Economic outlook: Time for an oil change? June 2, Douglas Porter, CFA. Chief Economist, BMO Financial Group

Transcription

1 Economic outlook: Time for an oil change? June 2, 2015 Douglas Porter, CFA Chief Economist, BMO Financial Group Please refer to the next page for Important Disclosures A presentation of BMO Capital Markets Economic Research

2 General Disclosure BMO Capital Markets is a trade name used by the BMO Investment Banking Group, which includes the wholesale arm of Bank of Montreal and its subsidiaries BMO Nesbitt Burns Inc., BMO Capital Markets Ltd. in the U.K. and BMO Capital Markets Corp. in the U.S. BMO Nesbitt Burns Inc., BMO Capital Markets Ltd. and BMO Capital Markets Corp are affiliates. Bank of Montreal or its subsidiaries ( BMO Financial Group ) has lending arrangements with, or provide other remunerated services to, many issuers covered by BMO Capital Markets. The opinions, estimates and projections contained in this report are those of BMO Capital Markets as of the date of this report and are subject to change without notice. BMO Capital Markets endeavours to ensure that the contents have been compiled or derived from sources that we believe are reliable and contain information and opinions that are accurate and complete. However, BMO Capital Markets makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions contained herein and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this report or its contents. Information may be available to BMO Capital Markets or its affiliates that is not reflected in this report. The information in this report is not intended to be used as the primary basis of investment decisions, and because of individual client objectives, should not be construed as advice designed to meet the particular investment needs of any investor. This material is for information purposes only and is not an offer to sell or the solicitation of an offer to buy any security. BMO Capital Markets or its affiliates will buy from or sell to customers the securities of issuers mentioned in this report on a principal basis. BMO Capital Markets or its affiliates, officers, directors or employees have a long or short position in many of the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon. The reader should assume that BMO Capital Markets or its affiliates may have a conflict of interest and should not rely solely on this report in evaluating whether or not to buy or sell securities of issuers discussed herein. Dissemination of Research Our publications are disseminated via and may also be available via our web site Please contact your BMO Financial Group Representative for more information. Conflict Statement A general description of how BMO Financial Group identifies and manages conflicts of interest is contained in our public facing policy for managing conflicts of interest in connection with investment research which is available at ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST BMO Financial Group (NYSE, TSX: BMO) is an integrated financial services provider offering a range of retail banking, wealth management, and investment and corporate banking products. BMO serves Canadian retail clients through BMO Bank of Montreal and BMO Nesbitt Burns. In the United States, personal and commercial banking clients are served by BMO Harris Bank N.A., Member FDIC. Investment and corporate banking services are provided in and the through BMO Capital Markets. BMO Capital Markets is a trade name used by BMO Financial Group for the wholesale banking businesses of Bank of Montreal, BMO Harris Bank N.A, BMO Ireland Plc, and Bank of Montreal (China) Co. Ltd. and the institutional broker dealer businesses of BMO Capital Markets Corp. (Member SIPC), BMO Nesbitt Burns Securities Limited (Member SIPC) and BMO Capital Markets GKST Inc. (Member SIPC) in the U.S., BMO Nesbitt Burns Inc. (Member Canadian Investor Protection Fund) in, Europe and Asia, BMO Capital Markets Limited in Europe, Asia and Australia and BMO Advisors Private Limited in India. Nesbitt Burns is a registered trademark of BMO Nesbitt Burns Inc., used under license. BMO Capital Markets is a trademark of Bank of Montreal, used under license. "BMO (M-Bar roundel symbol)" is a registered trademark of Bank of Montreal, used under license. Registered trademark of Bank of Montreal in the United States, and elsewhere. TM Trademark Bank of Montreal COPYRIGHT 2015 BMO CAPITAL MARKETS CORP. A member of BMO Financial Group

3 Market volatility (as of June 1, 2015) 2200 Stocks Record Canadian dollar ($/C$) 4 10-year GoC yield (percent) 1800 S&P 500 (lhs) Record TSX (rhs) Record lines: weekly averages record dots: daily closes Oil price gyrations the big driver BMO Capital Markets 1 Global GDP: New leader, new laggards 2015:Q1 (y/y % chng) Real GDP India 7.5 China Mexico 2.5 UK Australia (e) 2.0 Eurozone Brazil Japan Russia World Emerging markets G Another sub-par year (e) = estimate BMO Capital Markets 2

4 North American growth divergence in 2015 (q/q % chng : ar) Real GDP Weather Weather -6 forecast to outpace by most since 2003 BMO Capital Markets 3 consumer positives United States 120 Confidence¹ (1985 = 100) 20 Auto sales (mlns : 3-mnth ma) 4 Job growth (y/y % chng) 7½-yr high 15-yr high 100 8½-yr high Bonus: Gas prices, mortgage rates ¹ Source: Conference Board Consumer Confidence BMO Capital Markets 4

5 Jobless rates: falling fast not so much Unemployment rate (percent) % 8.7% Greece 25.4 Spain 23.0 Portugal 13.5 Italy France 10.6 Ireland % 6.8 Australia [33-year low] 5.8% 5.4% 5.4 UK 5.4 Germany 4.7 Japan % forecast participation rate: Lowest since 1978 BMO Capital Markets 5 Commodities: Oil spill (as of June 1, 2015) Crude oil ($/bbl) 150 Brent WTI¹ ,000 1,600 1,200 Precious metals ($/oz) Silver (rhs) Gold (lhs) Natural gas ($/mmbtu) Base metals ($000s/ton) Nickel (rhs) Copper (lhs) ¹ West Texas Intermediate BMO Capital Markets 6

6 : The crude reality The first quarter of 2015 will look atrocious, because the oil shock is a big deal for us - Stephen Poloz, Governor of the Bank of, March, 2015 Canadian oil & gas industry 6.2% of GDP 2.2% of employment 34% of private non-housing capital spending Estimated impact of lower oil prices in ppts from real GDP growth Oil sands Regional breakdown (oil & gas % of GDP) Alberta 24% Newfoundland & Labrador 22% Saskatchewan 15% BMO Capital Markets 7 Regional outlook: The changing of the guard (y/y % chng) Retail sales¹ (3-mnth ma) Employment² Real GDP³ BC 8.2 MB 2.9 BC 2.4 ON 4.3 AB 2.4 ON 2.4 MB 1.3 QC 1.7 MB 2.1 QC 1.1 SK 1.4 QC 1.8 PE 0.2 PE 0.4 NS 1.7 NB -0.1 NB 0.4 PE 1.4 NL -0.6 ON 0.2 NB 1.1 AB -2.0 NL -0.6 SK 0.8 NS -3.7 NS -0.7 AB -0.2 SK -4.3 BC -0.8 NL ¹ March 2015 ² April 2015 ³ 2015 BMO forecast BMO Capital Markets 8

7 Provincial deficits: Some progress, some trouble FY15/16 (% of GDP) Budget balance British Columbia Alberta Saskatchewan Manitoba Ontario Quebec New Brunswick Nova Scotia Prince Edward Island¹ Newfoundland and Labrador All provinces Federal 0.1 $0.3 bln $5.0 bln 0.1 $0.1 bln $0.4 bln $8.5 bln 0.4 $1.6 bln $0.5 bln $0.1 bln 0.0 $0.0 bln $0.9 bln $13.6 bln 0.1 $1.4 bln deficit surplus Quebec: Before GF transfers Newfoundland and Labrador: FY14/15 ¹ Budget pending Sources: Federal and provincial budgets/fiscal updates BMO Capital Markets 9 Debt: Crossing paths (% of GDP) Net government debt Federal crossover 20 All other BMO Capital Markets 10

8 Federal budget Source: theglobeandmail.com Canadian political landscape 2015 Federal election (as of May 26, 2015) Political party Latest polls¹ 2011 Votes (%) Seat projections Votes (%) Seats Stephen Harper [Conservatives] Thomas Mulcair [NDP] Conservatives NDP Liberals Bloc Québécois Justin Trudeau [Liberals] Other ¹ Weighted average poll $5.5 bln of goodies announced Income splitting, Universal Child Care Benefit, child care expense deduction, TFSA boost, RRIF changes Source: ThreeHundredEight.com BMO Capital Markets 12

9 Will Canadian housing calm, correct, crash? Seven-year glitch 2015: is in serious trouble 2014: Why isn t immune to a -style housing crash 2013: Inside the great real estate crash of : s housing crash begins 2011: s housing bubble deemed close to bursting 2010: s housing bubble: An accident waiting to happen 2009: Why s housing bubble will burst 2008: s housing bubble could soon burst Deutsche Bank 2015 Maclean s Maclean s Canadian Business CBC News CCPA The Tyee investment firm Canadian housing stays solid... 8 Existing home sales (mlns : ar) Home prices¹ (y/y % chng) 7 (rhs) (lhs) ¹ [] Teranet Composite 11 [] FHFA House Price Index... getting back on track BMO Capital Markets 14

10 Canadian house prices: Regional divide Vancouver Toronto (y/y % chng : nsa : as of April 2015) Existing home prices¹ Average home price (y-t-d avg) $882,000 $610, $435,000 Victoria 4.0 $504,000 Winnipeg Calgary $279,000 $451,000 Montreal 1.1 $331,000 Ottawa 0.1 $368,000 Saskatoon -0.1 $342, ¹ HPI composite benchmark where available ² Average home price (y-t-d) Sales up 6% y-t-d in April BMO Capital Markets 15 Canadian consumers: Still borrowing Households¹ 1.8 Debt ratio (ratio to personal disposable income) 15 Debt growth² (y/y % chng) 1.6 crossover Debt ratio at record highs ¹ Households, nonprofits and unincorporated businesses ² Consumer credit and residential mortgages only BMO Capital Markets 16

11 Global debt comparison: not unusual Household debt-to-disposable income 2014 (ratio) High Low Denmark Netherlands Iceland Switzerland Norway Australia New Zealand Ireland Sweden South Korea UK Spain Finland Japan Belgium Austria Greece France Germany Italy Poland Hungary median Source: Reserve Bank of New Zealand BMO Capital Markets 17 Canadian dollar: Leaking oil Loonie drops below 80, rebounds Bank of changes course Commodities retreat $: Renewed strength January: Down 9%, 2 nd largest drop ever BMO Capital Markets 18

12 Bank of : One and done? Canadian dollar ( : as of June 1, 2015) Year-end parity Poloz takes over at BoC (June 1, 2013) Bank of Governor Stephen Poloz Q1 atrocious BMO Capital Markets 19 Inflation plunges for now Consumer price index (y/y % chng) 4.5 United States 4.5 Total CPI (latest month) Brazil Total Core 1.8% -0.2% Total Core 2.3% 0.8% India China Japan Eurozone UK -0.1 forecast Mostly a gas story BMO Capital Markets 20

13 Inflation and deflation Consumer price index (y/y % chng : as of April 2015) Deflationary Gasoline Down 14% y/y in late May Natural gas Home entertainment equipment -4.8 Car rentals -4.2 Camera equipment -3.4 Toys -2.2 Sugar -1.9 Computer equipment -1.4 Mortgage interest -0.9 Inflationary Beef 18.6 Pork 7.2 Beer 6.6 Cigarettes 6.4 Phone services 6.3 Household furniture 6.3 Books 6.3 Tuition fees 3.2 Electricity 2.9 Core CPI 2.3% Overall CPI 0.8% Interest rates: Bank of back on the sidelines (% : as of June 1, 2015) 6 5 Overnight rate Year-end forecast year bonds Year-end % record lows 0%-0.25% Fed hike in September? % 1.64% Yields slide despite QE end BMO Capital Markets 22

14 Global diversity Equity markets (% chng) year-to-date (as of June 1, 2015) China 51.7 China 43.7 India 29.9 Russia 20.6 Nasdaq 13.4 Japan 17.9 S&P Germany 16.6 DJIA 7.5 Nasdaq 7.3 TSX 7.4 Australia 6.4 Japan 7.1 Brazil 6.0 Germany 2.7 UK 5.9 Australia 0.7 TSX 3.0 UK -2.7 S&P Brazil -2.9 India 1.3 Russia DJIA BMO Capital Markets 23 Outlook in a nutshell expansion still young Businesses hiring, consumers thriving, oil prices help Housing recovery ongoing tripped up by oil Major regional re-shuffling underway Housing market concerns overdone Provincial governments tight-fisted Interest rates: Gradual upward drift in rates Exchange rates: dollar to hold firm Stocks: Bull market to continue, but valuations a headwind BMO Capital Markets 24