Making Sense of Recent Financial Events

Great article that was published today from TD Economics,

Enjoy!

 There has been widespread talk of "green shoots" and considerable swings in financial markets with rallying equities, a strengthening Canadian dollar and significantly higher bond yields.

To make sense of this, we talked to Craig Alexander, Vice President of TD Economics who gave us the scoop.

 So Craig, what are these green shoots we keep hearing about?

"The term green shoots refers to the recent signs that suggest an economic recovery is on the horizon," says Craig. "To be clear, the economic data are still negative, as they continue to show a contraction with rising unemployment. However, the good news is that there is clear evidence that the rate of decline is slowing. This is important because it has a powerful psychological impact. Last fall and during the winter, people were worried about a repeat of the 1930s depression. The recent numbers show that this fear is unfounded. It will be a severe recession, but we had recessions in the early 70s, 80s and 90s. Bottom line, recessions inevitably end. It looks like 2010 will see a recovery take hold in Canada, the United States and around the world."

Financial markets have experienced wild swings in recent months, is this tied to the Green shoots?

"Absolutely. There has been a fundamental shift in financial market sentiment in recent months as the green shoots have materialized. Fear has subsided, which has fuelled a rally in equities. Some of the money moving into stocks have come from the sale of bonds, which has lifted bond yields. There has also been a shift out of U.S. dollars and that has lifted the Canadian dollar."

What about the state of consumer credit. How would you characterize the way Canadian banks are currently approaching lending to customers?

"Credit is flowing in Canada at a strong pace. Household credit from Canadian chartered banks in May was up 9.9% year-over-year, and overall all categories of consumer credit have been growing. We believe that there will be a shift to greater thrift in the coming years, with a higher personal savings rate, and this suggests that when the recovery comes, the rate of growth in consumer borrowing will be slower than in the early part of this decade. Regardless, the main message is that the Canadian banks are clearly open for business"

 Check out the TD Economics Quarterly Forecast for more information.