Financial Markets Fall 28 Economic Update October 7, 28 Jeff Rubin Chief Economist, Chief Strategist Avery Shenfeld Managing Director, Senior Economist
Crash in Commodity Prices Exaggerates Growth Slowdown 6 y/y % chg Fcst 5 5 45 4 4 35 3 3 25 2 2 15 1 1 5 86 88 9 92 94 96 98 2 4 6 8 9 World GDP growth (L) CRB Futures Index (R) Past Resource Bear Markets 1/8/28 Page 1
Neither US Nor Europe Driving Global Growth 4 35 3 25 % of global GDP growth, 24-7 Key Emerging Markets (Braz il, Russia, India, China) + Mideast Oil Producers 2 15 1 5 "BRICA" Other Asia US Eurozone Central & Eastern Europe Japan 1/8/28 Page 2
Marginal Cost of Oil Close to $9/Bbl 18 16 14 12 1 8 6 4 2 US$/bbl Jan-4 Apr-4 Jul-4 Oct-4 Jan-5 Apr-5 Jul-5 Oct-5 Jan-6 Apr-6 Jul-6 Oct-6 Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Jul-8 Oct-8 Jan-9 Apr-9 Jul-9 Oct-9 Rosa (Angola) Usan (Nigeria) Source: Total SA, CIBC WM Crude Oil Price Marginal Cost of New Supply C dn Oil Sands 1/8/28 Page 3
24 26 28 Oil Demand Destruction in US Moderate So Far 1 8 yr/yr % chg 6 4 2-2 -4-6 -8-1 1/8/28 Page 4 1974 1976 1978 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 US Recession US oil demand -3% (US Dept of Energy)
No Growth in World Oil Supply 76 Mn bbl/day 74 72 Jun-8 7 68 66 64 Source: US Dept of Energy 62 Jan-2 Jul-2 Jan-3 Jul-3 Jan-4 Jul-4 Jan-5 Jul-5 Jan-6 Jul-6 Jan-7 Jul-7 Jan-8 1/8/28 Page 5
US Economy in Recession 6 q/q % chg, s.a.a.r. q/q ch, thousands, s.a. 8 5 4 3 2 1-1 -2-3 forecast 7.Q2 7.Q4 8.Q2 8.Q4 9.Q2 9.Q4 Real GDP (left) Nonfarm Payrolls (right) 6 4 2-2 -4 1/8/28 Page 6
Soaring TED Spread Shows Money Market Collapse 6 5 3-month eurodollars less 3-month T-bills, bps October 4 3 2 1 Sep-6 Dec-6 Mar-7 Jun-7 Sep-7 Dec-7 Mar-8 Jun-8 Sep-8 1/8/28 Page 7
US House Deflation: The End is in Sight 21. 25. Index: 2=1 Falling.. 1..5 % change.. At a Slower Rate 2.. 195. 19. -.5 185. -1. 18. -1.5 175. 17. 165. -2. -2.5 Fcst 16. Jan-6 Sep-6 May-7 Jan-8-3. Jan-6 Sep-6 May-7 Jan-8 Sep-8 1/8/28 Page 8
House Prices & Income Back in Balance 7 Index 1975=1 6 5 4 3 2 1 75 78 81 84 87 9 93 96 99 2 5 8 Household Income House Prices 1/8/28 Page 9
US Home Equity Withdrawals 8. SAAR, $bn 7. 6. 5. 4. 3. 2. 1.. Q1 1Q1 2Q1 3Q1 4Q1 5Q1 6Q1 7Q1 8Q1 1/8/28 Page 1
US Vehicle Sales to Crash to Decade Lows 19 Mar-9 Mar-91 Mar-92 Mar-93 Mar-94 Mar-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar- Mar-1 Mar-2 Mar-3 Mar-4 Mar-5 Mar-6 Mar-7 Mar-8 Mar-9 18 17 16 15 14 13 12 11 Mn units, SAAR 3 mo moving avg Fcst 1/8/28 Page 11
Sep4 Sep8 Real Fed Funds Rate 1 8 6 4 2-2 -4-6 1/8/28 Page 12 Sep Sep96 Sep92 Sep88 Real Fed Funds Rate (%) Sep6 Sep64 Sep68 Sep72 Sep76 Sep8 Sep84
Energy Inflation Will Soar on Rebound in Oil Prices 18 16 14 12 $US/bbl CPI: Energy y/y % chg Fcst 5% 4% 3% 1 2% 8 1% 6 4 2 WTI Oil Prices % -1% -2% Dec.99 Jun.2 Dec.4 Jun.7 Dec.9 1/8/28 Page 13
Canadian Growth Has Faltered; Rebound in 9 5 4 3 2 1-1 -2 %, s.a.a.r. % Forecast 7:1 7:3 8:1 8:3 9:1 9:3 6.8 6.6 6.4 6.2 6. 5.8 5.6 Real GDP Grow th (left) Unemployment Rate (right) 1/8/28 Page 14
Similar Real GDP Growth, But Worse Impact 7 6 5 4 3 2 1-1 % chg, SAAR 14.7% real GDP nominal GDP employ. corp. profit Three quarters ending Q2 8 Three quarters ending Q1 9 1/8/28 Page 15
Nominal GDP More Linked to Global Growth 8 7 6 5 4 3 2 1 % of variance explained C dn Real GDP R sq with US real GDP C dn Nominal GDP R sq with World Real GDP 1/8/28 Page 16
Canadian House Prices Some Overshooting 5 Index: 198 = 1 4 3 2 1 198 1984 1988 1992 1996 2 24 28 first half Resale House Prices Disposable Income 1/8/28 Page 17
Canada vs US: Vive la Différence debt per capita CANADA $35, US $62, Share of Speculative Activity in Total Mortgage Outstanding mortgage debt as share of income 8% 12% 12% 1% consumer debt as share of income net worth as share of income cash position as share of fin. assets 52% 647% 2% 66% 557% 17% 8% 6% 4% 2% % Australia UK US Canada 1/8/28 Page 18
Canadian Banks Asset-to-Capital Multiples Not Particularly High 7 6 5 4 3 2 1 European banks (highest) European banks (avg) US Investment Banks (Sep-8) Canadian Chartered Banks 1/8/28 Page 19
Canadian Bank Spreads Tarred with Global Brush 35 3 bps over Canadas, mid-term Bear Stearns Bailout Lehman Filing 25 2 15 1 5 6/2/7 8/29/7 11/7/7 1/16/8 3/26/8 6/4/8 8/13/8 1/8/28 Page 2
Rates Ease to Counter Wide Spreads 5 % 1-yr Canada 4 3 2 Forecast overnight rate 1 Jul-4 Sep-5 Nov-6 Jan-8 Mar-9 1/8/28 Page 21
Sep8 Crisis Has Seen Flight to US$ 1..8.6.4.2. -.2 -.4 -.6 -.8-1. 1/8/28 Page 22 Jul8 Aug8 Jun8 May8 15-day correlation S&P 5 and Trade-weighted US$ Apr7 May7 Jun7 Jul7 Aug7 Sep7 Oct7 Nov7 Dec7 Jan8 Feb8 Mar8 Apr8
But Fundamentals Point to Weaker US$ Once Flight to Safety Ends 4 3 2 1-1 -2-3 -4-5 -6 Current account as a % of GDP (Q2 28) Japan Canada EU UK US 1/8/28 Page 23
C$ Hit by Global Growth Slump 35 Index US cents 11 3 1 25 9 2 15 8 1 7 Forecast monthly averages 5 6 Nov-98 May- Nov-1 May-3 Nov-4 May-6 Nov-7 May-9 BoC Commodity Index (left) C anadian Dollar (right) 1/8/28 Page 24
TSX Has Greater Global Link 3% 25% 2% Correlation with S&P5 Correlation with TSX ( annual correlation since 1984) 15% 1% 5% % -5% World GDP G7 GDP 1/8/28 Page 25
TSX is the High Beta Play 1,6 1,5 1,4 1,3 1,2 1,1 1, 9 8 7 6 Jan-4 Nov-4 Sep-5 Jul-6 May-7 Mar-8 16, 15, 14, 13, 12, 11, 1, 9, 8, 7, 6, S&P 5 (left) TSX (right) 1/8/28 Page 26
Canadian Stocks Did Better Under Democrats % annual price return, TSX C omposite 4 Republican Years mean = 3.5% 3 2 1-1 -2 Democratic Years mean = 13.9% -3 Note: Data for 1956 to 27. Each dot represents 1 observed annual return. 1/8/28 Page 27