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How Scary Is It

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How Scary Is It

  1. 1. How Scary Is It?By Avery Shenfeld, Chief Economist & Managing DirectorNovember 2011
  2. 2. Canadian Growth Resumes After Disruptions in Autos and Energy108 Monthly GDP Index Nearly 3% Q3107106105104103102101100 99 98 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 C anada US | 2
  3. 3. Food Inflation Could Also Ease in Lagged Response to Commodity Trend210 2005=100 1982-84=100 235190 225170150 215130110 205 90 195 70 50 185 05 06 07 08 09 10 11 World C ommodity Price Index: Food (L) US C PI: Food (R) Source: Bureau of Labour Statistics, Statistics Canada, CIBC | 3
  4. 4. Europe’s Economies Look Recession Bound65 Expansion/C ontraction60 Threshold55504540 Italy35 France30 Germany25 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 | 4
  5. 5. Bond Indigestion: From Moussaka to Lasagna 10-year Italian bond spreads, bps 500 foreign claims/exposures of500 reporting banks (US$, bns) 450 400400 350 300300 250200 200 150100 100 50 0 0 France Germany Spain United Kingdom Exposure to Greece Exposure to Italy | 5
  6. 6. EFSF: Who Will Guarantee the Guarantors? (L) French Ratings Risk in Further Expansion (R)Rest of Europe Italy, 10 % of French GDP Spain Expanded 23% EFSF 30% 8 Original 6 EFSF 20% 4 27% 2France Germany 0 Fr EFSF French DeficitShare of EFSF € 780bn guarantee Guarantee (2012) commitments C ommitment | 6
  7. 7. Eurozone Banks Cutting Back on Lending Due to Capital Shortages net % of banks reporting increases in15% capital or liquidity positions as a contributor to net tightening of credit standards10%5%0% Q4 2010 Q1 2011 Q2 2011 Q3 2011 | 7
  8. 8. Obama Seeks to Delay Fiscal Tightening600 US$, bns Other500 Expiring in Infrastructure400 2012 State and Local Transfers300 3.5% of Employer Payroll GDP* Tax C ut200 1.8% of Expensing of GDP Investments100 Unemployment Insurance 0 Payroll Tax Holiday Prev. Stimulus American Jobs for Employees Act *Of which 3% is for 2012 | 8
  9. 9. US Consumers: Where’s the Deleveraging? US light vehicle sales9 (SAAR-mn units) US personal savings rate (%) 188 8-mon. "C ash for C lunkers" high 1676 145 1243 102 810 6Jan-06 Jan-09 Sep-11 Jan-07 Jan-10 Sep-11 | 9
  10. 10. Gasoline and Food Inflation Should Ease in Response to Commodity Trend 2005=100 1982-84=100210 235190 225170150 215130110 205 90 195 70 50 185 05 06 07 08 09 10 11 World C ommodity Price Index: Food (L) US C PI: Food (R) Source: Bureau of Labour Statistics, Statistics Canada, CIBC | 10
  11. 11. Slack Keeps Fed On Hold Through 2013; Fed Extending Term to Anchor Long Rates6 % decline in non-farm payrolls from peak420-2-4-6 2008-11-8 recession /recovery -24 -18 -12 -6 0 6 12 Months from Employment Trough 1948 1953 1958 2007- | 11
  12. 12. A Twist Not Worth Shouting About 140 inde xe s 600 Negative or near-negative equity 120 500 100 400 80 300 28%* 60 200 40Positive 100 20Equity 0 0 Aug-03 Aug-05 Aug-07 Aug-09 Aug-11 Mortga ge Applica tions for Home P urcha se (R) US P e nding Home Sa le s (L) | 12
  13. 13. Global Growth Disappointments A Challenge to Pace of Equities Rally World GDP, % chg (at purchasing power parity)5.5 US 1.9* US 1.7 C hina 8.35.0 C hina 9.3 EZ 0.4 EZ 1.6 Jpn 2.5 Jpn -0.24.54.03.53.0 2010A 2011F 2012F Actual/C IBC Forecast IMF Forecast (June 11) Source: IMF, CIBC *Assumes US extends payroll tax cut and extended jobless benefits | 13
  14. 14. Emerging Markets Now the Drivers For Commodities Rallies BIC (Brazil, India, C hina) Share of Total C onsumption60%40%20%0% Refined Primary Petroleum Coal Copper Nickel Note: latest coal data as of 2009; petroleum 1990s data as of 2010; nickel and copper data as Today of 2011 Q2, copper data excludes Brazil Source: EIA, CRU, WBMS | 14
  15. 15. Higher Prices Restrained Oil Demand US Ve hicle s Mile s Chinas Auto Sales Driv e n 140 y/y % chg3.0 y/y % chg 1202.0 1001.0 80 600.0 40-1.0 20-2.0 0-3.0 -20 Aug- Nov- Feb- May- Aug- Feb- Oct- Jun- Feb- 10 10 11 11 11 2009 2009 2010 2011 | 15
  16. 16. The Continental Divide Output Ga p Em ploy me nt/ Popula tion Ra tio 4 % 65 % 2 64 0 63 62 -2 61 -4 60 59 -6 58 57 -8 56-10 55 01 03 05 07 09 11 01 03 05 07 09 11 C anada US C anada US | 16
  17. 17. Canada Sees 2.1% Growth in 2012 But it Will Take Low Rates to Get There GDP growth (s.a.a.r.) Forecast %6.0% 5.04.0% 4.02.0%0.0% 3.0-2.0% 2.0-4.0% 1.0-6.0%-8.0% 0.0 Q1-07 Q1-08 Q1-09 Q1-10 Q1-11 Q1-12 Real GDP Growth (L) Overnight Interest Rate (R) | 17
  18. 18. Consumers Reduced Debt AppetiteSlows Retail Sales: Low Rates Needed for Longer 10% y/y chg y/y 20% 16% 6% 12% 8% 2% 4% 0% -2% -4% -8% -6% -12% - 03 - 04 - 05 - 06 - 07 - 08 - 09 - 10 - 11 n n n n n n n n n Ja Ja Ja Ja Ja Ja Ja Ja Ja Real Retail Consumption (L) Consumer Credit (R) | 18
  19. 19. Debt Service Costs Unthreatening If Overnight Rates Contained to 2% in 2013 % of personal disposable income111098765 89 91 93 95 97 99 01 03 05 07 09 11 13 4- 4- 4- 4- 4- 4- 4- 4- 4- 4- 4- 4- 4-QQQQQQQQQQQQQ | 19
  20. 20. Outlook for Investment Spending Still Favourable Equipment Spending Plans, Balance of Opinion 40 (%-pts) 30 20 10 0 -10 -20 -30 -40 98:Q3 99:Q2 00:Q1 00:Q4 01:Q3 02:Q2 03:Q1 03:Q4 04:Q3 05:Q2 06:Q1 06:Q4 07:Q3 08:Q2 09:Q1 09:Q4 10:Q3 11:Q2 Source: Bank of Canada Business Outlook Survey | 20
  21. 21. Housing Easing But Not Crashing260 000 units, SAAR240220 193200 190 191180160140120100 80 20 F F 00 01 02 03 04 06 07 08 09 10 05 11 1220 20 20 20 20 20 20 20 20 20 20 20 | 21
  22. 22. Commodities Drive C$; C$ Strengthens later in 2012, Also Helped by BoC Hikes US$/bbl US¢/C$120 108110 104100 90 100 80 96 70 Arrows denote BoC rate hikes 60 92 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Crude Oil (WTI) Canadian Dollar | 22
  23. 23. Bond Yields Drift Higher; Remain Low By Historical Standards C anada6 10-yr bond yields (%) US Forecast54321Dec00 Dec04 Dec08 Dec12 | 23
  24. 24. Fiscal Credentials: Canada’s Earlier Hard Work Paid Dividends General Government Debt, % (2011)250 Gross200 Net150100 128 50 101 79 75 72 55 35 General Government Net Debt, % of GDP 0 175 Fcst JPN ITA FRA UK US GER CAN 150 125 100 75 50 25 0 1990 95 00 05 10 15 CAN US UK FRA GER JPN ITA | 24
  25. 25. West is Best in 2012 Real GDP Growth, Y/Y % Chg4.03.5 2011 20123.02.52.01.51.00.50.0 BC A lta Sask Man Ont Qué NB NS PEI N&L | 25
  26. 26. Ontario’s Slower Path Back to Balance $billions15 Forecasts10 5 2013/14 0 -5-10-15-20 Return to Budget Balance Fiscal Year Years to Go-25 BC Alta 2013/14 2013/14 3 3 1 FY88 91 94 97 00 03 06 09 12 15 Sask Man NA 2014/15 NA 4 Ont 2017/18 7 Qué 2013/14 3 Ontario Sum of Remaining Provinces NB 2014/15 4 NS 2013/14 3 PEI 2013/14 3 2 N&L NA NA Federal 2014/15 4 Based on 2010 Budgets 1. General Revenue Fund in surplus 2. Budget balanced in 2010/11 | 26
  27. 27. Demand for Liquidity Sees Non-Ontario Names Underperform on Relative Basis 30-Year N.I. Roll to Ontario, bps 35 30 25 20 15 10 5 0 -5 -10 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10 Apr-11 British Columbia Québec Manitoba New Brunswick | 27
  28. 28. TSX Forward PE Low by Historical Standards, Matching US 17 16 15 14 13 12 11 10 Valuation gap 9 closed 8 Jan-07 May-10 TSX C omposite S&P 500 | 28
  29. 29. Analysts However Cutting 2012 Earnings Expectations9 Ratio of Downgrades to Upgrades8765 last4 observation Normal = 1.5:1 Oct-113 2.121 0Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 | 29
  30. 30. Equity Markets to See Below-Consensus Earnings 40 TSX 12-mo fwd earnings, % chg from year ago 30 20 +17% 10 +13% 0 -10 -20 -30 -40 Dec- Apr- Aug- Dec- Apr- Aug- Dec- Apr- Aug- 08 09 09 09 10 10 10 11 11 Predicted by CIBC Earnings Indicator Bottom up Consensus Source: Thomson Reuters, CIBC | 30
  31. 31. Quality Dividend Stocks Should Outperform105 Total Return, April 5=100 +100 -1%9590 -11%85 *S&P/TSX Canadian Dividend Aristocrats80 5-Apr 3-May 31-May 28-Jun 26-Jul 23-Aug 20-Sep 18-Oct High Quality Dividend Sto cks* TSX Co mpo site | 31

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