Getting Through the To Do List By Avery Shenfeld, Chief Economist & Managing Director July 212
Global Economy: Seven Lean Years 6 Global GDP % chg Avg = 5.% 5 4 7 Lean Years Avg = 3.2% 3 2 1-1 4 5 6 7 8 9 1 11F 12F 13F 14F 2
World s Engines Slowing Together 3 y/y % chg 2 1-1 -2-3 Jan-9 Jan-1 Jan-11 Jan-12 25 2 15 1 5 Eurozone Industrial Production(L) US Manufacturing Shipments (L) China Industrial Production (R) 3
Portugal 2, Ireland 2 The To Do List for 212-13 Greece 3 or managed exit Cyprus Spanish bank/sovereign Other European bank equity infusions Austerity Lite Increased ESM ECB bond purchases or QE Chinese monetary and fiscal stimulus Stronger yuan US softening of fiscal cliff 4
Europe s Slowing Started With Gov t (L) Spread to Broader Eurozone Growth (R) 2.5% 2.% 211 GDP % Government Spending* Household Spending Business Investment 1.5% 1.% -1%.5%.% EU Fiscal Tighteners* Other EU Nations -2% * Excludes transfers *includes UK, Spain, Netherlands, Poland, Greece, Ireland, Portugal, Slovakia, Bulgaria and Malta, where 211 fiscal drag is greater than 1% of GDP -3% Change in volume (y/y), a/o Q1 212 5
Fixed Exchange Rate, Undercapitalized Banks Keys to Eurozone Troubles European Unemployment Rates, % % 25 Spain 11, bns 2 Greece 1 99 15 Ireland 98 1 97 5 Iceland 96 Europe: Credit to Households and Non-financial Corporations Mar-4 Mar-6 Mar-8 Mar-1 Mar-12 95 May-1 Jul-1 Sep-1 Nov-1 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 6
Spain: Too Big to Fail, Too Big to Bail 1 8 6 4 2 Billions of IMF EFSF/ESM Resources EFSM Spain Bank Rescue 2nd Portuguese Bailout Adverse Scenario: Additional Spain Bank Bailout Spain Sovereign Bailout Costs 2nd Irish Bailout Source: EFSF, IMF, European Union, Bloomberg, CIBC 7
Chinese Indicators Point to Sub-8% Growth (L) and Weaker Resource Demand (R) 58 y/y % chg 35 16 China's Consumption y/y % chg 56 3 14 54 25 12 Projected 52 2 1 5 15 8 48 46 1 5 6 4 +3.6%+4.2% *3-month moving average 44 Jan-1 Aug-1 Mar-11 Oct-11 May-12 Purchasing Managers' Index (L) Electricity Use* (R ) Railway Freight Volumes* (R ) 2 9 1 11 12 Copper Oil Source: IEA, CRU, ICSG 8
Lower Inflation (L), Modest Debt (R): Room for Chinese Monetary/Fiscal Boost 1 7.5 14 Gross govt* debt/gdp (%) 8 Current Inflation Target 7. 12 12% 6 6.5 1 4 6. 2 5.5 5. -2 4.5-4 4. Jan-7 Jul-9 Jan-12 CPI, y/y % chg (L) 1-year best lending rate, % (R ) 8 6 4 2 49% G-7 China * national and sub-national Local Govt Financing Vehicles Local Govt- Direct National Govt Source: Bloomberg, Moody s CIBC, IMF 9
2% Growth Retains Labour Market Slack Keeps Fed On Hold for At Least Two Years 18 16 14 12 1 8 6 4 2 % Arrows Mark Start of Fed Tightening Forecast Dec- 84 Jun- 87 Dec- 89 Jun- 92 Dec- 94 Jun- 97 Dec- 99 Jun- 2 Dec- 4 Jun- 7 Dec- 9 Jun- 12 Unemployment Rate U6 Unemployment Rate 1
Lending Growth (L), Huge Reserves, and Low Yields (R) Limit QE or Twist Utility 75 US bank credit (loans and leases, bns of US$) 5 % Operation Twist discussed 7 4 3-yr yield 3 65 1-yr yield End of QE2 2 6 1 55 Jan-7 Sep-7 May-8 Jan-9 Sep-9 May-1 Jan-11 Sep-11 Jun-1 Oct-1 Feb-11 Jun-11 Oct-11 Feb-12 11
US Fiscal (L) and Monetary Policy (R) At Odds 5% Fiscal Cliff Threatens 213 %-pts contribution to GDP from spending 1. Reagan First Term Obama.8.6.4.2. -.2 -.4 12 115 11 15 1 95 9 Index: Q1 211 = 1 Q1-1 Q3-1 Q1-11 Q3-11 Forecast Q1-12 Q3-12 Q1-13 Q3-13 -.6 1 2 3 4 Years of Presidency Forecast Real durables consumption Real resid. construction Real gov't spending 12
Public Sector a Drag on Employment (L), But Private Hiring the Real Problem (R) Change in public employment in 3 years after recessions Change in private employment as % of jobs lost in recession 8 's 35% 6 3% 4 2 25% 2% Only half way 15% -2 1% -4-6 Jul'81- Nov'82 Jul'9- Mar'91 Recessions Dec'7- Jun'9 5% % Jul'81- Nov'82 Jul'9- Mar'91 Recessions Dec'7- Jun'9 Source: BLS, CIBC 13
Easing Food/Energy Inflation (L) Better Credit Access (R) Will Lift H2 Consumption 28. 27.5 Neccessity spending* as % disposable income forecast 6 Consumer Loan Delinquency Rate Back to Normal % 27. 5 26.5 26. 4 25.5 25. Mar- Mar-3 Mar-6 Mar-9 Mar-12 *Gasoline, housing and food purchased for home consumption 3 2 1 7 8 9 1 11 Source: BLS, CIBC 14
As More Families Rent (L) Multiples Construction Benefits (R) % of US families having own home 7 69 68 67 thousands (SAAR) 12 1 8 thousands (SAAR) 4 3 66 6 2 65 82 85 88 91 94 97 3 6 9 64 63 62 Q1 212 4 1 2 Apr-7 Apr-8 Apr-9 Apr-1 Apr-11 Apr-12 Single Family (Left) Multiple-Unit (Right) 15
US Property Price Index: Residential vs. Commercial 13 12 11 1 9 8 7 6 5 Index 26=1 6 7 8 9 1 11 12 Gains in Phoenix, Denver, Miami, Washington, Dallas, Minneapolis S&P/C ase-shiller Home Price Index GSA C ommercial Property Price Index Source: S&P, Fiserv, and MacroMarkets LLC, Federal Housing Finance Agency, CIBC 16
Vacancies Still Much Lower in Canada 18 % 16 US office 14 12 US Industrial 1 8 6 4 2 Cdn Office Cdn Industrial Q1/25 Q2/26 Q3/27 Q4/28 Q1/21 Q2/211 17
Business Investment: A Key Driver Poised to Cool Average contribution from business investment as a % of GDP growth 3% 25% 2% 15% 1% 1 5-5 -1-15 Core capital goods orders (non-defense ex aircraft) % 3m-o-3m 5% -2 % 197's 198's Present Jan-6 Apr-7 Jul-8 Oct-9 Jan-11 Apr-12 Recoveries 18
Canadian Rate Outlook: A Fine Line.5% Output Gap.% -.5% Bank of C anada April Forecast (2.4%) -1.% -1.5% -2.% CIBC Apr Forecast and Boc July Fcst (2.1%) Q1 21 Q3 21 Q1 211 Q3 211 Q1 212F Q3 212F Q1 213F 19
Canada s Government Jobs Slowdown (L) Leaves Hiring to Trade-Sensitive Sectors (R) 12% 1% Public sector share of employment growth Cdn change in employment, last 6 months (thous) 8% 6% Other 4% 2% Manufacturing and Natural Resources (Tradeables) % Dec '6 - Dec '8 Dec '8 - Dec '1 Last 6 months 26K per month total 2
Foreign Economic Activity Index Signals Slowing Canadian Real Exports 1 5-5 -1-15 y/y % chg Fcst -2 5- Q3 6- Q3 7- Q3 8- Q3 9- Q3 1- Q3 11- Q3 12- Q3 13- Q3 Foreign Activity Index Real Exports Source: Bank of Canada, Statistics Canada, CIBC 21
Government Drag Still Set to Hit in 212/13 3.5% 2.5% 1.5% Real Cdn government spending Forecast.5% -.5% -1.5% -2.5% -3.5% 21/11 211/12 212/13 Source: CIBC, Canadian federal and provincial budgets, Statistics Canada 22
Debt-to-Income Ratio by Country (211Q1) Denmark Netherland Ireland Norway Switzerland Australia Sweden Canada US UK Portugal Spain Finland Austria Germany France Italy % 5 1 15 2 25 3 Source: ECB, Bank of Canada, CIBC 23
Heavy Debtors Piled on More (L), Older Canadians Part of the Problem (R) Contribution to Change in Total Household Debt since 27 11.4 % 46 44 Share of Age 45+ in Total No. of Heavy Borrowers % 42 4 38-1.4% Heavy * Medium & Light 27 Debt/Income 36 34 32 7 8 9 1 11 * Heavy Borrowers are those with >1.6 debt to gross income ratio Source: Canadian Financial Monitor, CIBC 24
Consumers Reduced Debt Appetite Slows Retail Sales: Low Rates Needed for Longer 1% y/y chg, 3 mo. m.a. y/y chg 2% 16% 6% 12% 8% 2% 4% % -2% -4% -8% -6% Apr-3 Apr-4 Apr-5 Apr-6 Apr-7 Apr-8 Apr-9 Apr-1 Apr-11 Apr-12-12% Real Retail Consumption (L) Consumer Credit (R) 25
The Housing Market: Cooling Underway Unit Sales Avg House Price 2 15 1 5-5 -1-15 -2-25 y/y % chg 3-mos moving avg 1 9 8 7 6 5 4 3 2 1 y/y % chg 3-mos moving avg 21.1 21.12 211.2 211.4 211.6 211.8 211.1 211.12 212.2 21.1 21.12 211.2 211.4 211.6 211.8 211.1 211.12 212.2 Source: CREA, CIBC 26
Bond Flows, Not Dutch Disease, Key to C$ 35 C$bn (3M Sum) US /C$ 15 3 25 1 2 95 15 1 9 5 85-5 8-1 Dec-6 Dec-7 Dec-8 Dec-9 Dec-1 Dec-11 75 Net Purchases of C$ Bonds (L) Canadian Dollar (R) 27
Resulting C$ Strength Hits Labour Costs; Hurts Canada s Trade Balance 3 Goods Sector Wage Rates (US dollars/hour) 25 Canada 2 US 15 1 5 Jan-93 Oct-96 Jul- Apr-4 Jan-8 Oct-11 28
Resource Link Means Contained C$ Until Rate Hikes or Global Growth Improves US$/bbl US$/C $ 12 1.6 11 1.4 1 9 1.2 1..98 8.96 7.94 Jan- 11 May- 11 Sep- 11 Jan- 12 May- 12 Crude Oil (WTI) Canadian Dollar 29
Commodities Rebound With Better 213 Growth Non-Cyclical Commodities Favoured for 212 Average 6-Jun 28 29 21 211 212 (f) 213 (f) Oil (WTI) $/bbl 85 1 62 8 95 95 98 Natural Gas (Henry) $/Mn Btu 2.39 8.89 3.82 4.37 3.99 2.5 3.5 Gold* $/troy oz 163 87 188 146* 1531* 165* 16* Copper $/lb 3.37 3.16 2.35 3.43 4.1 3.5 4. Aluminum $/lb.88 1.17.76.99 1.9.85.95 Nickel $/lb 7.29 9.57 6.69 9.91 1.38 7.5 7.75 Zinc $/lb.85.85.76.98 1..82 1. Lumber** $/' bd ft 284 252 221 245 255 27 315 Potash*** $/tonne 435 449 44 316 412 463 511 Uranium $/lb(contract) 6 95 65 6 68 6 65 * end of period **1st Futures ***producer, realized 3
World Oil Production Has Outpaced Demand (L), US Crude Inventories at 22-Year High (R ) 9 Mn bbl/day Mn bbl/day 4 Mn bbl 89 88 38 87 36 86 85 34 84 83 32 82 3 81 8 Jan-9 May-9 Sep-9 Demand (L) Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-12 May-12 Production (L) 28 26 85 9 95 5 1 31
1 9 8 $/bbl A More Challenging Environment for Canadian Megaprojects Average 215 NYMEX Light Sweet Futures Price 7 6 5 4 Source: Company Reports, CAPP, CIBC 3 2 1 Upgraded Mining Mining SAGDaverage Tight Carbonate Saskatchewan Bakken 32
Investment Intentions, Income Growth Highlight Shifting Regional Fortunes 3 25 2 Private/Public Investment Intentions* (212), % * Construction + machinery & equipment 26.9 15 1 5 1.5 2.1 2.2 4.2 4.7 5.6 6.2 1.1 1.3-5 -2. PEI Ont NS NB Sask Man Qué Cda BC Alta N&L 16 14 Corporate Profits, CAGR (22-1) Sask 12 1 8 BC Man N&L 6 4 2 Ont NS Qué PEI NB Cda Alta 3 4 5 6 7 8 9 Personal Income, CAGR (22-1) 33
Analysts Haven t Pared H2 Earnings Much (R) Historically Low Forward PE Offers Cushion (L) 17 16 15 14 S&P 5 median, last 3 yrs 14.4. -.5-1. 13 12 11 12. -1.5-2. % Change in "Bottom-Up" for TSX Composite EPS Since Mid-April 1-2.5 9 8 Nearly 3-pts below long term average Jan-7 Sep-8 May-1 Jan-12 TSX Composite S&P 5-3. -3.5 12:Q2 12:Q3 12:Q4 34
Bond Yields Drift Higher, But Very Low By Historic Standards Thru 214 6 % 5 4 3 2 1 Mar- 6 Jan- 7 Nov- 7 Sep- 8 Jul-9 May- 1 Mar- 11 Jan- 12 Nov- 12 Sep- 13 2-Yr Canadas 1-Yr Canadas 1-Yr US Treasuries 35