THE WEEK AHEAD July 9-13, 2012

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1 THE WEEK AHEAD July 9-13, 2012 Bracing for the S&P 500 Earnings Deluge by Peter Buchanan Economics Avery Shenfeld (416) Benjamin Tal (416) Peter Buchanan (416) Warren Lovely (416) Emanuella Enenajor (416) Andrew Grantham (416) cibcwm.com/res/eco/ EcoResearch.html The reporting season for the Dow s corporate elephants starts on Monday. Some of the market s attention is likely to shift, consequently, in coming days from Europe s politicians and more activist central bankers to the North American earnings landscape. Europe s leaders managed to pull a rabbit from the hat at late-june s summit. Will similar magic on the profit side let North American equity markets extend late June s gains? Success depends on the location of the goal posts, and one advantage that America s boardroom chieftains clearly have in common with Europe s leaders is low expectations. The latest industry analysts consensus from Bloomberg equates to a rise of just over 1% in S&P 500 earnings on the year, the softest pace in three years, and the underlying number is actually more restrained than that figure might suggest. The headline builds in a several point lift from expected stellar results from a key electronics/media firm and easy comps for a major financial institution relative to a losing, year-earlier quarter. Investors buy stocks for tomorrow s, not yesterday s earnings. It s worth noting in that regard that two key indicators of profit expectations have been giving somewhat different messages. Not as many US firms are raising dividends as a quarter or two ago, (matching the pattern seen in Canada), but few so far see things as dire enough to risk shareholder displeasure by cutting them. More worrisome if anything is the sharp deterioration in the earnings guidance. For every S&P 500 member upgrading their estimates for the current quarter, 3.6 have pared their expectations, the highest ratio in over a decade. The good news is that even if GDP only ekes out a rise of around 2% this year, the US will still rank as one of the better mature economies for doing business. The less welcome is that with nearly one dollar in three now earned outside the country, US corporations are more sensitive to external profit headwinds than in the past. Europe s 14% share of S&P earnings makes it the most notable worry spot, but it is not the only one. The greenback s 2% tradeweighted rise against other currencies in the quarter will have a negative translation effect on foreign-sourced earnings. Expected soft Q2 GDP numbers from China on Friday will highlight another concern fast-cooling emerging market growth. Given historical market correlations, the upcoming US earnings harvest will almost certainly have important implications for valuations north as well as south of the border. That gives Canadian investors good reason for keeping an ear closely tuned US Corporations Turn More Cautious (% of S&P 500 Members Hiking/Cutting Dividends) :Q3 11:Q4 12:Q1 12:Q2 Hiking Cutting Source: Bloomberg, CIBC CIBC World Markets Inc. PO Box 500, 161 Bay Street, Brookfield Place, Toronto, Canada M5J 2S8 WGEC1 (416) CIBC World Markets Corp 300 Madison Avenue, New York, NY (212) , (800)

2 Week Ahead Calendar And Forecast CANADA UNITED STATES CIBC Consensus Prior CIBC Consensus Prior Monday 10:30 AM AUCTION: 3-M BILLS $30B, 6-M BILLS $27B July 9 BoC Business Outlook and Senior Loan Officer Surveys 3:00 PM CONSUMER CREDIT (May) (L) $8.5B $6.5B Speaker: 11:55 AM John C Williams (San Francisco) Speaker: Eric Rosengren (Boston) Speaker: Charles L. Evans (Chicago) Tuesday CASH MANAGEMENT BUYBACK (Sep'12 - Sep'13) - $500MM AUCTION: 4-WEEK BILLS $30B (prev) July 10 AUCTION: 3-YR TREASURIES $32B 8:15 AM HOUSING STARTS SAAR (Jun) (H) 207K 200K 211K Speaker: 6:05 AM James Bullard (St Louis) Wednesday AUCTION: 5-YR CANADAS $3.4B AUCTION: 10-YR (r) TREASURIES $21B July 11 7:00 AM MERCHANDISE TRADE BALANCE (May) (H) -C$0.7B -$0.6B -$0.4B MBA-APPLICATIONS Jul-6 (L) -6.7% GOODS & SERVICES TRADE BALANCE (May) (H) -$48.8B -$48.4B -$50.1B WHOLESALE INVENTORIES M/M (May) (L) 0.3% 0.6% 2:00 PM Minutes of Jun 19th-20th FOMC Meeting Thursday AUCTION: 30-YR (r) TREASURIES $13B July 12 NEW HOUSING PRICES M/M (May) (M) 0.2% 0.2% CONTINUING CLAIMS Jun-30 (L) 374K 3306K INITIAL CLAIMS Jul-7 (H) 374K 374K IMPORT PRICE INDEX M/M (Jun) (L) -1.6% -1.0% 2:00 PM TREASURY BUDGET (Jun) (L) -$124.6B Speaker: 3:40 PM John C Williams (San Francisco) Friday July 13 PPI M/M (Jun) (H) -0.2% -0.6% -1.0% PPI M/M (core) (Jun) (H) 0.2% 0.2% 0.2% PPI Y/Y (Jun) (H) 0.5% 0.2% 0.7% PPI Y/Y (core) (Jun) (H) 2.6% 2.6% 2.7% 9:55 AM MICHIGAN CONSUMER SENTIMENT Jul-P (H) Speaker: 1:20 PM Dennis Lockhart (Atlanta) H, M, L = High, Medium or Low Significance SAAR = Seasonally Adjusted Annual Rate Consensus Source: Bloomberg `

3 Week Ahead s Market Call by Peter Buchanan and Andrew Grantham In Canada, June housing starts and May merchandise trade will provide some indication as to the degree to which April s improved GDP growth extended into the later spring months. Although secondary sales have slowed in some markets, the latest permits numbers suggest construction itself is still showing some resilience. We expect that to be reflected in a moderately above consensus 207K print for June starts. Cooling demand in a number of key export markets and softer commodity prices should see the merchandise deficit widen to -C$0.7 bn in May. That s slightly worse than the consensus. Investors will also keep an eye on developments overseas with Eurozone Finance Ministers convening on Monday to consider Spain s bank bailout and China s monthly data dump on Friday. In the US, the main focus will be on Wednesday s FOMC minutes and any hints of support within the committee for stronger Fed action beyond the Twist extension. Trade data are expected to show a further narrowing in the deficit during May, albeit with exports restrained by weak overseas demand. On Friday, producer price figures should signal a further easing in inflationary pressure, but consensus expectations for a modest bounce-back in consumer sentiment may be disappointed. 3

4 Week Ahead s Key Canadian Number: Merchandise Trade Balance May (Wednesday, 8:30 a.m.) 3 Billion C$ Merchandise Trade Balance Emanuella Enenajor (416) Merchandise trade bal. CIBC Mkt Prior -C$0.7B -C$0.6B -C$0.4B -3 May-09 May-10 May-11 May-12F Source: Statistics Canada, CIBC Falling energy prices likely kicked Canada s trade balance when it was already down, knocking the deficit to $700 mn in May. Adding to deflating resource prices, production at a large oil sands plant declined that month, likely denting petroleum export volumes, while an endof-month rail strike, though brief, could have slowed shipments in other sectors. But exports won t entirely be a sea of red a weakening C$ could have boosted looniedenominated receipts of goods sold abroad. And auto shipments to the States may have been up, as domestic data point to increased assembly-line activity. Forecast Implications Growth in Canada s major trading partner, the US will remain tame this year and next, putting downward pressure on the trade balance. But there may be some solace for exporters if commodity prices gain as global growth accelerates next year. Market Impact Our call is slightly below the consensus, which could hit the C$ if we re right. Imports likely inched higher, on rising machinery and equipment purchases. Imports in other categories may have also risen, supported by acceleration in domestic activity in Q2. Other Canadian Releases: Housing Starts June (Tuesday, 8:15 a.m.) Homebuilding in June should have slowed from the pace seen in May, as that reading (and to a greater extent, the month before) was influenced by the executions of a large, outsized chunk of multi-family permits. Also, the weather-related boost to winter/early spring construction likely wore off by June, providing little from that side to stoke the numbers. However, starts could still trend at an above-consensus 207K pace, given recent indicators on the building permits side that the appetite for homebuilding is still alive and well. Looking forward, recent steps from the Department of Finance to cool the housing sector could have some impact in months to come, although the low-rate environment should restrain the extent of any potential correction. 4

5 Week Ahead s Key US Number: Goods & Services Trade Balance May (Wednesday, 8:30 a.m.) Andrew Grantham (416) US Trade Balance - Goods & Services -30 Trade balance CIBC Mkt Prior -$48.8B -$48.4B -$50.1B $ bn Jan10 Aug10 Mar-11 Oct-11 May-12F The US trade deficit narrowed for all the wrong reasons in April, as import prices showed a softer trend than exports, while volumes of both fell around 1.5% in real terms. May could have seen a similar trend. Price reductions for imports were likely more pronounced than those for exports, largely reflecting the slump in oil, resulting in a further narrowing in the trade deficit. In volume terms, though, exports could underperform imports. Softening overseas demand could have further depressed exports of industrial supplies and capital goods, which already gave back ground in April. On the import side, autos may have rebounded slightly following two successive declines, given recent evidence of vehicle demand firming once again. Forecast Implications Although the trade deficit should have narrowed further in May, the change may once again reflect relative price movements. A continued weakening in real exports would add to mounting evidence that slowing global demand is restraining the previously buoyant US manufacturing sector. Market Impact The trade data could be a minor negative for stocks should exports falter further. 5

6 Equity Insights Peter Buchanan TSX Payout Ratio Near Average, But Room for Hikes in Some Sectors The percentage of TSX members hiking dividends hit four-year highs in Q1 as cash-rich firms opted to funnel a larger proportion of rising earnings to shareholders. Our analysis suggests that the payout ratio for the index is now back near its longer term median of about 40%, based on current policies and consensus 2012 earnings. While that suggests a limited potential for further catchup dividend growth, there are still a few sectors where payout levels are low in either historical or absolute terms. This may indicate added leeway in these segments for further distribution increases. The list includes the industrial sector, materials and energy, and consumer discretionary stocks. Dividend Payout Ratios Health Care Utilities Energy Telecom Svcs Financials TSX Comp Info Tech Industrials Cons Staples Cons Discr Materials % *Assumes consensus earnings for 2012, current dividend policy Proj, 2012* Median, last decade Source: Bloomberg, CIBC The US Housing Recovery May Not be Such a Barnburner Are some observers jumping the gun in forecasting an imminent, strong recovery in what until now has been the recovery s weakest link? We suspect so. Although rising rents are a plus for multiples, a continued lack of first-time buyers is likely to slow healing in the single family segment. On the demographic side, the age population has contracted by 3.2 million over the past 12 years. Rising joblessness, meanwhile, has fallen disproportionately on those of typical first-home buying age, with the number of full-time workers aged 45 or under down by some nine million from pre-recession levels. A third factor limiting new buyers is the current near-$1 trillion student debt load. Many graduates are likely to defer home ownership until their finances are in order. Commodity Prices: Not Out of the Woods Commodity prices reached 8-week highs in early July amidst bank easing hopes and light holiday trading. Although we see better 2013 global growth expectations lending sustained support towards year end, we have doubts about the recent rally s staying power. If the PBOC s two staccato rate cuts and mushrooming coal stockpiles are any indication, China s Q2 GDP report on Thursday is likely to show that a bottom there is a quarter or two a way. US fiscal cliff worries, meanwhile, are likely to fuel investor risk aversion in the second half of the year. A welter of sub-par PMI, job market and other indicators suggest global growth is still easing, contributing to the potential for further demand disappointments. 6 Fewer Potential First-Time US Homebuyers chg in US resident population, , mns Under Age Cohort Source: US Census Bureau Eurozone Manufacturing PMI (L) and Cooling GDP Growth in China (R) index Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May :Q1 y/y% chg Official Target 7.5% 10:Q3 11:Q1 11:Q3 CIBC Q2 Fcst 7.4% 12:Q1 Source: Markit, NBS

7 Currency Currents Emanuella Enenajor and Andrew Grantham Canada s Trade Problems not Born in the USA Much has been made about Canada s declining share of US imports, and the week s trade report could point to that issue yet again. But a broader look suggests we ve got bigger fish to fry. Merchandise trade with the US is still in surplus, but trade with the rest of the world doesn t look as healthy, namely with other countries. That category includes emerging Asia, where many producers face lower input costs, and in some cases, currencies that are at advantageous levels for trade. With dynamic Asian nations likely to fare more prominently in future trade, unless the Canadian economy boosts productivity to compete with such markets, Canada faces a rising goods trade and current account deficit that could put destabilizing downward pressure on the C$. Problems Mount for US Manufacturing Previously the shining light of a gloomy recovery, the US manufacturing sector has recently looked increasingly vulnerable. A slump in the ISM manufacturing index and the negative trajectory in factory orders (despite May s rebound) are trends not seen during last year s soft patch. While exports to Asia and other emerging markets contributed significantly to growth in the early part of the recovery, momentum is beginning to wane. Meanwhile US manufacturers also have to cope with a problem closer to home higher inventories relative to shipments than pre-recession. Though global uncertainty will keep the US$ well supported in the near-term, a stuttering manufacturing sector will ensure QE3 and dollar depreciation remain on the cards for Trade Balance with the Overseas Economies Slipping Source: Statistics Canada, CIBC US Manufacturing Restrained by Slowdown in China and Brazil (L), Coupled with Poor Inventory Management (R) Growth by country as proportion of total export growth Mexico UK Japan Canada Brazil China Euro Area Merchandise trade balance, (C$, bns) underperforming US UK, Europe, Japan Other OECD Other Countries YTD vs '11 Recovery 1999 outperforming inventory to shipments (or sales) ratios Manf Wholesale 2008 Retail 2012 average Pre-recession average 2011 Source: Federal Reserve, Census Bureau, CIBC Europe s Job Recession: Devil in the Details The Eurozone jobless rate rose to a record 11.1% in May, holding back the euro even after last week s positive EU summit results. While the recent increase in jobless ranks is only half of what was seen during the recession, the details are still distressing. Jobs lost in Greece, Ireland, Italy, Portugal and Spain account for the entire recent rise in unemployment. But those are the exact nations facing challenges to growth in coming years as governments and households de-lever. So the recently fired won t likely be briskly hired back next year even if the Eurozone emerges from recession then. That factor should keep the ECB dovish, putting pressure on the euro to stay weak vis-à-vis other global currencies in the quarters ahead. 7 Eurozone Joblessness: Blame it on the GIIPS 100% 80% 60% 40% 20% 0% Increase in Eurozone unemployment due to Portugal, Italy, Ireland, Spain and Greece Same period ( recession) Today Source: Eurostat, CIBC

8 CANADIAN RELEASE AND EVENT DATES July/August 2012 MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY CANADA DAY (HOLIDAY) (Markets Closed) INTERNATIONAL RESERVES 8:15 AM $BN $BN CHANGE LEVEL APR LABOUR FORCE SURVEY AVG EMPLOY UNEMP HRLY (HSHOLD) RATE EARN M Y % Y APR BUILDING PERMITS ($) M M (RES) (NON-RES) MAR APR IVEY PURCHASING MANAGERS INDEX Bank of Canada Business Outlook Survey HOUSING STARTS 8:15 AM 000 s (AR) TOTAL SINGLES APR MERCHANDISE TRADE $MN 12 MO. BALANCE MAR 152 3,100 APR ,563 NEW HOUSING PRICE INDEX INT L TRANSACTIONS IN SECURITIES C$BN, NET BONDS MONEY STOCKS TOT MARKET MAR APR WAGE SETTLEMENTS (%) PVT. PUB. TOT. MAR APR SURVEY OF MANUFACTURING SHIPMENTS M Y MAR APR Bank of Canada Interest Rate Announcement Bank of Canada Monetary Policy Report Bank of Canada Governor s Press 11:15 AM ET WHOLESALE TRADE CONSUMER PRICE INDEX M (NSA) Y APR RETAIL TRADE (Current$) M Y MAR APR PAYROLL EMPLOYMENT, EARNINGS & HOURS GDP BY INDUSTRY (2002$) GDP IND.PROD. M M MAR APR INDUSTRIAL PRICES M (NSA) Y APR INTERNATIONAL RESERVES 8:15 AM $BN $BN CHANGE LEVEL JUL 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 Bank of Canada. 8

9 U.S. RELEASE AND EVENT DATES July/August 2012 MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY ISM MFG SURVEY COMP. PRICES INDEX INDEX APR ,5,7-Yr NOTE SETTLEMENT CONSUMER CREDIT 3:00PM RETAIL SALES M Y APR BUSINESS INVENTORIES 3,10-Yr NOTE SETTLEMENT 30-Yr BOND SETTLEMENT FACTORY ORDERS M(SA) Y(NSA) MAR APR LIGHT VEHICLES SALES MIL (AR) Y APR BOT (9:00) REDBOOK (8:55) INDEPENDENCE DAY (HOLIDAY) (Markets Closed) Yr NOTE AUCTION BOT (9:00) REDBOOK (8:55) GOODS & SERV. BALANCE (BOP) $B GDS SERV TOT MAR APR Yr NOTE AUCTION FOMC Minutes 30 ECI 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 ADP SURVEY 8:15 AM ISM NON-MFG SURVEY 3,10-Yr NOTE ANNOUNCEMENT 30-Yr BOND ANNOUNCEMENT INITIAL JOBLESS CLAIMS (8:30) 30-Yr BOND AUCTION TREASURY BUDGET 2:00 PM INITIAL JOBLESS CLAIMS (8:30) EMPLOY.SITUATION NON- CIV AVG FARM UNEMP HRLY PAYROLL RATE EARN (000s) M % Y APR PPI M (SA) Y (NSA) APR MICHIGAN SENTIMENT (P) 9:55 AM CPI M(SA) Y (NSA) APR NET CAPITAL INFLOWS TICS 9:00 AM CAPACITY UTIL/IND. PROD. 9:15 AM LEV M Y APR BOT (9:00) REDBOOK (8:55) HOUSING STARTS MIL (AR) M APR Beige Book EXISTING HOME SALES PHILADELPHIA FED INDEX LEADING INDICATOR 2,5,7-Yr NOTE ANNOUNCEMENT INITIAL JOBLESS CLAIMS (8:30) GDP 27 2-Yr NOTE AUCTION BOT (9:00) REDBOOK (8:55) WAGES & TOTAL SALARY BEN. 11:Q :Q :Q2 PERS. INC & OUTLAYS SAVING INCOME CONS RATE M M AR APR S&P/CASE-SHILLER HOUSE PRICE INDEX 9:00 AM CHICAGO PMI 9:45 AM CONSUMER CONFIDENCE FOMC Meeting Begins 2,5,7-Yr NOTE SETTLEMENT BOT (9:00) REDBOOK (8:55) NEW HOME SALES 5-Yr NOTE AUCTION ADP SURVEY 8:15 AM ISM MFG SURVEY COMP. PRICES INDEX INDEX JUL 3,10-Yr NOTE ANNOUNCEMENT 30-Yr BOND ANNOUNCEMENT LIGHT VEHICLES SALES MIL (AR) Y APR FOMC Rate Decision MONEY SUPPLY M-2 4:30 PM M Y APR DURABLE GOODS ORDERS M Y APR Yr NOTE AUCTION INITIAL JOBLESS CLAIMS (8:30) INITIAL JOBLESS CLAIMS (8:30) (AR) REAL IMPLICIT GDP DEFLATOR 11:Q4(F) :Q1(F) :Q2(A) MICHIGAN SENTIMENT (F) 9:55 AM EMPLOY.SITUATION NON- CIV AVG FARM UNEMP HRLY PAYROLL RATE EARN (000s) M % Y JUL ISM NON-MFG SURVEY

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