March 15, 2010 Canadian Real GDP Growth To Slow. Improvement in the Canadian Job Market: Caution is in Order. LBS Economic Research Carlos Leitao Chief Economist 514 350-3000 leitaoc@lb-securities.ca Sébastien Lavoie Assistant Chief Economist 514 350-2931 lavoies@lb-securities.ca Marie-Claude Guillotte Economist 514 350-2925 guillottemc@lb-securities.ca Emir Coskun 514 350-2941 coskune@lb-securities.ca Much Better Improvement in Quebec's Job Market Conditions. 's "New Housing Rush". Subscription: Martine Bérubé 514 350-3006 berubem@lb-securities.ca Stéphanie Fortin 514 350-2952 fortins@lb-securities.ca
Sébastien Lavoie Assistant Chief Economist The Monitor 15 03 2010 Canadian Real GDP Growth To Slow Recently released data signal that the pace of expansion of household demand, the key engine of the current recovery, will likely weaken during coming quarters. For one, improvement in job market conditions is insufficient in order to keep consumption growth at the sizzling pace we've observed lately. In addition, the upcoming sales tax harmonization in Ontario and British Columbia and soon-to-end very low interest rates are temporarily pushing home buyers to rush, buying new homes as soon as possible to save a lot of money. Improvement in the Canadian Job Market: Caution is in Order In contrast with the and Europe where labour market conditions have been stabilizing, here in they have been clearly improving. 159,000 new posts were created since the recovery began last summer. This year started particularly well with 43,000 new jobs added during January followed by another 21,000 tally in February. The unemployment rate slipped from 8.7% in August to 8.2% in February. Despite these undeniable signs of improvement, not everything is coming up roses. The level of employment remains 260,000 jobs below the October 2008 peak, reached just before the economic crisis led to layoffs. Furthermore, the quality of existing jobs is not, relatively speaking, as good as before: Despite the creation of 60,200 full-time posts during February, the job market includes a higher proportion of part-time positions today than during the pre-crisis era. Today s job market also includes higher proportions of independent and public sector workers, and a smaller number of private sector employees. In other words, the labour market s bread and butter (full-time employment in the private sector) shows few convincing signs of strength. Particularly, businesses that cut hours to retain qualified staff during the recession do not need to hire to a large extent during the recovery cycle. When the economy began to pick up some steam last summer, many companies just needed to increase the number of hours worked. Furthermore, when private sector employers want to hire these days, they often offer temporary jobs: The number of temporary workers increased by 10% relative to last year, while the number of permanent workers fell (-0.7% on a y/y basis). This is an interesting development because temporary workers earned 16% less per hour than permanent workers did during 2003 according to a Statistics study. This considerable gap means wage growth will fail to spur significant inflationary pressures down the road. 11200 11100 11000 10900 10800 10700 : Private Sector Employment (left scale, in 000s) : Full-Time Employment (right scale, in 000s) 10600 07 08 Sources: Statistics /Haver Analytics 09 14100 14000 13900 13800 13700 13600 13500 Much Better Improvement in Quebec's Job Market Conditions So far, Quebec saw much better improvement in its job market conditions compared to the rest of. Since peaking in the summer of 2009, Quebec s unemployment rate has fallen faster (from 9.1% in August 2009 to 8.1% in February 2010). This is due almost equally to stronger job creation (+1.3% in Quebec vs. +0.9% in ) and slower labour force growth (0.3% vs. 0.6%). In fact, the level of employment (3,873,300) in Quebec is just a mere 0.5% below its peak, compared to 1.5% for the country as a whole. Ontario, Alberta and British Columbia in particular have a long way to go before they have fully reversed recession related job losses. These provinces all have far fewer full-time workers today than they did before the financial crisis hit, which is not the case in Quebec. 3200 3160 3120 3080 Full-Time Employment (in 000s) 3040 06 07 Sources: Statistics /Haver Analytics 08 09 Quebec Ontario 5550 5475 5400 5325 5250 5175 2
's "New Housing Rush" Many parts of the world including experienced a Gold Rush in the 19 th Century. Now it seems that is experiencing a "New Housing Rush" at the beginning of 2010. There are two main reasons for this. Firstly, many potential buyers realize that mortgage rates won t remain this low for long. Secondly, Ontarians and British Columbians have been particularly motivated to close deals before July 1, 2010 (the day on which those provinces sales taxes will be harmonized with the federal GST) to avoid supplementary taxes. Builders too want to pull forward residential construction projects in order to boost sales. This so-called pull-forward demand is likely to continue until July. Then, it would not be surprising to see a sharp fall-off in construction during the second half of 2010. LBS Economic Research sees this on-going buoyant activity has the last hurrah of the stretched housing boom. In Quebec, where no major change in the tax system is in sight (except, as of today, the 1% hike in the provincial sales tax in January 2011), buyers are not forced to "pull forward" new home purchases. Nevertheless, residential home construction remains strong in the province. Housing starts fell by 13.3% m/m during February to a fairly respectable level (47,800 units) after roaring the previous two months. Since the beginning of the year, the Quebec urban region has seen strong single and multiple unit start levels. In Montreal, housing starts hit a seven-month low during February (17,600 units on an annualized basis). The main reason for the divergent regional performances stems from their employment situations. Never before has the unemployment rate spread between Montreal (9.2%) and Quebec (4.1%) been so large. 12 10 8 6 Unemployment Rate (%) Montreal Toronto Quebec City 12 10 8 6 4 99 00 01 02 03 04 Sources: Statistics /Haver Analytics 05 06 07 08 09 4 3
North American Forecasts This Week's Forecasts (%) This Week Next 4 Weeks In 3 Months 3-Month T-Bills 0.15-0.25 0.10-0.25 0.25 2-Year Bond 1.50-1.60 1.40-1.60 1.60 10-Year Bond 3.45-3.55 3.40-3.60 3.60 Canadian Dollar (CAN$/US$) 1.015-1.023 1.000-1.030 1.00 3-Month T-Bills 0.05-0.15 0.00-0.25 0.10 2-Year Bond 0.95-1.00 0.80-1.00 0.90 10-Year Bond 3.65-3.75 3.60-3.80 3.70 Yen (Yen/US$) 90.0-92.0 89.0-92.0 91.0 Euro (US$/Euro) 1.36-1.38 1.36-1.39 1.38 15/03/2010 Historical Data Forecasts* 2007 2008 2009 Q1 2009 Q2 2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 Overnight Rate 4.35 3.03 0.50 0.25 0.25 0.25 0.25 0.25 0.75 1.75 2.00 2.00 3-Month Treasury Bills 4.14 2.33 0.39 0.24 0.22 0.19 0.20 0.25 0.70 1.70 2.00 2.00 2-Year Bond 4.18 2.66 1.07 1.20 1.26 1.43 1.50 1.60 1.75 2.25 2.50 2.60 10-Year Bond 4.27 3.61 2.79 3.36 3.31 3.60 3.60 3.65 3.75 3.70 3.75 3.90 30-Year Bond 4.31 4.06 3.74 3.91 3.84 4.07 4.20 4.25 4.35 4.30 4.35 4.50 Federal Funds Rate 5.05 2.08 0.25 0.25 0.25 0.25 0.25 0.25 0.25 1.00 1.50 2.00 3-Month Treasury Bills 4.48 1.40 0.21 0.19 0.14 0.06 0.10 0.15 0.20 1.00 1.50 2.00 2-Year Bond 4.36 2.01 0.81 1.11 0.96 1.14 0.90 0.95 1.00 1.30 1.50 2.00 10-Year Bond 4.63 3.66 2.71 3.53 3.32 3.85 3.80 3.85 3.95 3.75 3.90 4.10 30-Year Bond 4.84 4.29 3.56 4.32 4.03 4.63 4.70 4.60 4.70 4.50 4.60 4.80 Canadian Dollar (US$/C$) 0.930 0.938 0.794 0.893 0.935 0.953 0.985 1.000 1.010 1.015 1.005 1.000 Canadian Dollar (Euro/C$) 0.679 0.637 0.599 0.652 0.639 0.663 0.719 0.725 0.721 0.715 0.703 0.699 Euro (US$/Euro) 1.371 1.473 1.326 1.370 1.463 1.438 1.370 1.380 1.400 1.420 1.430 1.430 Yen (Yen/US$) 118 103 99 95 90 93 90 91 90 91 92 93 Quarter-end data and annual averages March 15th, 2010 Interest-Rate and Exchange-Rate Forecasts 4
Market Review: Bonds and Currencies International 3-Month Rates Current Spreads (b.p.) against U.S. Yield Mar-12-10 -1 week -4 weeks -1 quarter - 1 year Jan-09 U.S. 0.15 0.20 5 4 7 16 21 74 UK 0.52 37 38 42 44 48 122 France 0.30 15 15 20 32 50 176 International Bonds: Benchmark 10-Year Yield Current Spreads (b.p.) against U.S. Yield Mar-12-10 -1 week -4 weeks -1 quarter - 1 year Jan-09 U.S. 3.71 3.54-17 -22-22 -16-2 40 UK 4.10 39 38 39 31 5 67 France 3.48-23 -24-16 -9 77 108 Germany 3.17-54 -55-48 -35 19 61 Japan 1.33-239 -238-235 -230-157 -117 Provincial Bonds: Benchmark 10-Year Yield Current Spreads (b.p.) against Yield Mar-12-10 -1 week -4 weeks -1 quarter - 1 year Jan-09 3.52 Alberta 3.99 47.0 53.0 44.0 51.5 140.0 123.0 British Columbia 4.07 55.0 53.0 52.0 61.5 140.0 120.0 Prince Edward Island 4.20 68.0 66.0 65.0 72.5 167.0 151.0 Manitoba 4.11 59.0 57.0 56.0 66.5 148.0 134.0 New Brunswick 4.14 62.0 60.0 59.0 70.5 160.0 138.0 Nova Scotia 4.14 62.0 60.0 59.0 70.5 160.0 138.0 Ontario 4.13 61.0 59.0 58.0 68.5 140.0 126.0 Quebec 4.19 67.0 64.0 63.0 72.5 163.0 147.0 Saskatchewan 4.06 54.0 52.0 51.0 64.5 140.0 123.0 Newfoundland 4.18 66.0 64.0 63.0 72.5 160.0 133.0 Currencies Currencies Mar-12-10 -1 week -4 weeks -1 quarter - 1 year Jan-09 (%) (/US$) 1.0187 1.0286 1.0692 1.0590 1.2752-16.3 (US$/) 0.9816 0.9722 0.9353 0.9443 0.7842 19.5 Australia (Australia/US$) 0.9152 0.9084 0.8693 0.9156 0.6576-23.2 U.K. (US$/ ) 1.5188 1.5060 1.5649 1.6284 1.3972 4.3 Japan (US$/Yen) 90.46 90.30 89.32 88.65 98.04-0.5 Euro (US$/Euro) 1.3753 1.3613 1.3699 1.4646 1.2892-1.3 Data updated as at: 15/03/2010 5
Market Review: Fixed Income Charts % 7.0 6.0 5.0 4.0 U.S. Yield on 3-Month T-Bills % 7.0 6.0 5.0 Yield on 10-Year Federal Bonds U.S. 3.0 2.0 1.0 4.0 3.0 0.0 2.0 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 % 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 - Yield Curve 12-Mar-10-1 month -1 year 3m 6m 2y 5y 10y % 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0-0.5 U.S. - Yield Curve 12-Mar-10-1 month -1 year 3m 6m 2y 5y 10y 30y 90 70 50 30 10-10 -30-50 Yield Spreads in basis points ( minus U.S.) 12-Mar-10-1 month -1 year 3m 6m 2y 5y 10y 600 500 400 300 200 100 0 11-Apr-08 Credit risk: TED spread Spread interbank loan rate / 3-month T-bills (in basis points) 18-Jul-08 Source: LBS Economic Research, Haver Analytics 24-Oct-08 30-J an-09 08-May-09 14-Aug-09 20-Nov-09 26-Feb-10 6
Market Review: Stocks Exchange and Commodities Stock Market Summary Level Change (%) Mar-12-10 52w HI 52w LOW (-1W) (-4W) (-13W) (-52W) Jan-2009 S&P/TSX 12,014 12,014 8,303 0.3 4.7 5.2 44.7 31.9 S&P/TSX 60 705 705 506 0.3 5.0 4.2 39.4 28.4 S&P/TSX Small Cap Index 602 603 326 0.7 4.3 9.8 84.6 61.0 S&P 500 1,150 1,150 754 1.0 6.9 3.9 52.0 25.3 Dow Jones 10,625 10,725 7,217 0.6 5.2 1.5 47.1 19.3 Nasdaq 2,368 2,368 1,404 1.8 8.4 8.1 65.4 47.6 In ternational U.K. - FTSE 100 5,626 5,641 3,754 0.5 9.4 6.9 49.9 25.1 Germany - DAX 5,945 6,048 3,954 1.2 8.1 3.3 50.4 20.9 France - CAC 40 3,927 4,045 2,706 0.4 9.1 3.3 45.2 19.6 Japan - Nikkei 225 10,751 10,982 7,569 3.7 6.5 6.4 42.0 20.1 Hong Kong - Hang Seng 21,210 22,944 12,526 2.0 4.6-3.2 69.3 44.1 Russia - RST 1,501 1,581 648-0.5 10.1 9.9 130.1 137.7 Australia - ASX All Ordinaries 4,832 4,981 3,295 1.2 5.3 3.9 46.6 32.1 Brazil - Bovespa 69,341 70,729 38,607 0.7 5.3 0.1 77.7 76.2 S&P/TSX Sector Summary Level Change (%) Mar-12-10 52w HI 52w LOW (-1W) (-4W) (-13W) (-52W) Jan-2009 S&P/TSX 12,014 12,014 8,303 0.3 4.7 5.2 44.7 31.9 Energy 290 308 208-0.2 3.4 3.7 39.3 30.0 Materials 338 369 236-1.1 4.1 0.5 39.4 36.1 Industrials 86 86 64 1.2 3.7 7.4 34.3 15.9 Consumers Discretionary 100 100 65-0.6 5.3 6.4 53.8 25.4 Consumers Staples 180 182 156-0.8 0.7 2.8 12.8 7.4 Health Care 37 37 25 0.5 6.6 5.9 38.5 31.2 Financials 184 184 112 0.7 7.1 7.9 65.2 44.0 Information Technology 32 32 18 0.9 2.7 15.4 72.7 64.9 Telecommunication Services 82 83 69 0.7 3.4 7.4 14.6 3.3 Utilities 202 202 152 0.3 4.6 6.3 29.9 13.8 Commodities Level Mar-12-10 52w HI 52w LOW (-1W) (-4W) (-13W) (-52W) Jan-2009 London -- Gold (US$/once) 1104.00 1212.50 870.25 1135.00 1082.00 1124.00 928.00 872.13 London -- Silver (US$/once) 17.06 19.45 12.05 17.40 15.46 17.00 13.20 11.34 Aluminium (US$/LB) #N/A #N/A #N/A #N/A #N/A #N/A 0.62 0.72 Copper (US$/LB) 3.37 3.48 1.66 3.40 3.08 3.11 1.66 1.42 WTI Crude Oil (US$/barrel) 81.24 83.18 45.88 81.50 74.13 69.87 46.25 45.47 Natural Gas (Henry Hub) (US$/MMBTU) 4.48 7.38 1.92 4.59 5.55 5.27 3.93 5.53 Data updated as at: 15/03/2010 7
Calendar of Major Economic Indicators KEY ECONOMIC INDICATORS WEEK OF MARCH 15, 2010 Date Time Release Unit Data for: LBS * Consensus Previous Mar 16 8:30 Labor Productivity Q/Q 4Q - - -0.3% Mar 17 8:30 Wholesale Sales M/M January - - 0.7% Mar 18 8:30 International Securities Transactions Billions January - - 11.231 Mar 19 7:00 Consumer Price Index M/M February 0.1% 0.3% 0.3% Mar 19 7:00 Consumer Price Index Y/Y February 1.2% 1.4% 1.9% Mar 19 7:00 Bank of CPI Core M/M February 0.3% 0.3% 0.1% Mar 19 7:00 Bank of CPI Core Y/Y February 1.7% 1.6% 2.0% Mar 19 8:30 Retail Sales M/M January - 0.5% 0.4% Mar 19 8:30 Retail Sales Less Autos M/M January - - 0.4% * Laurentian Bank Securities Forecast Consensus from Bloomberg L.P. Date Time Release Unit Data for: LBS* Consensus Previous Mar 15 9:15 Industrial Production M/M February - 0.0% 0.9% Mar 15 9:15 Capacity Utilization - February - 72.6% 72.6% Mar 16 8:30 Import Price Index M/M February - -0.2% 1.4% Mar 16 8:30 Import Price Index Y/Y February - 11.3% 11.5% Mar 16 8:30 Housing Starts Thousands February - 570.0 591.0 Mar 16 8:30 Building Permits Thousands February - 610.0 622.0 Mar 16 14:15 FOMC Rate Decision - Mar. 16 0.25% 0.25% 0.25% Mar 17 8:30 Producer Price Index M/M February - -0.2% 1.4% Mar 17 8:30 PPI Ex. Food & Energy M/M February - 0.1% 0.3% Mar 17 8:30 Producer Price Index Y/Y February - 5.1% 4.6% Mar 17 8:30 PPI Ex. Food & Energy Y/Y February - 1.0% 1.0% Mar 18 8:30 Consumer Price Index M/M February - 0.1% 0.2% Mar 18 8:30 CPI Ex. Food & Energy M/M February - 0.1% -0.1% Mar 18 8:30 Consumer Price Index Y/Y February - 2.3% 2.6% Mar 18 8:30 CPI Ex. Food & Energy Y/Y February - 1.4% 1.6% Mar 18 8:30 Initial Jobless Claims Thousands Mar. 16-450.0 462.0 Mar 18 8:30 Current Account Balance Billions 4Q - -119.8-108.0 Mar 18 10:00 Philadelphia Fed Index M/M March - 17.6 17.6 Mar 18 10:00 Leading Indicators - February - 0.1% 0.3% 15/03/2010 8
North American Economic Indicators Period Monthly Chg. (% or Level) Cumulative change Current Previous - 3 Month - 1 Year Gross Domestic Product (GDP) December 0.6% 0.4% 1.4% 0.0% Manufacturing Shipments December 1.6% 0.1% 3.2% -0.1% Housing Starts ( ' 000) * January #N/A 178 167 148 Retail Sales December 0.4% -0.5% 0.9% 6.7% Trade Balance (M$) * December 800 113-981 686 Employment ( ' 000) * * February 21 43 87-16 Unemployment Rate * February 8.2 8.3 8.4 8.1 Wages (avg. hourly earnings) February 2.4% 1.8% 3.3% 4.3% Total CPI inflation January 1.9% 1.3% 0.2% 1.1% Inflation ex-food & energy January 2.0% 1.4% 1.8% 2.0% Industrial Product Price Index January 0.3% 0.1% 1.4% -0.3% Raw Materials Price Index January 3.3% -1.7% 3.7% 29.3% Period Monthly Chg. (% or Level) Cumulative change Current Previous - 3 Month - 1 Year ISM - manufacturing * January 58.4 54.9 55.2 35.5 ISM - Non-manufacturing * January 50.5 49.8 50.1 35.5 Industrial Production * January 101.1 100.1 98.9 100.1 Capacity Utilization Rate * January 72.6 71.9 70.9 71.1 Consumer Confidence Index * February 73.6 74.4 67.4 56.3 Retail Sales January 0.1% -0.2% 1.9% 4.1% Trade Balance (M$) * December -39,902-36,114-35,281-36,901 Housing Starts ( ' 000) * January 591 575 524 488 Existing home sales January -7.2% -16.2% -15.6% 11.5% Median price of ex. home sales January -3.4% 0.3% -4.2% 0.0% Non-Farm Payrolls ( ' 000) * * January -26-109 -71-3987 Unemployment Rate * January 9.7 10.0 10.0 8.2 Wages (avg. hourly earnings) January 2.6% 2.5% 2.7% 3.8% Total CPI inflation January 2.7% 2.8% -1.3% -0.1% Inflation ex-food & energy January 1.5% 1.8% 1.7% 1.7% Producer Price Index January 1.4% 0.4% 3.3% 5.0% - Ex-Food & Energy January 0.3% 0.0% 0.8% 1.0% * Level * * Change in level for the last month, 3 months and 1 year * * * Annual % change Data updated as at: 15/03/2010 9
North American Forecasts 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2009 2010 2011 2010 2011 Real GDP (%) 2.2 5.9 3.8 3.0 2.5 2.5 2.7-2.4 3.3 2.7 2.9 2.8 Consumption 2.8 1.7 1.9 1.9 1.8 1.8 1.8-0.6 1.8 1.9 1.8 1.9 Private investment -5.1 7.7 2.8 4.3 5.7 5.7 9.5-17.6 2.7 7.8 4.6 9.0 Machinery and equipment 1.5 18.2 6.0 6.0 7.0 7.0 10.0-16.7 7.1 8.8 6.5 10.0 Residential construction 18.9 5.0 4.0 2.0 2.0 3.0 3.5-20.4 3.2 2.8 2.7 2.9 Government spending 2.7-1.2 5.8 4.4 3.8 3.8 1.3 1.9 3.5 2.2 4.4 1.3 Exports 17.8 22.4 12.5 7.5 6.0 5.8 4.6-9.6 11.5 5.1 7.9 4.5 Imports 21.3 15.3 10.0 5.8 5.2 5.3 3.9-13.9 8.8 4.1 6.6 3.2 Inflation (%) 0.0 0.0 Total (y/y) -1.6 1.5 2.0 1.8 1.5 1.2 1.7-0.3 1.6 1.9 1.2 1.8 Core (y/y) 1.5 1.7 1.3 1.1 1.0 1.0 1.2 1.7 1.1 1.5 1.0 1.7 Unemployment rate (%)* 9.6 10.0 10.0 10.3 10.3 10.0 9.8 9.3 10.2 9.7 - - Housing Starts (000s) 587 559.3 590 600 650 650 700 553 623 725 - - Before-tax Corp. profits (%, y/y) -6.6 6.0 10.0 7.5 10.0 10.0 5.0-8.9 9.4 8.2 10.0 10.0 * Average rate for the quarter or the year. Period-Over-Period Annualized Per Cent Change Unless Otherwise Indicated Annual Average 4th Qtr/4th Qtr Forecasts as of March 1st, 2010 This document is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author is an employee of Laurentian Bank Securities (LBS), a wholly owned subsidiary of the Laurentian Bank of. The author has taken all usual and reasonable precautions to determine that the information contained in this document has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze it are based on accepted practices and principles. However, the market forces underlying investment value are subject to evolve suddenly and dramatically. Consequently, neither the author nor LBS can make any warranty as to the accuracy or completeness of information, analysis or views contained in this document or their usefulness or suitability in any particular circumstance. You should not make any investment or undertake any portfolio assessment or other transaction on the basis of this document, but should first consult your Investment Advisor, who can assess the relevant factors of any proposed investment or transaction. LBS and the author accept no liability of whatsoever kind for any damages incurred as a result of the use of this document or of its contents in contravention of this notice. This report, the information, opinions or conclusions, in whole or in part, may not be reproduced, distributed, published or referred to in any manner whatsoever without in each case the prior express written consent of Laurentian Bank Securities. 10