Its Complicated By Avery Shenfeld, Chief Economist & Managing - - PowerPoint PPT Presentation

It’s Complicated

By Avery Shenfeld, Chief Economist & Managing Director January 2015

Title Major Economies: Worlds Apart

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5 yrs before recession, avg 2011A 2012A 2013A 2014E 2015E 2016E World* 4.8 4.1 3.4 3.3 3.3 3.4 3.6 US 2.9 1.6 2.3 2.2 2.4 3.2 2.4 Canada 2.6 3.0 1.9 2.0 2.4 1.9 2.5 Euroland 2.2 1.7

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0.8 1.4 1.9 UK 3.3 1.6 0.7 1.7 2.6 2.2 2.4 Japan 1.8

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1.5 1.5 0.3 1.0 1.3 Brazil 4.0 2.7 1.0 2.5 0.6

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2.8 Russia 7.5 4.3 3.4 1.3 0.2

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0.5 India 8.9 6.6 4.7 5.0 5.6 5.6 6.1 China 11.6 9.3 7.7 7.7 7.4 6.8 6.6 * at Purchasing Power Parity

Title The Ten Plagues

Source; OECD, CIBC

Ebola, Greek debt, Eurozone deflation, China transition, Ukraine, Russian recession, ISIS, Venezuela, Boko Haram /Nigeria, Japan debt/stagnation

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Title Global Oil Production: Price Weakness Inconsistent with Getting Needed Supply in LR

0.0 0.5 1.0 1.5 2.0 2.5 US Iraq Brazil Canada Projected Rise in Oil Production, 2013-2020, Mn bbl/day

Source: IEA, CIBC

10 20 30 40 50 60 70 80 90 100 Cdn Mined, No Upgrader Brazil Offshore Permian (Texas) Cdn SAGD Bakken (Typical) Breakeven Prices, US$/bbl

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Title

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Cheaper Oil – Broadly Positive

0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 Eurozone US China* % impact on GDP

• ver 2 yrs of a 50% price decline

*IMF estimate

Source: Bloomberg, IMF, CIBC

Title Effective Exchange Rate Has Fallen (L); A Boost to Eurozone GDP in 2015 (R)

0.0 0.5 1.0 1.5 Low Mid- Point High Impact of Exchange Rate Depreciation on 2015 GDP (%-pts)

Source: Eurostat, Bloomberg, CIBC

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86 88 90 92 94 96 98 100 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15

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Effective Exchange Rate Index

Title

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Exports Still Play Small Role in US Economy

Source: World Bank, CIBC

5 10 15 20 25 30 1980 1990 2000 2012 United States OECD Average % of Exports in GDP

Title

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Americans to Spend Less at Pumps (L); Frees Up Income (R)

Source: BEA, CIBC

0.0% 0.1% 0.2% 0.3% 0.4% 0.5% 0.6% 0.7% 2014 2015 2016 Savings at Gasoline Station (vs 2013, % disp. income)

2.0% 2.5% 3.0% 3.5% 4.0% 4.5% Jan-05 Dec-06 Nov-08 Oct-10 Sep-12 Aug-14 Jul-16

Forecast

Proportion of Household Disposable Income Spent on Gasoline (%)

Title

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Still Plenty of Pent-Up Demand From US Consumers

Source: BEA, CIBC

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Funiture & Elect/Appliance General Merchandise Clothing & Accessory Retail Sales Miscellaneous Health & Personal Care Sporting Goods, Hobby, etc Food & Beverage Nonstore Retail Sales vs pre-Recession Trend (% Difference)

Title

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No Longer Overbuilt – Household Formation Has Caught Up to Units Available

Source: US Census Bureau, CIBC

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500 1000 1500 2000 2500 3000 3500 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Cumulative Over/Under Building vs HH Formation (000)

Over-built Under-building

Title

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Mortgage Lending Conditions Improving Again (L); Huge Pent-Up Demand as Kids Move Out (R)

Source: BLS, CIBC

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10 20 2009 Q4 2010 Q3 2011 Q2 2012 Q1 2012 Q4 2013 Q3 2014 Q2

Lending Conditions For Prime Mortgages (% Balance)

Looser/ Improving Tighter/ Deteriorating 500 1000 1500 2000 2500

Low Unchanged Medium High

HH Formation March 2014 vs March 2013 = 491K Average Household Formation in Next 10 Years

Title Job Market: Nearing Zone for > 3% Wage Gains

5 7 9 11 13 15 17 Jan-85 Jul-89 Jan-94 Jul-98 Jan-03 Jul-07 Jan-12 Jul-16 1 2 3 4

Broad Unemployment* (% Workforce, L) Average Hourly Earnings (% Yr/Yr, R) Fcst % of workforce % Yr/Yr

* Unemployed + voluntary part-time

Title

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Slower GDP Trend Lowers Real Neutral Rate (L); Neither the FOMC nor Market Have it Right (R)

Source: OECD Working Paper #1081, Nov 2013, CIBC

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0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 1.0 2.0 3.0 4.0 US Potential GDP Growth (IMF estimates) Neutral Inflation-Adjusted Policy Rate, 1981-2013 R-Squared =0.6 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 2015 2016 2017 Futures CIBC FOMC year-end, %

Title Reasons For Poloz to be Dovish

OIL!!!!!!

I Want a Weaker Loonie

Low Core Inflation Ample Capacity

Title

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This Oil Shock Could be More Painful for Canada

Source: British Petroleum, Statistic Canada

0.6 0.8 1 1.2 1.4 1.6 1.8 80 90 00 10 Ratio of crude production to oil demand

3 6 9 Oil Prod./GDP Oil & Gas Capital Spending/GDP Energy Trade Surplus/GDP At time of 1997-98 Asian Crisis Today %

Title

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Canadian 2015 Growth and Oil Prices

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 Prev Forecast $70 Crude $60 Crude Real GDP Nominal GDP %

Title

Canada: Who Benefits and Who Loses From $60 Oil

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5 10 15 Consumer Savings* Industry Revenues Fed & Prov Revenues $Bn/year *Direct vehicle and heating costs only

Title

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Oil & Gas Near-30% of Cdn Business Cap-Ex (L), Oil Price 2nd Most Important Factor in Cap-Ex (R)

Source: Statistics Canada, CIBC

5 10 15 20 25 30 91 95 99 03 07 11

% share 14 5 10 15 20 25 30 35 Capacity Utilization Real Oil Prices (chg

• ver 4 qtrs)

Corp Profits CAD/USD Return on Equity 10-year GoC Yield

Relative importance, based on regression on normalized data, 1990:1 - 2014:Q2

Title Stable Tail Risk (L), Average Credit Score (R)

Average Credit Score

700 705 710 715 720 725 730 08Q2 09Q1 09Q4 10Q3 11Q2 12Q1 12Q4 13Q3

Share of Household with DSR Above 40% 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 99 01 03 05 07 09 11 13

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Title Ratio: Housing Starts to Household Formation (L); Data Undercounted Non-Perm Residents (R)

400 500 600 700 800 900 08 09 10 11 12 13 CIC Data StatCan Population Projection 000s

Source: Statistics Canada, CIC Data, CIBC

0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 72 77 82 87 92 97 02 07 12

Canada, Aggregate

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Title

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C$ Sensitivity to Oil & Canada-US Spreads (L); Negative Implications for Currency (R)

Source: CIBC

70 72 74 76 78 80 82 84 86 88 90 15Q1 15Q3 16Q1 16Q3

Mid-2014 fcst Latest

US cents

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50% decline in oil prices 100 bps tighter Cda- US bills yields % chg in C$ vs US$

Note: CIBC, based on Issa, Lafrance, Murray, BOC (2005)

Title Canada 15% More Costly as of Mid-2014, But Only Small Gap Remains

Source: Boston Consulting Group

60 70 80 90 100 110 120 130 140 C h i n a U S U K C a n a d a G e r m a n y A u s t r a l i a Early 2014 At Jan 2015 Exch Rates

Manufacturing Costs, US=100

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Weaker C$ Starting to Help Factory Exports (L), But Capacity Barriers Hit After Prior Closures (R)

65 70 75 80 85 90 Mar-95 Sep-97 Mar-00 Sep-02 Mar-05 Sep-07 Mar-10 Sep-12 Manufacturing Capacity Use (%) Avg Last Expansion

10 11 12 13 14 15 16 17 18 19 07 08 09 10 11 12 13 14 C$ Sensitive Non-Sensitive $bn |

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Few Currency-Sensitive Sectors Have Slack

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5 10 15 Petroleum Prod Electrical equip etc Printing etc Nonmetallic Min. Prod Clothing Primary Metal Chemical Plastic & Rubber

• Fab. Metal

Machinery Food Paper Beverage & Tobacco Textiles Computer Furniture Wood Prod. Trans Equip. Latest Capacity Use vs Pre-Recession Average (%-pts) Gold = Low Exchange Rate Sensitivity Red = Exchange Rate Sensitive |

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Québec Winning Among National Losses (L), as Province is More Levered to US Growth (R)

0.26 0.29 0.38 0.41 0.43 0.52 0.57 0.58 0.73 0.88 0.0 0.2 0.4 0.6 0.8 1.0 Sask N&L PEI NS NB Alta Man BC Qué Ont Correlation With Real US GDP Growth (1982-2013) 0.0 0.5 1.0 1.5 2.0 2.5 3.0 Canada Québec Jun-14 Now 2015 Real GDP Growth, %

Quebec Highly Indebted, But Deficit Smaller than Others

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TSX: Low Yields Limit Near-Term Downside Risk (L); Oil's Rebound to Help Energize 2016 Earnings (R)

Source: Bloomberg, Thomson Reuters, CIBC

1 2 3 4 5 6 TSX Earnings Yield minus 10-yr GOC, Avg since 1986 Current Spread Spread with GOC at 2.5% (yr-ahead forecast) %-pts 2

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5 10 15 20 12 13 14 15 16 % chg

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What a Complicated World Means for You

 Canadian growth sub-2% in 2015, while US tops 3%, gap tied in part to oil.  Fed hikes 125 bps while BoC likely to cut again, sending C$ to 77 cents US.  Bonds will over-react to Fed tightenings. Canada 10 yrs see smaller sell-off but still reach 2½% in mid-2016.  Equities still have some room to run with eye on 2016.  Yield plays and leverage to US consumer favoured for now.  Late in the year: The Dawn of the Dead for resources.  Risks: 10 plagues hit, no Moses to save us.

Title Interest & Exchange Rate Forecast

2015 2016 EN D OF PERIOD: 27-Jan Mar Jun Sep Dec Mar Jun Sep Dec CDA Overnight target rate 0.75 0.50 0.50 0.50 0.50 0.50 0.75 1.00 1.00 98-Day Treasury Bills 0.58 0.45 0.45 0.45 0.50 0.60 0.80 0.95 1.00 2-Year Gov't Bond 0.44 0.40 0.45 0.50 0.60 0.70 0.85 1.10 1.20 10-Year Gov't Bond 1.35 1.40 1.70 2.00 2.00 2.10 2.40 2.60 2.65 30-Year Gov't Bond 1.93 2.00 2.35 2.55 2.70 2.90 2.95 3.00 3.05 U.S. Federal Funds Rate 0.10 0.10 0.25 0.75 1.25 1.25 1.25 1.25 1.50 91-Day Treasury Bills 0.02 0.05 0.30 0.85 1.10 1.35 1.25 1.20 1.40 2-Year Gov't Note 0.50 0.75 1.20 1.50 1.70 1.65 1.65 1.70 1.90 10-Year Gov't Note 1.77 2.10 2.65 3.00 2.90 2.80 3.05 3.25 3.35 30-Year Gov't Bond 2.34 2.50 2.90 3.20 3.30 3.30 3.55 3.65 3.70 Canada - US T-Bill Spread 0.57 0.40 0.15

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• 0.60
• 0.75
• 0.45
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Canada - US 10-Year Bond Spread

• 0.41
• 0.70
• 0.95
• 1.00
• 0.90
• 0.70
• 0.65
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Canada Yield Curve (30-Year — 2-Year) 1.49 1.60 1.90 2.05 2.10 2.20 2.10 1.90 1.85 US Yield Curve (30-Year — 2-Year) 1.85 1.75 1.70 1.70 1.60 1.65 1.90 1.95 1.80 EXCHAN GE RATES CADUSD 0.81 0.79 0.77 0.77 0.78 0.80 0.81 0.82 0.81 USDCAD 1.24 1.26 1.30 1.30 1.28 1.25 1.23 1.22 1.24 USDJPY 118 119 122 125 122 117 116 115 114 EURUSD 1.14 1.12 1.09 1.07 1.10 1.13 1.16 1.20 1.23 GBPUSD 1.52 1.50 1.45 1.45 1.49 1.51 1.53 1.56 1.58 AUDUSD 0.79 0.77 0.76 0.74 0.76 0.79 0.81 0.83 0.85 USDCHF 0.90 0.88 0.89 0.90 0.89 0.88 0.86 0.83 0.83 USDBRL 2.57 2.75 2.80 2.83 2.97 3.02 3.05 3.05 3.04 USDMXN 14.57 14.15 13.85 13.58 13.55 13.62 13.63 13.90 13.86

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Thank You

Avery Shenfeld, Managing Director and Chief Economist CIBC World Markets Inc