The Oil Shock: How Shocking Is It? By Avery Shenfeld, Chief Economist & Managing Director May 211
Global Growth Shy of Pre-Recession Pace 6 Annual Global Real GDP growth 5 5% 4 3 2 4 yrs before recession 21 211 212 CIBC Forecast 2
Oil Cost Spikes Preceded US Recessions But Current Shock Smaller in % of OECD GDP Source: Wall Street Journal, CIBC 16 $/Barrel 14 12? 1 8 6 4 2 7 75 8 85 9 95 5 1 3
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
Excess Capacity Should Stabilize Oil Avg Near $1/bbl if No Further Dominoes Fall 16 $/bbl Mn bbl/day 6 14 12 1 5 4 8 3 6 2 4 1 2 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
US Food/Energy Inflation Gains No Longer Lead to Wage or Core CPI Spikes Correlation with food & energy inflation, 12-months lag 1. 1971-199.8 1991-21.6.4.2. C ore inflation Wages 6
US Labour Market: A Long Way to Go Before Fed Even Thinks of Hiking Rates 6 4 % decline in non-farm payrolls from peak 2-2 -4-6 -8-24 -18-12 -6 6 12 Months from Employment Trough 28-1 recession /recovery 1948 1953 1958 27-7
Cuts Will Partly Undo Tax Stimulus (L), Debt Path Shows Need for More Restraint (R) 3 Fiscal Injections in 211, $Bn* 12 Publicly held debt without major policy changes (% of GDP*) 25 1 2 15 8 1 6 5-5 -1 *compared to 211 Obama Budget Dec Tax Deal April Spending Cuts 4 2 2 2 4 6 *CBO Baseline with an extension of Bush tax cuts beyond 212, AMT indexation and const. Medicare rates after 211. 8 21 12 14 16 18 22 8
US Exporters: Going Where the Growth Lies (L), US Dollar at Historic Lows in Real Terms (R) 16 15 14 Index Jan 29=1 14 13 Trade-weighted US$ Index=1 (Mar1973) Real (L) Nominal (R) 45 4 13 12 35 12 11 11 3 25 1 9 rest of the world emerging markets 1 9 2 15 8 Jan-9 Mar-9 May-9 Jul-9 Sep-9 Nov-9 Jan-1 Mar-1 May-1 8 1 Dec74 Dec92 Dec1 9
No Flood of US Dollars: Quantitative Easing No Risk to US$ or Inflation 16 14 12 1 M2, y/y % chg 8 6 4 2 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
QE1 More Effective in Restraining Bond Yields Than QE2 8 Reduction in 1-yr bond yields, bps (average of research results*) 6 4 2 QE1 QE2 * Swanson (211), Gagnon/Raskin/Remache/Sack (211), Hamilton/Wu (211) 11
Bond Yields to Rise, But Gently 6 1-yr bond yields (%) Canada Forecast US 5 4 3 2 Dec Dec4 Dec8 Dec12 12
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 15 1 5 JPN ITA FRA UK US GER CAN Gross Debt Net Debt 13
211/212 Budget Balances 12 1 8 6 211/12 Budget Deficits, % of GDP Deficit * Based on CBO estimates for FY211 4 2-2 Surplus US* Ont NB Alta Qué NS PEI Man BC N&L Sask Canada Federal Gov't Provincial Governments 14
Net New Supply of Treasuries Running More than 3X Faster than Net Canada Issuance 12 1 8 6 4 2 Net Bond Issuance, % of GDP Fcst -2 6/7 7/8 8/9 9/1 1/11 11/12 US Treasuries Canadas 15
Gross / Net Canada Issuance: Off its Peak but Boosted by Plans to Enhance Liquidity 1 8 Government of Canada Nominal Issuance, C$billions Note: 211/12 is forecast 6 4 2-2 FY9 93 96 99 2 5 8 11F Net Gross 16
Budgets Based on Cautious Forecasts Real GDP Nominal GDP Y/Y % Chg 21E 211F 212F 21E 211F 212F Provincial Forecasts 1 BC 3.1 2. 2.6 5.6 4.1 4.9 Alta 3.5 3.3 3.2 9.9 7.1 7.9 Sask 1.7 4.2 2.8 5.7 9. 6.3 Man 2.5 2.7 2.7 5. 5.5 4.5 Ont 2.8 2.4 2.7 6.1 4.6 5.1 Qué 3. 2. 2.2 4.4 3.9 4.4 NB 2. 1.5 2.2 4. 3.2 4.6 NS 2.1 1.9 1.9 4.9 4.5 4. PEI 1.9 1.7 NA 2.3 NA NA N&L 5.6 3..2 18.8 9.7 1.4 Canada Forecasts Provincial 2 2.9 2.4 2.6 6.2 5.1 5.3 Federal 3.1 2.9 2.8 6.2 5.8 5. CIBC 3 3.1 2.8 2.8 6.2 5.6 4.4 1. 21 figures are estimates, differ from growth rates reported by StatCan 2. Weighted average of individual provincial forecasts 3. CIBC's current national forecast 17
Spending Needs to Slow Across Country 12 Growth in Provincial Expenditures, % (C AGR) 1 8 6 4 2 BC Alta Sask Man Ont Qué NS N&L History: 5Y Avg (FY3-8) Plan: 3Y Avg (FY1-13) 18
The Continental Divide: Huge Gap in Output Gaps 4. Output Gap, % of GDP 2.. -2. -4. -6. -8. Mar-1 Mar-3 Mar-5 Mar-7 Mar-9 Mar-11 Canada US 19
Canada Sees Nearly 3% Growth, Prime and Overnight Up 1 bps in 2 nd Half 8.% 6.% 4.% 2.%.% -2.% -4.% -6.% GDP growth (s.a.a.r.) % Forecast -8.% Q1-7 Q4-7 Q3-8 Q2-9 Q1-1 Q4-1 Q3-11 Q2-12 5. 4.5 4. 3.5 3. 2.5 2. 1.5 1..5. Real GDP Growth (L) Overnight Interest Rate (R) 2
Impact of a 25% Oil Price Shock on Canadian GDP.3 % chg, SAAR Pre-shock = 1 1.1.2.1 1.. 99.9 -.1 -.2 99.8 -.3 -.4 -.5 Growth (L) Level (R ) 1 2 3 4 5 6 7 8 9 1 Quarters from start of shock 99.7 99.6 21
Oil Prices Can Trump Rate Hikes for C$ 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-211 22
14 12 1 8 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 23 1999-Q4
Cdn Household Leverage Reaching US Levels 2 debt as a % of Personal Disposable Income 15 1 5 Note: both measures include unincorporated businesses Q1-9 Q1-94 Q1-98 Q1-2 Q1-6 Q1-1 United States Canada 24
Why the Bank of Canada Will Hike: Current Debt Trend Leads to Trouble 15 % 13 11 9 7 5 3 Q1-9 Q1-94 Q1-98 Q1-2 Q1-6 Q1-1 Q1-14 Debt Service Ratio Average Interest Rate on Debt 25
Gasoline Bills Take Bite out of Spending Power 6.2 5.7 5.2 4.7 4.2 3.7 3.2 2.7 2.2 1.7 As a Share of Disposable Income % 1.2 91 94 97 3 6 9 13 12 11 1 9 8 7 6 % As a Share of Retail Sales 5 91 95 99 3 7 11 Source: Statistics Canada Note: Data for 1 st quarter estimated by CIBC 26
Strong Fundamentals For Capital Expenditures.2.18.16.14.12.1.8.6.4.2 Record High Corporate Cash Position. 88 91 94 97 3 6 9 cash & deposits / total equity (L).4.35.3.25.2.15.1.5. cash & deposits / Sales of Goods & Services (R) 9 8 7 6 5 4 3 2 1-1 Real Return on Capital Employed (%) Long-term average 93 95 97 99 1 3 5 7 9 Source: Statistics Canada, CIBC 27
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 (%) 95 6 4 9 2 85 8 81-82 89-9 -2 75 8-9 1 2 3 4 5 6 Quarters -4-6 84 92 current Source: Statistics Canada, CIBC 28
Canadian Exports Recovering But Lose US Share As C$ to Stay Near Parity 14 135 Index, Q2 98 = 1 Index, Q2 98 = 1 135 13 13 125 125 12 12 gap 115 115 11 11 15 15 1 1 95 95 9 9 Q2-98 Q3- Q4-2 Q1-5 Q2-7 Q3-9 85 Real Cdn Exports (L) US Activity Index (BoC) (R) 29
House Prices Still Rising But Rate Hikes Likely to Prompt a Correction Major Markets 25 2 y/y % chg 15 1 5-5 -1-15 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
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
Interest and Exchange Rate Outlook 211 212 END OF PERIOD: 27-Apr Jun Sep Dec Mar Jun Sep Dec CDA Overnight target rate 1. 1. 1.5 2. 2. 2. 2. 2.25 98-Day Treasury Bills.99 1. 1.55 1.9 1.85 1.85 1.85 1.9 2-Year Gov't Bond 1.78 2. 2.15 2.5 2.4 2.75 2.85 3. 1-Year Gov't Bond 3.27 3.5 3.55 3.5 3.6 3.85 3.95 4. 3-Year Gov't Bond 3.74 3.8 3.9 3.85 4. 4.1 4.25 4.25 U.S. Federal Funds Rate.8.2.2.2.2.2.2.2 91-Day Treasury Bills.5.15.15.15.15.15.15.2 2-Year Gov't Note.64.75.65.65.85.9.9 1. 1-Year Gov't Note 3.36 3.55 3.5 3.4 3.5 3.8 3.85 3.95 3-Year Gov't Bond 4.45 4.6 4.55 4.4 4.65 4.75 4.8 4.8 Canada - US T-Bill Spread.94.85 1.4 1.75 1.7 1.7 1.7 1.7 Canada - US 1-Year Bond Spread -.9 -.5.5.1.1.5.1.5 Canada Yield Curve (3-Year 2-Year) 1.96 1.8 1.75 1.35 1.6 1.35 1.4 1.25 US Yield Curve (3-Year 2-Year) 3.81 3.85 3.9 3.75 3.8 3.85 3.9 3.8 EXCHANGE RATES CADUSD 1.5 1. 1.2 1.3 1.1 1.2 1.2 1.3 USDCAD.95 1..98.97.99.98.98.97 USDJPY 82 86 87 89 88 9 92 94 EURUSD 1.48 1.49 1.36 1.34 1.3 1.35 1.34 1.32 GBPUSD 1.66 1.66 1.6 1.62 1.62 1.67 1.65 1.65 AUDUSD 1.9 1.2.98.97.98 1.3 1.1 1. USDCHF.87.89.95.96.97.95.97 1.1 USDBRL 1.57 1.54 1.62 1.65 1.62 1.6 1.58 1.56 USDMXN 11.52 11.55 11.8 12. 12. 11.85 11.75 11.5 32