Early, But Fundamentally Correct

Transcription

1 Early, But Fundamentally Correct Economic Update By Avery Shenfeld, Chief Economist & Managing Director June 11, 29

2 A Shock Heard Round the World y/y % chg in W orld Real GDP Forecast

3 Bamboo Shoots 13 Index Korean Industrial Production 65 China's PMI expansion/contraction threshold Jan-3 Jan-5 Jan-7 Jan-9 3 Feb-7 Oct-7 Jun-8 Feb-9 3

4 Emerging Markets Savings Represents Potential Consumer Spending Power 7 Personal Savings, US$ Bn US China 4

5 Historical Lag in Commodity Prices vs Global Industrial Production Hot rolled steel Copper Aluminum Zinc Polyethylene Ethylene Potash Oil Coal Months Months Lead Timing vs Global Industrial Production Lag 5

6 Global Oil Demand Drop (Left) Leaves OPEC with Spare Capacity 4% yr/yr chg 9 Mn bbl/day 3% CIBC Forecast 8 7 2% 6 1% 5 % 4-1% 3 2-2% 1-3% Jan- Jan-2 Jan-4 Jan-6 Jan-8 6

7 Recent US Indicators Still in Recession Range 2 ADS Index of US Business Conditions Index, Long-run Average = prior recessions typical recessionend level May Source: Philadelphia Fed 7

8 US Economy: Sharp Recession, Sub-Par Recovery 6 q/q % chg, s.a.a.r. Real GDP 4 Forecast Q2 7.Q4 8.Q2 8.Q4 9.Q2 9.Q4 8

9 A Penny Saved... is a Penny Not Spent Q Q4-57 Q3-63 Q2-69 Q1-75 Q4-8 Q3-86 Q2-92 Q1-98 Q4-3 Q US Net Worth/Disp Income (left, inverse scale) Savings Rate (right) Forecast

10 Fed Not Repeating Japan s 199s Errors 7 % yrs to get rate to 1% Only 1 yr after equity peak Equity Peak months after equity peak Fed Funds Since Mar-7 BoJ Overnight After Jun-89 1

11 Fed Has the Printing Press Running Full Speed 4% 6-month annualized chg, M1 35% 3% 25% 2% 15% 1% 5% % -5% -1%

12 The Banking Crisis is Over 6 3-mn Libor (%) Jan-8 4-May-8 4-Sep-8 4-Jan-9 4-May-9 12

13 Fiscal Stimulus is Massive 25 US budget deficit as percentage of GDP 2 Fcst

14 Past War Debts Were Inflationary Look For 5%+ US CPI in US CPI, y/y % chg WW I WW II Vietnam Subprime Crisis? Korea

15 US Dollar on Long-Term Slide 12 Trade-w eighted US$ Index May2 May3 May4 May5 May6 May7 May8 May9 15

16 Canada s Recession: Steeper Dive This Time.% GDP drop 2 quarters after peak Employment drop 6 months after peak -.5% -1.% -1.5% -2.% -2.5% early 198's early 199's current recession 16

17 Recovery Will Also Be Sub-Par %, s.a.a.r. Forecast % 7:1 7:3 8:1 8:3 9:1 9:3 1:1 1: Real GDP Growth (left) Unemployment Rate (right) 17

18 Milder Decline in Household Net Worth 2 y/y % chg % :Q1 93:Q4 96:Q3 99:Q2 2:Q1 4:Q4 7:Q3-17.9% 8:Q4 Canada US 18

19 Canadian Banks Less Levered Pre-Crisis 7 Asset-to-Capital Multiples European Banks (highest) European Banks (avg) US Investment Banks (Sep-8) Canadian Chartered Banks 19

20 Non-Financial Debt/Equity Lower in Canada :1 92:1 94:1 96:1 98:1 :1 2:1 4:1 6:1 8:1 US UK Euro Canada 2

21 Government Dissaving Will More Than Offset Household Saving Projections in C$ Bn (29/1 and 21/11 cumulative) 4 2 Savings Increase Federal stimulus 21

22 A Structural Shift in Canadian Trade Other Products Furniture and Rail/Ship Equipm. Autos Energy/ Commodity related Trade bal. C$ bn

23 C$ Now More Responsive to Commodities 1. Correlation (Commodity price index and C $).14 C$ standard deviation present present 23

24 C$ Move Looks Early vs Commodities 35 Index US cents monthly averages Forecast 5 Nov-98 May-1 Nov-3 May-6 Nov BoC Commodity Index (left) Canadian Dollar (right) 24

25 TSX Cheap vs Long-Term Earnings 6 P/E (based on 1-year avg. annual earnings) Long-run avg. = Q1.84 Q1.91 Q1.98 Q1.5 25

26 TSX Spring Move Eclipsed Any Pre-Recession-End Rally US recession dates (coinciding with TSX bear markets) TSX return from its low to end of US recession TSX return over US recession % 13% % 21% % 5% % 14% % 17% % 34% % 13% 21* -8% -17% Median, past recessions -22% 14% Current Recession, 27-? -25%** 4%** * Market fell for 1 months after offical end of recession ** Through Early June 26

27 Corrective Rallies Will Be Short-Lived But Canadas Will Outperform 6 % Forecast yr UST 3 2 Cdn overnight rate 1-yr Cda 1 Jul-4 May-5 Mar-6 Jan-7 Nov-7 Sep-8 Jul-9 May-1 27

28 Gov t of Canada Issuance Elevated vs Deficits 2 % of GDP Past recessions Budget Balance Net Financial Requirements 28

29 Less Pressure from Canadian Borrowing Less Temptation to Inflate Debt Away Outstanding Canadas vs Treasuries 35 3 % of GDP FY Government of C anada Bonds US Treasuries 29

30 Provincial Deficit Target Near $3 Bn Based on Earlier, More Optimistic Forecasts 29 Real GDP, Yr/Yr % Chg Shaded areas reflect current fcst range: 5 large Cdn banks + Conference Board BC Alta Sask Man Ont Qué NB NS PEI N&L CIBC Fcst (June 29) Government Fcst (Time of Budget) 3

31 Still Some Room for Spread Narrowing 5 Spread between 1-Yr corporate bonds (BBB) and 1-Yr Canadas, bps 4 3 June 1 2 new normal? average 1993 to 27 approx /1/28 7/1/28 1/1/29 31