THE WEEK AHEAD October 1-5, 2012

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1 THE WEEK AHEAD October 1-5, 212 Canadian GDP: From Fahrenheit to Celsius by Avery Shenfeld Economics Avery Shenfeld (416) Benjamin Tal (416) Peter Buchanan (416) Warren Lovely (416) Emanuella Enenajor (416) Andrew Grantham (416) new GDP figures needn t alter our thinking on policy. cibcwm.com/res/eco/ EcoResearch.html Does zero degrees Celsius feel colder than 32 Fahrenheit? Of course not, and to some extent, the upcoming change in the yardstick (metre stick?) for Canada s GDP figures may not end up mattering as much as one might think. Monday will see Statistics Canada release a comprehensive revision for the history of Canadian real and nominal GDP. Information from new data sources could bump up the output of unincorporated businesses. The inclusion of more services exporting/ importing enterprises should peg services net trade and GDP higher than previously estimated, while revisions to export and import prices could see a higher level of net exports. A move to capitalize R&D expenditures and government military weapons systems will also result in a higher tally for output relative to historical measures. Downward revisions elsewhere could limit the overall upward adjustment in GDP. While we can t really anticipate the full magnitude of the changes in advance, unless there s a huge tilt in the relative performance of recent quarters compared with past ones, the new GDP figures needn t alter our thinking on policy. Suppose, as seems probable, that the whole history of real GDP growth is revised upward. That would seem to make a stronger case for earlier rate hikes, but there s another offsetting implication that neutralizes that impact. The faster historical pace, without any change in the estimate for labour inputs, implies that the economy s non-inflationary potential growth rate has also been higher, under the new measure. The result is that the estimated output gap the degree of slack in the economy needn t change. And the bar that the upcoming GDP figures would have to jump over to narrow economic slack, and justify rate hikes, would also be higher. Ironically, then, the less the overall history shifts, and the less potential GDP growth is changed as a result, the more it will matter if recent quarters are bumped up or down. But what won t change in this revision is the unemployment rate. It will still be above 7%, consistent with some slack in the labour market to defend against inflation. So while the data revisions might not alter the outlook for interest rates or bond yields, they might alter our perceptions on economic performance in other ways. If real GDP growth has been faster than we thought, Canada s productivity performance hasn t been as worrisome as feared. At the same time, changes in the definition of the household sector could strip out some income previously allocated to that sector, making the debt run-up seem more troubling, although there will be some boosts to net worth associated with valuing more assets at market rather than book value. Still, at the end of the day, while economists will be very busy Monday resetting their models to new definitions and new historical results, traders might not have a lot to do in response to this revision. Henceforth, we ll just have to get used to thinking in Celsius. CIBC World Markets Inc. PO Box 5, 161 Bay Street, Brookfield Place, Toronto, Canada M5J 2S8 WGEC1 (416) CIBC World Markets Corp 3 Madison Avenue, New York, NY 117 (212) 856-4, (8)

2 Week Ahead Calendar And Forecast CANADA UNITED STATES CIBC Consensus Prior CIBC Consensus Prior Monday AUCTION: 3-M BILLS $32B, 6-M BILLS $28B October 1 INDUSTRIAL PROD. PRICES M/M (Aug) (M) -.5% RAW MATERIALS M/M (Aug) (M).9% 8:58 AM MARKIT US PMI Final (Sep) 51.5 CONSTRUCTION SPENDING M/M (Aug) (M).5% -.9% ISM - MANUFACTURING (Sep) (H) Speaker: 12:3 PM Ben Bernanke (Chairman) Statistics Canada releases historical GDP revisions Speaker: 12: PM John C Williams (San Francisco) Tuesday CASH MANAGEMENT BUYBACK (Dec-12 - Nov-13) - $5MM AUCTION: 4-WEEK BILLS $4B (prev) October 2 Wednesday October 3 5: PM NEW VEHICLE SALES (Sep) (M) 14.4M 14.5M 7: AM MBA-APPLICATIONS Sep-28 (L) 2.8% 8:15 AM ADP EMPLOYMENT CHANGE (Sep) (M) 14K 21K ISM - NON-MANUFACTURING (Sep) (M) Thursday October 4 IVEY PMI (Sep) (L) 65.2 CONTINUING CLAIMS Sep-22 (L) 3271K INITIAL CLAIMS Sep-29 (H) 37K 359K FACTORY ORDERS M/M (Aug) (M) -6.5% -2.5% 2.8% 2: PM Minutes of Sep 13th FOMC Meeting Speaker: 8: PM James Bullard (St Louis) Friday October 5 BUILDING PERMITS M/M (Aug) (L) -2.3% NON-FARM PAYROLLS (Sep) (H) 138K 111K 96K EMPLOYMENT CHANGE (Sep) (H) 1K 15K 34.3K UNEMPLOYMENT RATE (Sep) (H) 8.1% 8.2% 8.1% UNEMPLOYMENT RATE (Sep) (H) 7.3% 7.3% 7.3% AVERAGE HOURLY EARNINGS ALL EMPLOYEES M/M (Sep) (H).2%.2%.% AVERAGE WEEKLY HOURS ALL EMPLOYEES (Sep) (H) MANUFACTURING PAYROLLS (Sep) (H) K -15K 3: PM CONSUMER CREDIT (Aug) (L) $7.5B -$3.3B Speaker: 1: PM Elizabeth A Duke (Governor) H, M, L = High, Medium or Low Significance SAAR = Seasonally Adjusted Annual Rate Consensus Source: Bloomberg `

3 CIBC WORLD MARKETS INC. The Week Ahead October 1-5, 212 Week Ahead s Market Call by Avery Shenfeld In the US, a busy week for data likely won t add much colour until Friday s payrolls. In light of the recent orders data, the factory ISM is still likely to come in below 5 in September, if only marginally. Factory orders will reflect the earlier-reported dive in the durables component, and there s nothing left for the Fed to reveal in the minutes of its September th meeting, or by Bernanke earlier in the week. We were surprised by how weak the prior payrolls report came in, and expect that to be made back with either an improvement in September, or an upward revision to August. Either way, a slightly less worrisome picture for the labour market should be supportive for equities. In Canada, economists will be mulling over the implications of a new measurement approach to GDP expect some changes to annual growth estimates as a result. In contrast to the US, employment growth in Canada has generally surprised to the upside in the last half-year, and looks ripe for a slowdown. As a result, we re projecting a tamer 1K jobs gain for September, with the usual caution about the wide confidence band around the StatCan estimate. 3

4 CIBC WORLD MARKETS INC. The Week Ahead October 1-5, 212 Week Ahead s Key Canadian Number: Labour Force Survey September Canadian Employment (Friday, 8:3 a.m.) Emanuella Enenajor (416) s % CIBC Mkt Prior -1 Sep-1 Mar-11 Sep-11 Mar-12 Sep-12F 7. Employment 1K 15K 34.3K Unemployment Rate 7.3% 7.3% 7.3% Month/Month Chg (L) Source: Statistics Canada, CIBC Jobless Rate (R) The Canadian economy lately hasn t exactly been a bastion of growth, and yet surprisingly, hiring hasn t been showing signs of letting up. Monthly job creation has averaged 27K over the past half-year; hardly indicative of an economy under pressure from risks to growth globally or waning domestic demand. But a reckoning may be around the corner, with hiring set to track a slower tempo in the months ahead. Tame demand could see limited need to boost headcounts, while continued government spending cuts will likely weigh on public sector payrolls. The prior month s 37K gain in transportation/warehousing hiring could be ripe for a reversal in September (given the survey data s volatility) while continued challenges in the factory sector suggest limited upside to hiring there. Growth in headcounts elsewhere could see a soft 1K gain in employment, holding the jobless rate steady at 7.3%. Forecast Implications We see economic growth as too slow in the quarters ahead to spark a measurable decrease in the jobless rate. Unemployment could track above 7% both this year and next. Market Impact Our call is a bit weaker than the consensus, which could dent the C$ and support fixed income. 4

5 CIBC WORLD MARKETS INC. The Week Ahead October 1-5, 212 Week Ahead s Key US Number: Employment Situation September (Friday, 8:3 a.m.) Andrew Grantham (416) CIBC Mkt Prior Employment (change) 138K 111K 96K Unemployment rate 8.1% 8.2% 8.1% July s acceleration in hiring proved a false dawn, as August disappointed with another sub-1k advance. Part of that weakness reflected changing seasonality in auto manufacturing, while higher consumer job sentiment (in the Conference Board s survey) provided an early indication of improvement in September. A more favourable trend in manufacturing, and a possible reemergence of job gains in construction, could contribute to a somewhat better 138K advance. US Payroll Employment s % Sep1 Mar-11 Sep-11 Mar-12 Sep-12F Monthly Payroll Chg (L) Unemployment Rate (R) Forecast Implications Lackluster growth means the US economy is struggling to maintain even a modest 15K rate of hiring. At the present underlying rate, unemployment is unlikely to dip much further, and could even edge up if previously discouraged workers re-enter the job market. Market Impact We are above consensus, which could support risk assets if correct. Hiring in the household survey may be slightly stronger, recouping ground following a couple of monthly declines in July and August. That would keep the unemployment rate steady at 8.1%, even if participation rebounds by a tick. Earnings growth could improve slightly to.2%, after stagnating in August, although that would leave the annual rate steady at a muted 1.7%. Other US Releases: ISM Manufacturing September (Monday, 1: a.m.) The ISM factory survey has treaded water just below 5 in recent months. With regional surveys showing decidedly mixed trends, and Markit s preliminary PMI holding steady, there seems little reason to expect a large move in the ISM survey this month either. We expect to see a reading of 49.8, from Factory Orders August (Thursday, 1: am) Durable goods orders slumped by 13% in August. While the decline was heavily influenced by a net reduction in aircraft orders, there was surprising weakness in extransport orders as well. Should nondurable orders ease modestly, in line with recent surveys, overall orders could see a 6.5% decline. 5

6 CIBC WORLD MARKETS INC. The Week Ahead October 1-5, 212 Equity Insights Peter Buchanan Don t Bank Too Heavily on Massive China Stimulus Program The Fed and ECB have cranked the pump handle, and now it s China s turn or is it? While factory PMI readings over the weekend could throw light on chances for more easing, we remain dubious that another massive, 28- style pump priming exercise is in the works, given local debt and other concerns. Premier Wen s remarks a week ago also suggests housing curbs will remain for a while. Some observers have gone so far as to talk about a USstyle QE program, but it s unclear how that would work or how effective it might be, given institutional differences with the US. One is smaller, and less liquid debt markets, corporate as well as public. Non-price factors also matter more in the capital allocation process, including directives to state controlled banks. Betting on the Presidential Race Obama is leading, but Romney has a chance to tighten things with the first of four presidential debates come Wednesday. Many observers are betting on the prez, so the greatest market impact would be if the challenger is able to narrow his polling deficit. That could help defense/ aerospace stocks, including some Canadian entities, and financials. Another winner would be traditional dividendpaying issues, like telecoms, given the Republican s inclination to maintain the current top tax rate at 15% on qualified dividend and long-term capital gains. While the surprise to markets won t be as great, stocks to own if you re betting on an Obama second term include health, housing, and alternate energy issues. China: Room to Stimulate but Perhaps Not the Political Will Sectors That Could Do Well Obama Portfolio Health Housing gross public debt, national & sub-national (% of GDP) USA UK Germany Alternate Energy *including local govts, direct & financing vehicles India Brazil Romney Portfolio Defense/Aerospace Financials China* South Africa Source: IMF, CIBC Telecoms/Dividend Payers Source: CIBC Implied Volatility and Canadian Stock Performance Do unduly low implied vol levels imply a sell-off danger an underappreciation by investors, so to speak, of risk? While we haven t examined the data for other countries, our analysis of the Canadian data, using a statistical technique known as a Granger causality test, failed to find convincing evidence that changes in the S&P/ TSX 6 VIX index have foreshadowed movements in the TSX Composite. The analysis examined weekly data for broad market price moves and volatility, back to October, 29. Interestingly, though, causality appears to flow in the other direction. Strong moves one way can lead to turbulence, as Greenspan famously alluded to back in 1996, when he warned of irrational exuberance. After a strong market performance in recent months, that could be a reason for investors to think a bit more defensively. 6 Volatility and Stock Prices: Does One Lead the Other? Oct- 9 Feb- Jul-1 Nov- 1 1 Apr- 11 Sep- 11 Jan- 12 Jun- 12 TSX Composite (L) TSX 6 VIX (R ) Source: Standard & Poors, CIBC 5

7 CIBC WORLD MARKETS INC. The Week Ahead October 1-5, 212 Currency Currents Andrew Grantham and Emanuella Enenajor Cdn Housing: If You Build It, Will They Come? While Canada s economy has disappointed on many counts, homebuilding is one area that has consistently shined. The latest housing starts data suggest an uptick in construction activity, and the coming week s building permits report could provide a better picture of just how buoyant the segment remains. But not all housing indicators are flashing positive. Secondary market activity, a good leading indicator of homebuilding, has been showing signs of renewed weakening. For the fourth straight month, dollar and volume sales are down raising red flags about the underlying demand in this sector that has long supported consumer sentiment. That could filter into a slowdown in homebuilding, holding growth in 213 down to 2%, leaving C$ with little reason to rally given limited risk of BoC tightening. More Pain For Spain The focus on Spain this week proved more of a siesta than fiesta for the euro. Dented earlier in the week by evidence central government may not meet its borrowing targets, Spanish policymakers warning of a deepening recession and unrest in the Catalan region, Spain s budget on Thursday was greeted with muted enthusiasm in FX markets. But even with the new measures, Spain may struggle to meet its 6.3% budget target for this year, nor are we likely to see budget deficits in line with the EU s 3% target any time soon. A full bailout will likely be needed, which would presumably spark ECB bondbuying. However, should Spain keep missing targets, support for ECB action from the likes of Germany may be hard to get. That uncertainty could continue weighing on the euro into 213. Don t Forget the UK s Old Foe The depth of the UK s recession may have been scaled back slightly while optimism has grown for a significant bounce in Q3 GDP. However, the flow of credit, or lack of it, remains the elephant in the room for the UK economy, one that could trample down 213 growth expectations. Despite ongoing QE and the new Funding for Lending initiative, corporate credit remains depressed. The BoE s latest survey showed that banks continue to draw back the availability of credit, while firms of all sizes are seeking to borrow less. The flow of credit remains a key constraint in the UK which, after the Q3 bounce, could see growth disappoint again next year, weighing on sterling. 7 Softening Sales Bode Poorly for Construction Source: Statistics Canada, CREA, CIBC Central Government Deficit Already at Full-Year Target (L), Making Full Budget Targets Hard to Achieve (R) Source: Spain Ministry of Finance, CIBC Corporate Credit Credit Availability and Demand Continue to Fall Jan-26 Oct-26 Jul-27 Apr-28 Spain Central Accumulated Gov. Deficit (%GDP) Revised target (Aug) 4.5% Availability of Credit to corporates (% Balance) National Resale Activity (C $, mns) (L) Building Permits (C$, mns) (R) Q1 211 Q2 211 Q3 211 Q4 211 Q1 212 Q2 212 Q3 212 Jan-29 Jan Feb Mar Apr May Jun Jul Aug Oct Jul-21 Demand for Credit By Company Size Small Apr-211 Jan-212 Increasing Decreasing Medium Budget deficit* targets (% GDP) EU Target *central, autonomous & local gov. Large Q2 212 Q3 212 Source: BoE, CIBC

8 CIBC WORLD MARKETS INC. The Week Ahead October 1-5, 212 CANADIAN RELEASE AND EVENT DATES September/October 212 MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY Gov Carney speaks at 3: PM ET in Ottawa INDUSTRIAL PRICES M (NSA) Y JUN JUL GDP BY 28 RETAIL TRADE (Current$) M Y MAY.2 3. JUN JUL.7 3. PAYROLL EMPLOYMENT, EARNINGS & HOURS INDUSTRY (22$) GDP IND.PROD. M M MAY JUN JUL INTERNATIONAL RESERVES 8:15 AM $BN $BN CHANGE LEVEL JUL IVEY PURCHASING MANAGERS INDEX WAGE SETTLEMENTS (%) PVT. PUB. TOT. MAY JUN JUL LABOUR FORCE SURVEY AVG EMPLOY UNEMP HRLY (HSHOLD) RATE EARN M Y % Y JUL BUILDING PERMITS ($) M M (RES) (NON-RES) JUN JUL THANKSGIVING DAY (HOLIDAY) (MarketS Closed) HOUSING STARTS 8:15 AM s (AR) TOTAL SINGLES JUL MERCHANDISE TRADE $MN 12 MO. BALANCE JUN -1,925 3,92 JUL -2,335 8 Business Outlook Survey Governor Carney speaks in B.C. at 3:2 PM and 4:1 PM ET (see website at 3:5 PM) All data seasonally adjusted except where noted NSA. M: per cent change from previous month. Q: per cent change from previous quarter at annual rates. Y: per cent change from year earlier. AR: Annual Rate. YTD: Year to date. Release dates are provided by sources outside CIBC World Markets Inc. Dates are subject to change. Sources for historical data: Statistics Canada, CMHC, Human Resources Development Canada and the. 8 NEW HOUSING PRICE INDEX SURVEY OF MANUFACTURING SHIPMENTS M Y JUN JUL INT L TRANSACTIONS IN SECURITIES C$BN, NET BONDS MONEY STOCKS TOT MARKET JUN JUL WHOLESALE TRADE CONSUMER PRICE INDEX M (NSA) Y JUL RETAIL TRADE (Current$) M Y JUN JUL.7 3. Interest Rate Announcement Monetary Policy Report Update PAYROLL EMPLOYMENT, EARNINGS & HOURS

9 CIBC WORLD MARKETS INC. The Week Ahead October 1-5, 212 U.S. RELEASE AND EVENT DATES September/October 212 MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY ISM MFG SURVEY COMP. PRICES INDEX INDEX JUL Chairman Bernanke speaks in Indianapolis at 12:3 PM ET on Federal Reserve & Monetary Policy 2,5,7-Yr NOTE SETTLEMENT DURABLE S&P/CASE-SHILLER HOUSE PRICE INDEX 9: AM CONSUMER CONFIDENCE 2-Yr NOTE AUCTION BOT (9:) REDBOOK (8:55) NEW HOME SALES 5-Yr NOTE AUCTION EMPLOY. 5 LIGHT VEHICLES SALES MIL (AR) Y JUL BOT (9:) REDBOOK (8:55) ADP SURVEY 8:15 AM ISM NON-MFG SURVEY BOT (9:) REDBOOK (8:55) GDP 26 All data seasonally adjusted except where noted NSA. M: per cent change from previous month. Q: per cent change from previous quarter at annual rates. Y: per cent change from year earlier. AR: Annual Rate. YTD: Year to date. Release dates are provided by sources outside CIBC World Markets inc. Dates are subject to change. Sources for historical data: U.S. Department of Commerce, U.S. Department of Labor and U.S. Federal Reserve Board. 9 GOODS ORDERS M Y JUN JUL GDP (AR) REAL IMPLICIT GDP DEFLATOR 12:Q1(F) :Q2(F) CORPORATE PROFITS 7-Yr NOTE AUCTION INITIAL JOBLESS CLAIMS (8:3) FACTORY ORDERS M(SA) Y(NSA) JUN JUL FOMC Minutes 3,1-Yr NOTE ANNOUNCEMENT 3-Yr BOND ANNOUNCEMENT INITIAL JOBLESS CLAIMS (8:3) GOODS & SERV. BALANCE (BOP) $B GDS SERV TOT JUN JUL COLUMBUS DAY (HOLIDAY) (Treasury Markets Closed) TREASURY BUDGET MONEY SUPPLY M-2 2: PM 4:3 PM M Y Beige Book JUL Yr NOTE AUCTION 1-Yr NOTE AUCTION 3-Yr BOND AUCTION RETAIL SALES M Y JUL BUSINESS INVENTORIES 3-Yr BOND SETTLEMENT 3,1-Yr NOTE SETTLEMENT CPI M(SA) Y (NSA) JUL NET CAPITAL INFLOWS TICS 9: AM CAPACITY UTIL/IND. PROD. 9:15 AM LEV M Y JUL BOT (9:) REDBOOK (8:55) FOMC Meeting Begins 2-Yr NOTE AUCTION BOT (9:) REDBOOK (8:55) HOUSING STARTS MIL (AR) M JUL NEW HOME SALES FOMC Rate Decision 5-Yr NOTE AUCTION INITIAL JOBLESS CLAIMS (8:3) LEADING INDICATOR PHILADELPHIA FED INDEX 2,5,7-Yr NOTE ANNOUNCEMENT INITIAL JOBLESS CLAIMS (8:3) DURABLE GOODS ORDERS M Y JUL Yr NOTE AUCTION INITIAL JOBLESS CLAIMS (8:3) PERS. INC & OUTLAYS SAVING INCOME CONS RATE M M AR JUN JUL CHICAGO PMI 9:45 AM MICHIGAN SENTIMENT (F) 9:55 AM SITUATION NON- CIV AVG FARM UNEMP HRLY PAYROLL RATE EARN (s) M % Y JUL CONSUMER CREDIT 3:PM PPI M (SA) Y (NSA) JUL MICHIGAN SENTIMENT (P) 9:55 AM EXISTING HOME SALES (AR) REAL IMPLICIT GDP DEFLATOR 12:Q1(F) :Q2(F) :Q3(A) MICHIGAN SENTIMENT (F) 9:55 AM

10 CIBC WORLD MARKETS INC. The Week Ahead October 1-5, 212 This report is issued and approved for distribution by (a) in Canada, CIBC World Markets Inc., a member of the Investment Industry Regulatory Organization of Canada, the Toronto Stock Exchange, the TSX Venture Exchange and a Member of the Canadian Investor Protection Fund, (b) in the United Kingdom, CIBC World Markets plc, which is regulated by the Financial Services Authority, and (c) in Australia, CIBC Australia Limited, a member of the Australian Stock Exchange and regulated by the ASIC (collectively, CIBC ) and (d) in the United States either by (i) CIBC World Markets Inc. for distribution only to U.S. Major Institutional Investors ( MII ) (as such term is defined in SEC Rule 15a-6) or (ii) CIBC World Markets Corp., a member of the Financial Industry Regulatory Authority. U.S. MIIs receiving this report from CIBC World Markets Inc. (the Canadian broker-dealer) are required to effect transactions (other than negotiating their terms) in securities discussed in the report through CIBC World Markets Corp. (the U.S. broker-dealer). This report is provided, for informational purposes only, to institutional investor and retail clients of CIBC World Markets Inc. in Canada, and does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such offer or solicitation would be prohibited. This document and any of the products and information contained herein are not intended for the use of private investors in the United Kingdom. Such investors will not be able to enter into agreements or purchase products mentioned herein from CIBC World Markets plc. The comments and views expressed in this document are meant for the general interests of wholesale clients of CIBC Australia Limited. This report does not take into account the investment objectives, financial situation or specific needs of any particular client of CIBC. Before making an investment decision on the basis of any information contained in this report, the recipient should consider whether such information is appropriate given the recipient s particular investment needs, objectives and financial circumstances. CIBC suggests that, prior to acting on any information contained herein, you contact one of our client advisers in your jurisdiction to discuss your particular circumstances. Since the levels and bases of taxation can change, any reference in this report to the impact of taxation should not be construed as offering tax advice; as with any transaction having potential tax implications, clients should consult with their own tax advisors. Past performance is not a guarantee of future results. The information and any statistical data contained herein were obtained from sources that we believe to be reliable, but we do not represent that they are accurate or complete, and they should not be relied upon as such. All estimates and opinions expressed herein constitute judgments as of the date of this report and are subject to change without notice. This report may provide addresses of, or contain hyperlinks to, Internet web sites. CIBC has not reviewed the linked Internet web site of any third party and takes no responsibility for the contents thereof. Each such address or hyperlink is provided solely for the recipient s convenience and information, and the content of linked third-party web sites is not in any way incorporated into this document. Recipients who choose to access such third-party web sites or follow such hyperlinks do so at their own risk. 212 CIBC World Markets Inc. All rights reserved. Unauthorized use, distribution, duplication or disclosure without the prior written permission of CIBC World Markets Inc. is prohibited by law and may result in prosecution. 1