The Oil Shock: How Shocking Is It? By Avery Shenfeld, Chief Economist & Managing Director

Transcription

1 The Oil Shock: How Shocking Is It? By Avery Shenfeld, Chief Economist & Managing Director May 211

2 Global Growth Shy of Pre-Recession Pace 6 Annual Global Real GDP growth 5 5% yrs before recession CIBC Forecast 2

3 Oil Cost Spikes Preceded US Recessions But Current Shock Smaller in % of OECD GDP Source: Wall Street Journal, CIBC 16 $/Barrel 14 12?

4 Net Speculative Interest in Oil Markets Hits Record Levels 3, 25, 2, 15, 1, 5, -5, -1, Non-C ommercials Nymex Lt. Sweet C rude, 1 bbl contracts Jan-6 Jul-6 Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul-1 Jan-11 Source: CFTC 4

5 Excess Capacity Should Stabilize Oil Avg Near $1/bbl if No Further Dominoes Fall 16 $/bbl Mn bbl/day Source: US DOE, Bloomberg Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul-1 Jan-11 OPEC Spare Capacity West Texas Price (L) 5

6 US Food/Energy Inflation Gains No Longer Lead to Wage or Core CPI Spikes Correlation with food & energy inflation, 12-months lag C ore inflation Wages 6

7 US Labour Market: A Long Way to Go Before Fed Even Thinks of Hiking Rates 6 4 % decline in non-farm payrolls from peak Months from Employment Trough 28-1 recession /recovery

8 Cuts Will Partly Undo Tax Stimulus (L), Debt Path Shows Need for More Restraint (R) 3 Fiscal Injections in 211, $Bn* 12 Publicly held debt without major policy changes (% of GDP*) *compared to 211 Obama Budget Dec Tax Deal April Spending Cuts *CBO Baseline with an extension of Bush tax cuts beyond 212, AMT indexation and const. Medicare rates after

9 US Exporters: Going Where the Growth Lies (L), US Dollar at Historic Lows in Real Terms (R) Index Jan 29= Trade-weighted US$ Index=1 (Mar1973) Real (L) Nominal (R) rest of the world emerging markets Jan-9 Mar-9 May-9 Jul-9 Sep-9 Nov-9 Jan-1 Mar-1 May Dec74 Dec92 Dec1 9

10 No Flood of US Dollars: Quantitative Easing No Risk to US$ or Inflation M2, y/y % chg US M2 avg 2-1 Jan- 7 Jul- 7 Jan- 8 Jul- 8 Jan- 9 Jul- 9 Jan- 1 Jul- 1 Jan- 11 Canada US 1

11 QE1 More Effective in Restraining Bond Yields Than QE2 8 Reduction in 1-yr bond yields, bps (average of research results*) QE1 QE2 * Swanson (211), Gagnon/Raskin/Remache/Sack (211), Hamilton/Wu (211) 11

12 Bond Yields to Rise, But Gently 6 1-yr bond yields (%) Canada Forecast US Dec Dec4 Dec8 Dec12 12

13 Canada s Edge in Net Debt Keeps 3-Year Rates Well Below US 25 General Gov't Debt, % of GDP (21) 2 Net Debt = Gross Debt less Financial Assets JPN ITA FRA UK US GER CAN Gross Debt Net Debt 13

14 211/212 Budget Balances /12 Budget Deficits, % of GDP Deficit * Based on CBO estimates for FY Surplus US* Ont NB Alta Qué NS PEI Man BC N&L Sask Canada Federal Gov't Provincial Governments 14

15 Net New Supply of Treasuries Running More than 3X Faster than Net Canada Issuance Net Bond Issuance, % of GDP Fcst -2 6/7 7/8 8/9 9/1 1/11 11/12 US Treasuries Canadas 15

16 Gross / Net Canada Issuance: Off its Peak but Boosted by Plans to Enhance Liquidity 1 8 Government of Canada Nominal Issuance, C$billions Note: 211/12 is forecast FY F Net Gross 16

17 Budgets Based on Cautious Forecasts Real GDP Nominal GDP Y/Y % Chg 21E 211F 212F 21E 211F 212F Provincial Forecasts 1 BC Alta Sask Man Ont Qué NB NS PEI NA 2.3 NA NA N&L Canada Forecasts Provincial Federal CIBC figures are estimates, differ from growth rates reported by StatCan 2. Weighted average of individual provincial forecasts 3. CIBC's current national forecast 17

18 Spending Needs to Slow Across Country 12 Growth in Provincial Expenditures, % (C AGR) BC Alta Sask Man Ont Qué NS N&L History: 5Y Avg (FY3-8) Plan: 3Y Avg (FY1-13) 18

19 The Continental Divide: Huge Gap in Output Gaps 4. Output Gap, % of GDP Mar-1 Mar-3 Mar-5 Mar-7 Mar-9 Mar-11 Canada US 19

20 Canada Sees Nearly 3% Growth, Prime and Overnight Up 1 bps in 2 nd Half 8.% 6.% 4.% 2.%.% -2.% -4.% -6.% GDP growth (s.a.a.r.) % Forecast -8.% Q1-7 Q4-7 Q3-8 Q2-9 Q1-1 Q4-1 Q3-11 Q Real GDP Growth (L) Overnight Interest Rate (R) 2

21 Impact of a 25% Oil Price Shock on Canadian GDP.3 % chg, SAAR Pre-shock = Growth (L) Level (R ) Quarters from start of shock

22 Oil Prices Can Trump Rate Hikes for C$ Direction $/bbl C$ (reverse scale).96 9 First rate hike Second rate hike 1. 8 C$ depreciation 1.4 Third rate 1.8 hike 7 Feb1 May1 Aug1 Nov1 Feb11 WTI Crude Oil (L) CAD (R) C$ cooled in 21 despite rate hikes Could see a replay of that story towards mid

23 Real Incomes: Advantage Canada Index of Real Gross National Income (1999 Q4 = 1) 21-Q4 23-Q4 25-Q4 27-Q4 29-Q4 Canada US Q4

24 Cdn Household Leverage Reaching US Levels 2 debt as a % of Personal Disposable Income Note: both measures include unincorporated businesses Q1-9 Q1-94 Q1-98 Q1-2 Q1-6 Q1-1 United States Canada 24

25 Why the Bank of Canada Will Hike: Current Debt Trend Leads to Trouble 15 % Q1-9 Q1-94 Q1-98 Q1-2 Q1-6 Q1-1 Q1-14 Debt Service Ratio Average Interest Rate on Debt 25

26 Gasoline Bills Take Bite out of Spending Power As a Share of Disposable Income % % As a Share of Retail Sales Source: Statistics Canada Note: Data for 1 st quarter estimated by CIBC 26

27 Strong Fundamentals For Capital Expenditures Record High Corporate Cash Position cash & deposits / total equity (L) cash & deposits / Sales of Goods & Services (R) Real Return on Capital Employed (%) Long-term average Source: Statistics Canada, CIBC 27

28 Business Investment on a Steeper Climb A Normal Recession And Faster Recovery 15 1 Peak-to-trough in the past 3 recessions (index) 1 8 Avg q/q growth (ar) in the 1 st 5 qtrs of recovery (%) Quarters current Source: Statistics Canada, CIBC 28

29 Canadian Exports Recovering But Lose US Share As C$ to Stay Near Parity Index, Q2 98 = 1 Index, Q2 98 = gap Q2-98 Q3- Q4-2 Q1-5 Q2-7 Q Real Cdn Exports (L) US Activity Index (BoC) (R) 29

30 House Prices Still Rising But Rate Hikes Likely to Prompt a Correction Major Markets 25 2 y/y % chg Jan-7 May-7 Sep-7 Jan-8 May-8 Sep-8 Jan-9 May-9 Sep-9 Jan-1 May-1 Sep-1 Jan-11 Weighted residential avg. price Source: CIBC Residential avg. price 3

31 Asset Class Performance and Oil Shocks 7% 6% % probability each asset class will outperform others in quarter, 1956-date 5% 4% TSX Composite Long Canada Cash 3% 2% 1% % -3 5 % change in oil prices during quarter 31

32 Interest and Exchange Rate Outlook END OF PERIOD: 27-Apr Jun Sep Dec Mar Jun Sep Dec CDA Overnight target rate Day Treasury Bills Year Gov't Bond Year Gov't Bond Year Gov't Bond U.S. Federal Funds Rate Day Treasury Bills Year Gov't Note Year Gov't Note Year Gov't Bond Canada - US T-Bill Spread Canada - US 1-Year Bond Spread Canada Yield Curve (3-Year 2-Year) US Yield Curve (3-Year 2-Year) EXCHANGE RATES CADUSD USDCAD USDJPY EURUSD GBPUSD AUDUSD USDCHF USDBRL USDMXN