The Great Escape? Douglas Porter, CFA Deputy Chief Economist & Managing Director, BMO Capital Markets
Financial Markets Revive (as of May 3, 21) 16 Stocks 16 15 Canadian Dollar ( ) 15 Commodities 4.5 14 12 1 8 S&P 5 (lhs) TSX (rhs) 14 12 1 8 1 95 9 85 8 12 9 6 Oil ($/bbl: lhs) Copper ($/lb: rhs) 3.75 3. 2.25 1.5 6 8 9 1 6 75 8 9 1 3 8 9 1.75 Recovery Trumps New Concerns
Major Indicators On the Mend 3 Employment (m/m chng : s) 9 6 3 Retail Sales (y/y % chng) 45 3 China s Exports (y/y % chng : 2-mnth ma) -3-6 -3-6 -9 15-15 -9 7 8 9 1-12 7 8 9 1-3 7 8 9 1
Recession Ends (q/q % chng : ar) Real GDP 6 4 2 8 9 1 11.4-2.6 3.4 3.2.4-2.4 3.1 3.1-2 -4-6 -8 Recession Gauges: Length ~19 mnths 3 qtrs Depth -3.8% -3.6% (last 4 qtrs) forecast 4 5 6 7 8 9 1 11
Canadian Housing Markets Rebound 9 8 Home Sales (mlns : ar) (rhs).6.5 2 1 Existing Home Prices (y/y % chng : 3-mnth ma) 12 1 Housing Starts (25 = 1 : 2-mnth ma) 7 6 5 4 (lhs) 3 5 7 9.4.3.2-1 -2 3 5 7 9 8 6 4 2 3 5 7 9 Home Sales: = Existing = Existing + New
Canadian House Prices Major Markets (y/y % chng : as of March 21) Existing Home Prices Vancouver Toronto Major Markets Ottawa Quebec City Montreal Calgary Winnipeg 7.5 9. 1.7 13.2 14.9 16.1 2.1 (weighted) 3.7 Average Home Price $693, $435, $374, $331, $26, $278, $46, $227, 5 1 15 2 25 3 35 4
Affordability: Back Below Average... Before Rate Hikes (January 1988 = 1) Housing Affordability Index 18 16 14 12 mean 1 8 6 88 9 92 94 96 98 2 4 6 8 1 Source: BMO Capital Markets
Job Losses in Perspective (y/y % chng) Employment 6 Cumulative Chng in Recession % Level -2.4% -417, -5.9% -8.4 mln 4 2-2 -4-6 Record -4.7% -2.4% recession 75 8 85 9 95 5 1 Recession Much Worse.9% -1.8%
Unemployment to Remain High (percent) Unemployment Rate 12 9 Quebec 9.7% 8.2% 6 8.% 3 forecast 98 99 1 2 3 4 5 6 7 8 9 1 11
Ontario, Alberta and BC Hit Hardest Victoria Change in Unemployment Rate 3.7 3.4 Vancouver (chng since credit crisis erupted : ppts) 3.8 Edmonton Calgary [September 8 to March 1] 3.5 Winnipeg. 1. 5.3 1.2 1.9 1.7 Saskatoon Regina Southwestern Ontario 2.3 Windsor 2.6 3. Sudbury Quebec City Montreal 3.4 4.2 Ottawa 1. 2.7 Thunder Bay Oshawa Toronto 2. Windsor Kitchener London 2.4 St Catharines Hamilton Toronto.1 1.8 Saint John Sherbrooke 1.2 Halifax St John s -.2 1.2
Provincial Outlook: Broad Recovery Real GDP (y/y % chng) 29 21 8 9 1 11.4-2.6 3.4 3.2 Man Que BC Atlan Ont Alta Sask -6.3-5.1-2.3-3.1-3.1 -.2-1. Sask BC Alta Ont Man Que Atlan 4.2 3.9 3.6 3.4 3. 2.9 2.8-8 -6-4 -2 2 4 6 8 Source: [21] BMO Capital Markets forecasts
Consumers Retrench 6 3 8 9 1 11 3..2 3.2 3.5 -.2 -.6 2.4 3.1 Real Consumer Spending (y/y % chng) 6 5 4 3 Personal Savings Rate (% of disposable income) 2-3 6 7 8 9 1 11 1 forecast 6 7 8 9 1 11
Canadian Consumers: Holding Up Better Consumer Confidence Index (January 27 = 1) 15 9 75 6 64 63 62 61 Employment Ratio (% of population) 15 1 5 Household Credit (y/y % chng) 45 3 6 59 15 7 8 9 1 58 5 6 7 8 9 1 Confidence, Cash and Credit Are Key Household Credit = Consumer Credit and Residential Mortgages -5 5 6 7 8 9 1
Canadian Household Sector in Better Shape Total Debt (ratio to personal disposable income) 2. 1.75 7 6 Loan-to-House Value (%) Subprime Malaise Net Worth (ratio to personal disposable income) 6.5 Housing Bubble Tech Stock Bubble 6. 1.5 1.25 1. 95 5 1 5 4 3 2 95 5 1 5.5 5. 4.5 95 5 1 Total Debt includes unincorporated businesses
Changing Gears Vehicle Sales (mlns : ar) 2 24 2.4 15 1 China Crossover 2 16 12 (lhs) (rhs) 2. 1.6 1.2 5 5 6 7 8 9 1 (3-mnth ma) 8 : Mar & Apr = estimate 5 6 7 8 9 1.8
Global GDP: World of Difference 29:Q4 (y/y % chng) Real GDP 8 9 1 11 World 3.1 -.8 4.1 4.3 China Taiwan Korea India Brazil Australia Japan Eurozone Mexico UK Russia -1. -1.2-2.2-2.3-3.1-3.8.1 [Q1] -.3 2.7 2.6 [Q1] 4.3 4.5 6. [Q1] 6. 7.8 [Q1] 9.2 1.7 11.9 [Q1] -6-3 3 6 9 12 15
Loonie & Commodities: So Happy Together Again (as of May 3, 21) 32 12 28 24 2 BoC Commodity Price Index (lhs) C$ ( : rhs) 11 1 9 16 8 12 7 8 95 97 99 1 3 5 7 9 6
Dollar Still Vulnerable (as of May 3, 21) 14 13 12 11 1 9 Broad Trade-weighted $ February 27, 22 Peak March 9, 29 July 15, 28 Trough 2 4 6 8 1 forecast % Chng (vs $) Sovereign Risks Australian $ Canadian $ Swiss Franc Euro Japanese Yen Chinese Yuan UK Pound Trade-weighted $ Mexican Peso Feb 2 Peak to Present 79.5 59.2 57.4 52.7 42.4 21.3 7.6-21.3-25.8 21 Y-T-D 3.2 4.2-4.6-7.8-1.6. -5.7. 6.8
Budget Deficit: Record Shortfall Budget Balance United States $ Blns 4-4 Reagan Bush Clinton Bush Obama 8-8 % of Nominal GDP -5.1% -6.% -8.3% -9.9% -1.6% -8-1,2-1,6 81 89 93 1 9 Source: OMB 21-12 = forecast -1,413-1,5-914 -1,342 Record -16-24 World War I AAA Rating At Risk World War II -32 19 1925 195 1975 2
Priming the Fiscal Pump in Budget Balance C$ Blns 2-2 2-2 -4 % of Nominal GDP -4-6 89 94 99 4 9 14-6 -8-1 Prior Trough 62 72 82 92 2 12 Attention Will Soon Turn to Restraint Source: Federal Budget 29/1 = estimate forecast
OECD Fiscal Landscape 21 (% of nominal GDP) Deficit vs Debt 15 12 9 6 3 Deficit Surplus New Zealand Australia Ireland -3-6 -3 3 6 9 12 Net Debt Dots represent countries in the OECD, except Norway, which has huge assets UK Spain France Portugal Germany TROUBLE Greece Italy Japan
Europe: Sovereign Risk 1-year Spreads vs Germany 1 (as of May 3, 21) 4 8 3 6 4 Greece 2 Portugal 2 Ireland 1 Spain 7 8 9 1 7 8 9 1
Canadian Exports: Where now? Canadian Exports (% of total) 85 United States 16 Europe & Emerging Markets 8 14 75 7 12 1 8 Europe Emerging Markets 65 6 6 75 8 85 9 95 5 1 4 75 8 85 9 95 5 1
Loonacy ( : as of May 3, 21) Canadian Dollar 11 1 9 8 Parity Current 98.96 7 6 3 4 5 6 7 8 9 1 11 Parity Beckons forecast
Headline Inflation Bounces Back Consumer Price Index (y/y % chng) United States 6 3 Total forecast 1.7% 6 3 Total 2.3% Core 1.4% Core 1.1% -3-3 4 5 6 7 8 9 1 11 4 5 6 7 8 9 1 11 HST: Short-term Bump for Inflation
Inflation and Deflation Consumer Price Index (y/y % chng : as of March 21) Deflationary Inflationary Natural Gas Video Equipment Air Fares Mortgage Interest Clothing Furniture/Appliances Vegetables -22.4-16.6-1.9-6. -4.2-2.1-1.5 Gasoline Water Charges Auto Insurance Telephone Services Child Care Property Tax Tuition Fees 17.2 5.6 5.5 5. 4.8 4.3 4.1 Core CPI 1.7% Overall CPI 1.4%
Canadian Rate Hikes Coming (% : as of May 3, 21) Overnight Rate 7 6 5 4 3 forecast 2 1 % -.25% 1 2 3 4 5 6 7 8 9 1 11 Can Go It Alone?.25% Record Lows
Long-term Yields Will Rise a Bit (% : as of May 3, 21) 1-year Bonds 6 5 4 3 3.69% 3.65% Current spread -4 bps forecast 4.15% 4.5% (Year-end 1) 5.% 4.7% (Year-end 11) 2 6 7 8 9 1 11 Fed Quantitative Easing Finished
Global Equities: From Worst to First Equity Markets (% chng) UK DJIA TSX S&P 5 Germany Nasdaq Japan Australia India China Russia 28-31.3-33.8-35. -38.5-4.4-4.5-42.1-43. -52.5-65.7-72.4-1 -75-5 -25 Russia China India Nasdaq Australia TSX Germany S&P 5 UK Japan DJIA 29 43.9 33.4 3.7 23.9 23.5 22.1 19. 18.8 95. 81. 128.6 5 1 15 Nasdaq Russia S&P 5 DJIA Japan TSX Germany UK India Australia China 21 Year-to-Date (as of May 3, 21) -14.4 -.5-1.6 1.1 8.9 7.8 6.9 4.8 3.8 3.5 2.6-3 -15 15
A Long Way Back (as of May 3, 21) 16 October 9, 27 S&P 5 +3.2% 16 TSX June 18, 28 +23.6% 14 12 +77.7% 14 12 +61.2% 1 1 8 6-56.8% March 9, 29 8 6-49.8% March 9, 29 7 8 9 1 7 8 9 1
Valuations in Check United States S&P 5 Price/Trend Earnings 5 4 Overvalued 3 2 1 Undervalued 19 191 192 193 194 195 196 197 198 199 2 21 (± one standard deviation)
Worst Is Over Massive Rate Cuts Fiscal Stimulus Financial Markets Heal But... Sovereign Risks Deleveraging Continues Strong Canadian Dollar Threat Outperforms, But Challenges Remain
The Great Escape? Douglas Porter, CFA Deputy Chief Economist & Managing Director, BMO Capital Markets