected and that the global outlook is “vulnerable
to major shocks from US or Europe”. The Bank’s assessment that inflation will return
to the 2% target over the next 12 months, however, implies that policymakers view the
recent slowing in Canadian growth as a short-term hiccup. As such, we expect the Bank
to be in position to raise the overnight rate in the third quarter of 2013 and maintain a
gradual pace of reducing stimulus. We look for the policy rate to stand at 1.5% at the
end of 2013 and 2.0% at the end of the 2014. Longer-term interest rates will take their
cue from the rise in the domestic policy rate as well as remaining strongly correlated to
the increase in US Treasury yields.

4

 Recent data point to
the recession in the euro
area extending at least
through year-end 2012.
RBC trimmed growth
forecasts for 2012 and
2013.
 Near-term growth has
been revised lower in
the UK, but questions

about the efficacy of
asset purchases mean
that policy will likely
remain on hold.
 Below-trend growth in
Australia supports recent
decisions to cut the
OCR, and we expect a
further 25 basis point
cut to come in the sec-
ond quarter of 2013.
Highlights

The rumours are true: euro area officially in a recession
The release of the third-quarter 2012 national accounts for the aggregated euro area made it offi-
cial that the region fell back into a technical recession because real GDP declined by a non-
annualized 0.1% after the 0.2% contraction recorded in the second quarter. Moreover, recent
indications are that the downward trend in activity evident thus far in 2012 may be intensifying in
the current quarter, with the November PMI data suggesting that the recession is likely to con-
tinue to at least year-end 2012. We lowered our fourth-quarter growth forecast to a non-
annualized -0.2% (from a flat reading previously), thereby resulting in real GDP for the 2012 as a
whole declining by 0.4% to mark the first annual contraction since 2009. Our forecast for growth
in 2013 (revised down to a mere 0.1% from 0.4% previously) is contingent on conditions stabi-
lizing in the first quarter of 2013; should a stabilization not materialize, it would not likely take
much in the way of downside economic news to cause growth in the euro area to turn negative

again in 2013. Recent political developments have combined with the earlier actions of the Euro-
pean Central Bank (ECB) to help diminish the downside risks to the outlook. Without material
deterioration to the outlook, we expect that the ECB will maintain its current policy stance and
policy rates will remain on hold for the foreseeable future.
UK outlook dims as Olympics become distant memory
After receiving an Olympic-sized boost in the summer that helped pick it up and out of recession
in the third quarter of 2012, the UK is now left to face a less jubilant economic reality. Early indi-
cators of activity in the current quarter point to underlying growth that remains sluggish at best.
Taking into account some payback from the one-off factors that elevated growth in the previous
quarter, we now expect real GDP to contract by a non-annualized 0.1% in the fourth quarter
(downwardly revised from 0.3%), while growth in the first quarter of 2013 is now expected to be
modest 0.2% (compared to 0.3% previously). The Bank of England’s Monetary Policy Commit-

tee (MPC) likewise revised downward its near-term outlook in the November Inflation Report
while also noting that the risks to the outlook have shifted materially to the downside. The MPC
also revised upward its forecast for inflation in the near-term, although it remained broadly un-
changed in the policy-relevant medium term. The minutes from the November MPC meeting
again showed that members questioned the efficacy of further asset purchases in boosting domes-
tic demand, suggesting that the inflationary risks associated with more quantitative easing are
currently viewed as outweighing the economic benefits. Given this scepticism and that the MPC
is “unlikely to wish to reduce Bank Rate in the foreseeable future,” it appears as if the Funding
for Lending Scheme (FLS) has become the policy tool of choice. We now anticipate that the
MPC will sit on the sidelines and watch to see if the FLS has a significant effect on demand;
early indications are supportive of it helping to improve overall credit conditions.
RBA to cut deeper as growth slows

The surprise decision by the Reserve Bank of Australia (RBA) to leave interest rates unchanged in
November ended up being just a brief pause in the policy easing cycle as the central bank cut the
Official Cash Rate (OCR) by 25 basis points to 3.00% in December. The case for further policy
accommodation has grown on indications that the economy shifted to a below-trend pace of growth
in the second half of 2012 as the void left by slowing business investment from the natural resource
sector is not being adequately filled by other areas of the economy. The third-quarter 2012 national
accounts data showed that overall GDP growth in the quarter moderated to its lowest rate since
natural disasters wreaked havoc on the country in the first quarter of 2011. Our expectation of sof-
tening labour markets and slowing income growth will likely limit residential investment and con-
sumption from picking up the slack after capital expenditure peaks in 2013, meaning that below-
trend growth will likely continue. While the RBA hinted that it may move to the sidelines and as-
sess the effect of its cumulative 175 basis points worth of cuts to date, we believe that further ac-

commodation is warranted. We expect that the OCR will be cut further to 2.75% in the second
quarter of 2013 and remain at this level for the remainder of 2013.


5


Interest rate outlook
%, end of period
Central bank policy rate
%, end of period
Source: Bloomberg, Reuters, RBC Economics Research

* Two-year/10-year spread in basis points **New Zealand’s yield curve: 10-year vs. three-year

Source: Reuters, RBC Economics Research
Current Last
Eurozone Refi rate 0.75 1.00 Jul. 5, 2012
Australia Cash rate 3.00 3.25 Dec. 5, 2012
New Zealand Cash rate
2.50 3.00 Mar. 10, 2011
Current Last
United States Fed funds 0.0-0.25 1.00 Dec. 16, 2008
Canada Overnight rate 1.00 0.75 Sep. 8, 2010
United Kingdom Bank rate 0.50 1.00 Mar. 5, 2009

11Q3 11Q4 12Q1 12Q2 12Q3 12Q4 13Q1 13Q2 13Q3 13Q4 14Q1 14Q2
Canada
Overnight 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.25 1.50 1.50 1.75
Three-month 0.80 1.10 0.92 0.88 0.90 1.05 1.05 1.10 1.25 1.50 1.55 1.80
Two-year 0.88 1.00 1.20 1.03 1.15 1.05 1.10 1.40 1.65 1.90 2.10 2.25
Five-year 1.39 1.50 1.56 1.25 1.35 1.30 1.45 1.75 1.95 2.15 2.40 2.55
10-year 2.15 2.30 2.11 1.74 1.75 1.75 1.85 2.15 2.35 2.45 2.60 2.75
30-year 2.77 3.10 2.64 2.33 2.40 2.40 2.45 2.60 2.75 2.95 3.05 3.20
United States
Fed funds 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13
Three-month 0.02 0.05 0.07 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05
Two-year 0.25 0.30 0.34 0.25 0.25 0.25 0.25 0.25 0.35 0.45 0.65 0.85

Five-year 0.96 1.10 1.04 0.70 0.72 0.70 0.85 0.90 1.05 1.20 1.40 1.50
10-year 1.92 2.15 2.20 1.60 1.65 1.70 1.95 2.10 2.25 2.40 2.55 2.65
30-year 2.92 3.20 3.32 2.70 2.80 2.90 3.25 3.45 3.60 3.85 3.95 4.00
United Kingdom
Bank rate 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50
Two-year 0.60 0.70 0.43 0.40 0.20 0.20 0.20 0.20 0.30 0.30 0.30 0.30
10-year 2.44 2.45 2.00 1.80 1.70 1.70 1.75 1.80 2.00 2.00 2.00 2.25
Eurozone
Refi rate 1.50 1.00 1.00 1.00 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75
Two-year 0.66 0.65 0.09 0.10 0.00 0.00 0.10 0.15 0.20 0.25 0.30 0.30
10-year 1.90 2.20 1.61 1.50 1.50 1.50 1.60 1.70 1.85 2.00 2.00 2.10
Australia

Cash target rate 4.75 4.25 4.25 3.50 3.50 3.00 3.00 2.75 2.75 2.75 2.75 2.75
Two-year 3.63 3.15 3.49 2.46 2.49 2.75 2.60 2.60 2.70 2.80 2.90 3.00
10-year 4.22 4.05 4.10 3.04 2.94 3.00 3.25 3.30 3.45 3.60 3.75 3.90
New Zealand
Cash target rate 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.75 3.00
Three-year 2.88 2.85 3.11 2.37 2.55 2.60 2.70 2.70 2.80 2.90 3.00 3.20
10-year 4.39 4.25 4.17 3.40 3.57 3.80 4.00 4.10 4.25 4.50 4.70 4.80
Yield curve
Canada 127 130 91 71 60 70 75 75 70 55 50 50
United States 167 185 186 135 140 145 170 185 190 195 190 180
United Kingdom 184 175 157 140 150 150 155 160 170 170 170 195
Eurozone 124 155 152 140 150 150 150 155 165 175 170 180

Australia 599061584525657075808590
New Zealand 151 140 106 103 102 120 130 140 145 160 170 160
Actuals Forecast


6

Economic outlook
Inflation tracking
Source: Statistics Canada, Bureau of Labor Statistics, Bank of England, European Central Bank, Reserve Bank of Australia, Reserve Bank of New
Zealand, RBC Economics Research
Source: Statistics Canada, US Bureau of Labor Statistics, Bank of England, European Central Bank, Reserve Bank of Australia, Reserve Bank of New

Zealand, RBC Economics Research
1 Seasonally adjusted measurement.
2
Personal consumption expenditures less food and energy price indices.
*Seasonally adjusted annualized rates

Inflation Watch
Current period Three-month trend Six-month trend
Canada Bank of Canada core CPI
1
Oct. 0.1 1.2 1.1 1.2
United States Core PCE

2
Oct. 0.1 1.6 0.9 1.5
United Kingdom All-items CPI Oct. 0.6 2.6 3.5 2.1
Eurozone All-items CPI Oct. 0.1 2.5 3.7 2.1
Australia Trimmed mean Q3 0.7 2.4 N/A N/A
New Zealand CPI Q3 0.3 0.8 N/A N/A
Measure
Period ago Year ago
Growth outlook
% change, quarter-over-quarter in real GDP
11Q3 11Q4 12Q1 12Q2 12Q3 12Q
4

13Q1 13Q2 13Q3 13Q4 14Q1 14Q2 2011A 2012
F
2013
F
2014F
Canada* 5.8 2.1 1.7 1.7 0.6 2.2 2.4 2.7 3.4 3.2 2.9 2.2 2.6 2.0 2.4 2.8
United States* 1.3 4.1 2.0 1.3 2.7 1.4 2.0 2.7 3.0 3.3 3.0 3.0 1.8 2.2 2.3 3.1
United Kingdom 0.5 -0.4 -0.3 -0.4 1.0 -0.1 0.2 0.4 0.5 0.5 0.5 0.5 0.9 -0.1 1.3 2.1
Eurozone 0.1 -0.3 0.0 -0.2 -0.1 -0.2 0.0 0.2 0.3 0.3 0.3 0.3 1.5 -0.4 0.1 1.0
Australia 1.1 0.5 1.3 0.6 0.5 0.5 0.6 0.7 0.9 0.8 0.8 0.7 2.4 3.6 2.5 3.0
New Zealand 0.4 0.4 1.0 0.6 0.5 0.8 0.8 0.8 0.7 0.7 0.7 0.6 1.2 2.6 3.0 2.7
Inflation outlook

% change, year-over-year
11Q3 11Q4 12Q1 12Q2 12Q3 12Q
4
13Q1 13Q2 13Q3 13Q4 14Q1 14Q2 2011A 2012F 2013F 2014F
Canada 3.0 2.7 2.4 1.6 1.2 1.2 1.2 1.5 1.9 1.9 1.9 1.9 2.9 1.6 1.7 2.0
United States 3.8 3.3 2.8 1.9 1.7 1.9 1.4 1.7 1.7 1.8 1.9 1.9 3.2 2.0 1.7 1.9
United Kingdom 4.7 4.7 3.5 2.8 2.4 2.6 2.3 2.5 2.5 2.3 2.3 2.3 4.5 2.8 2.4 2.3
Eurozone 2.7 2.9 2.7 2.5 2.5 2.4 2.0 2.0 1.9 1.9 1.8 1.8 2.7 2.5 2.0 1.7
Australia 3.5 3.1 1.6 1.2 2.0 2.7 3.4 3.6 2.9 2.9 2.8 2.8 3.3 1.9 3.2 2.9
New Zealand 4.6 1.8 1.6 1.0 0.8 1.3 1.2 1.4 1.7 1.9 1.9 1.8 4.0 1.2 1.5 1.8

7

Currency outlook
RBC Economics outlook compared to the market
Source: Bloomberg, RBC Economics Research
Level, end of period
Rates are expressed in currency units per US dollar and currency units per Canadian dollar, except the euro, UK pound, Australian dollar, and New
Zealand dollar, which are expressed in US dollars per currency unit and Canadian dollars per currency unit.

The following charts track historical exchange rates plus the forward rate (dashed line) compared to the RBC Economics forecast
(dotted line) out one year. The cone for the forecast period frames the forward rate with confidence bounds using implied option
volatilities as of the date of publication.

11Q1 11Q2 11Q3 11Q4 12Q1 12Q2 12Q3 12Q4 13Q1 13Q2 13Q3 13Q4
Canadian dollar 0.97 0.96 1.05 1.02 1.00 1.02 0.98 0.99 0.98 0.96 0.95 0.94
Euro 1.42 1.45 1.34 1.30 1.33 1.27 1.29 1.32 1.28 1.25 1.23 1.22
U.K. poun
d
ster
l
ing1.601.611.561.551.601.571.621.651.621.601.601.63
New Zea
l
an

d

d
o
ll
ar 0.76 0.83 0.76 0.78 0.82 0.80 0.83 0.82 0.81 0.79 0.77 0.77
Japanese yen 83.1 80.6 77.0 76.9 82.9 79.8 77.9 77.0 75.0 72.0 71.0 70.0
C
h
inese renmin
b
i 6.556.466.386.306.296.366.296.306.256.206.156.15

Austra
l
ian
d
o
ll
ar 1.03 1.07 0.97 1.02 1.03 1.02 1.04 1.06 1.04 1.02 1.00 1.00
Mexican peso 11.9 11.7 13.9 14.0 12.8 13.4 12.9 12.8 12.8 12.7 12.5 12.3
Canadian dollar cross-rates
11Q1 11Q2 11Q3
11Q4
12Q1 12Q2 12Q3 12Q4 13Q1 13Q2

13Q3 13Q4
EUR/CAD 1.371.401.411.321.331.291.261.311.251.201.171.15
GBP/CAD 1.561.551.641.591.601.601.591.631.591.541.521.53
NZD/CAD 0.740.800.800.790.820.810.820.810.790.760.730.72
CAD/JPY 85.6 83.6 73.3 75.3 83.0 78.5 79.2 77.8 76.5 75.0 74.7 74.5
AUD/CAD 1.001.031.011.041.031.041.021.051.020.980.950.94
Forecast
Actuals
Canadian dollar
0.80
0.90
1.00

1.10
1.20
Nov-11 May-12 Nov-12 May-13
Euro
1.00
1.10
1.20
1.30
1.40
1.50
1.60
1.70

Nov-11 May-12 Nov-12 May-13
Japanese yen
66
76
86
96
Nov-11 May-12 Nov-12 May-13
U.K. pound
1.20
1.40
1.60
1.80

2.00
Nov-11 May-12 Nov-12 May-13


8

Central bank watch
Bank of Canada
Federal Reserve
European Central Bank
Bank of England
Australia and New Zealand

• Canadian real GDP growth slowed to an an-
nualized 0.6% in Q3/12 from 1.7% in Q2/12 as
weakness in exports and business investment
weighed on economic output.
• We expect the BoC to be in position to raise
rates in Q3/13 and maintain a gradual pace of
reducing stimulus, with the overnight rate ending
2014 at 2.00%.
• US Q3/12 real GDP growth was revised up-
ward to an annualized 2.7% from 2.0% reflecting
higher inventories and stronger exports tempered by
weaker spending by consumers and businesses.

• The Fed is committed to keeping monetary
policy highly accommodative to support a strength-
ening in growth and drive the unemployment rate
lower.
• Early indicators of activity in the current
quarter point to underlying growth that remains
sluggish at best, and we now expect real GDP to
contract by 0.1% on a non-annualized in Q4/12.
• The MPC is unlikely to extend its asset pur-
chase target beyond the current £375 billion,
while rates will remain unchanged over the fore-
cast horizon.

• The RBA cut policy rates by 25bp in Decem-
ber, and we expect a further 25bp cut to come in
Q2/13, with the OCR holding at 2.75% until late
2014.
• The RBNZ left policy unchanged at its De-
cember meeting, and we continue to expect that
the OCR will remain at its current 2.50% level
through 2013.
• The November PMI data suggest that the
recession in the euro area is likely to continue
through to at least year-end 2012.
• In the absence of a material deterioration to

the outlook, we expect that the ECB will maintain
its current policy stance and that the policy rate
will remain on hold for the foreseeable future.
-10
-8
-6
-4
-2
2
4
6
8

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Quarter-over-quarter annualized % change
Canadian real GDP growth
Forecasted values:
Source: S tatistics Canada, RBC Economics Research
-10
-8
-6
-4
-2
2
4

6
8
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Quarter-ov er-quarter annualized % change
U.S. real GDP growth
Source: Bureau of Economics Analysis, RBC Economics Research
Forecasted values:
-3.0
-2.5
-2.0
-1.5
-1.0

-0.5
0.0
0.5
1.0
1.5
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
% change, quarter-over-quarter
Eurozone GDP
Source: Eurostat, RBC Economics Research
Forecasted values:
-2.5
-2.0

-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
% change, quarter-over-quarter
U.K. real GDP growth
Source: Central Statis tical Office, RBC Economics Research
0

1
2
3
4
5
6
7
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
BoC overnight rate Fed funds rate
Source: Bank of Canada, Federal Reserve Board, RBC Economics Research
%
Forecast

Canadian and U.S. central bank policy rates
0
1
2
3
4
5
6
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
U.S. core CPI inflation
Source: Bureau of Labor Statistics, RBC Economics Research
% change, year-over-year

Forecast
0
1
2
3
4
5
6
7
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: Bank of England, RBC Economics Research
%

Forecast
U.K. policy rate
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Australia New Zealand
% change, quarter-ov er-quarter
Australia and New Zealand GDP growth
Source: Australian Bureau of Statistics, Statistics New Zealand, RBC Economics Research
Forecast
0
1
2
3
4
5

6
7
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Australia New Zealand
% change, year-ov er-year
Australia and New Zealand inflation
Source: Australian Bureau of Statistics, Statistics New Zealand, RBC Economics Research
Forecast
0
1
2
3

4
5
6
7
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: ECB, RBC Economics Research
%
Forecast
ECB refi rate


9

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®Registered trademark of Royal Bank of Canada.
©Royal Bank of Canada.
What’s in store for 2013-2014
As global uncertainties fade, economic growth will accelerate. Spare capacity created during the economic downturn will cap
the upside on inflation.
Monetary policy will remain stimulative, even taking into ac-
count modest rates increases in some countries.

Term yields will drift higher although are likely to remain below
historical norms.
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0

Canada U.S. UK Eurozone Australia New Zealand
2011 2012 2013 2014
year-over-year, % change
Real GDP Growth
Source: International Monetary Fund, RBC Economics Research
1
2
3
4
5
Canada U.S. UK Eurozone Australia New Zealand
2011 2012F 2013F 2014F

year-over-year, % change
CPI Inflations
Source: Statistics Canada, Bureau of Labor Statistics, Office for National Statistics, Statistical Office of the European
Communities, Australian Bureau of Statistics, Statistics New Zealand, RBC Economics Research
1
2
3
4
5
6
7
8

9
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Canada
U.S.
UK
Eurozone
Australia
New Zealand
%
Central Bank Policy Rates: International
Forecast
Source: Bank of England, European Central Bank, Federal Reserve, Bank of Canada, Reserve Bank of Australia, Reserve

Bank of New Zealand, RBC Economics Research
1
2
3
4
5
6
7
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Canada
U.S.
UK

Eurozone
Australia
New Zealand
%
10 year bond yields
Forecast
Source: Bank of Canada , U.S. Treasury, Financial Times, Reuters, RBC Economics Research