Its Complicated By Avery Shenfeld, Chief Economist & Managing - PowerPoint PPT Presentation

It’s Complicated By Avery Shenfeld, Chief Economist & Managing Director January 2015

Title Major Economies: Worlds Apart 5 yrs before 2011A 2012A 2013A 2014E 2015E 2016E recession, avg World* 4.8 4.1 3.4 3.3 3.3 3.4 3.6 US 2.9 1.6 2.3 2.2 2.4 3.2 2.4 Canada 2.6 3.0 1.9 2.0 2.4 1.9 2.5 Euroland 2.2 1.7 -0.7 -0.4 0.8 1.4 1.9 UK 3.3 1.6 0.7 1.7 2.6 2.2 2.4 Japan 1.8 -0.4 1.5 1.5 0.3 1.0 1.3 Brazil 4.0 2.7 1.0 2.5 0.6 -0.5 2.8 Russia 7.5 4.3 3.4 1.3 0.2 -3.2 0.5 India 8.9 6.6 4.7 5.0 5.6 5.6 6.1 China 11.6 9.3 7.7 7.7 7.4 6.8 6.6 * at Purchasing Power Parity | 2

Title The Ten Plagues Ebola, Greek debt, Eurozone deflation, China transition, Ukraine, Russian recession, ISIS, Venezuela, Boko Haram /Nigeria, Japan debt/stagnation | Source; OECD, CIBC 3

Global Oil Production: Price Weakness Title Inconsistent with Getting Needed Supply in LR Breakeven Prices, US$/bbl Projected Rise in Oil Production, 100 2.5 2013-2020, Mn bbl/day 90 80 70 2.0 60 50 40 1.5 30 20 1.0 10 0 Permian (Texas) Bakken (Typical) Brazil Offshore Cdn Mined, No Cdn SAGD 0.5 Upgrader 0.0 US Iraq Brazil Canada | Source: IEA, CIBC 4

Title Cheaper Oil – Broadly Positive % impact on GDP 1.6 over 2 yrs of a 50% price decline 1.4 1.2 *IMF estimate 1.0 0.8 0.6 0.4 0.2 0.0 Eurozone US China* Source: Bloomberg, IMF, CIBC | 5

Effective Exchange Rate Has Fallen (L); Title A Boost to Eurozone GDP in 2015 (R) Impact of Exchange Rate Effective Exchange 100 Depreciation on 2015 GDP (%-pts) Rate Index 98 1.5 96 -10% 94 1.0 92 90 0.5 88 86 Mar-14 May-14 Sep-14 Nov-14 Jan-14 Jan-15 Jul-14 0.0 Low Mid- High Point | Source: Eurostat, Bloomberg, CIBC 6

Title Exports Still Play Small Role in US Economy % of Exports in GDP 30 25 United States OECD Average 20 15 10 5 0 1980 1990 2000 2012 | Source: World Bank, CIBC 7

Title Americans to Spend Less at Pumps (L); Frees Up Income (R) Savings at Gasoline Station Proportion of Household Disposable (vs 2013, % disp. income) Income Spent on Gasoline (%) 4.5% 0.7% Forecast 0.6% 4.0% 0.5% 3.5% 0.4% 3.0% 0.3% 2.5% 0.2% 0.1% 2.0% Nov-08 Sep-12 Jan-05 Dec-06 Aug-14 Oct-10 Jul-16 0.0% 2014 2015 2016 | Source: BEA, CIBC 8

-30 -20 -10 10 20 0 Source: BEA, CIBC Funiture & Elect/Appliance General Merchandise Retail Sales vs pre-Recession Trend Clothing & Accessory Still Plenty of Pent-Up Demand (% Difference) Retail Sales Miscellaneous From US Consumers Health & Personal Care Sporting Goods, Hobby, etc Food & Beverage Nonstore Title | 9

Title No Longer Overbuilt – Household Formation Has Caught Up to Units Available Cumulative Over/Under Building vs HH Formation (000) 3500 3000 Over-built 2500 2000 1500 1000 500 0 -500 -1000 Under-building -1500 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 | Source: US Census Bureau, CIBC 10

Title Mortgage Lending Conditions Improving Again (L); Huge Pent-Up Demand as Kids Move Out (R) Average Household Formation Lending Conditions For Prime in Next 10 Years Mortgages (% Balance) 2500 20 Looser/ Improving 10 2000 HH Formation March 2014 vs March 2013 = 491K 0 1500 -10 Tighter/ Deteriorating 1000 -20 -30 500 2009 Q4 2010 Q3 2011 Q2 2012 Q1 2012 Q4 2013 Q3 2014 Q2 0 Low Unchanged Medium High | | Source: BLS, CIBC 11 11 | 11

Title Job Market: Nearing Zone for > 3% Wage Gains % of workforce % Yr/Yr 17 Fcst 4 15 13 3 11 9 2 7 5 1 Jul-89 Jul-98 Jul-07 Jul-16 Jan-85 Jan-94 Jan-03 Jan-12 Broad Unemployment* (% Workforce, L) Average Hourly Earnings (% Yr/Yr, R) * Unemployed + voluntary part-time

Title Slower GDP Trend Lowers Real Neutral Rate (L); Neither the FOMC nor Market Have it Right (R) year-end, % 4.0 3.5 Neutral Inflation-Adjusted Policy Rate, R-Squared 3.5 3.0 =0.6 2.5 3.0 Futures 2.0 CIBC 1981-2013 2.5 1.5 FOMC 1.0 2.0 0.5 1.5 0.0 -0.5 1.0 -1.0 1.0 2.0 3.0 4.0 0.5 US Potential GDP Growth (IMF estimates) 0.0 2015 2016 2017 | | Source: OECD Working Paper #1081, Nov 2013, CIBC 13 13

Title Reasons For Poloz to be Dovish Ample Low Core Capacity Inflation OIL!!!!!! I Want a Weaker Loonie

Title This Oil Shock Could be More Painful for Canada % 9 Ratio of crude production 1.8 to oil demand 6 1.6 1.4 3 1.2 0 1 Oil Prod./GDP Spending/GDP Energy Trade Surplus/GDP Oil & Gas Capital 0.8 0.6 80 90 00 10 At time of 1997-98 Asian Crisis Source: British Petroleum, Statistic Canada Today | 15

Title Canadian 2015 Growth and Oil Prices 5.0 Real GDP % 4.5 Nominal GDP 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Prev Forecast $70 Crude $60 Crude | 16

Title Canada: Who Benefits and Who Loses From $60 Oil $Bn/year 15 10 5 0 -5 -10 -15 -20 *Direct vehicle and -25 heating costs only -30 -35 -40 -45 -50 -55 Consumer Savings* Industry Revenues Fed & Prov Revenues | 17

Title Oil & Gas Near-30% of Cdn Business Cap-Ex (L), Oil Price 2 nd Most Important Factor in Cap-Ex (R) % share 30 25 20 15 10 5 0 14 91 95 99 03 07 11 Relative importance, 35 based on regression on normalized data, 1990:1 - 2014:Q2 30 25 20 15 10 5 0 Capacity Real Oil Corp Profits CAD/USD Return on 10-year GoC Utilization Prices (chg Equity Yield over 4 qtrs) | Source: Statistics Canada, CIBC 18

Title Stable Tail Risk (L), Average Credit Score (R) Share of Household with DSR Average Credit Score Above 40% 730 9.0 725 8.0 7.0 720 6.0 5.0 715 4.0 710 3.0 2.0 705 1.0 0.0 700 08Q2 09Q1 09Q4 10Q3 11Q2 12Q1 12Q4 13Q3 99 01 03 05 07 09 11 13 | 19

Ratio: Housing Starts to Household Formation (L); Title Data Undercounted Non-Perm Residents (R) Canada, Aggregate 000s 900 1.6 1.4 800 1.2 700 1.0 0.8 600 0.6 500 0.4 0.2 400 08 09 10 11 12 13 0.0 CIC Data 72 77 82 87 92 97 02 07 12 StatCan Population Projection | Source: Statistics Canada, CIC Data, CIBC 20

C$ Sensitivity to Oil & Canada-US Spreads (L); Title Negative Implications for Currency (R) % chg in C$ vs US$ US cents 90 0 88 -1 86 -2 84 -3 82 -4 80 -5 78 -6 76 -7 74 Mid-2014 fcst -8 72 Latest 50% decline in oil 100 bps tighter Cda- prices US bills yields 70 15Q1 15Q3 16Q1 16Q3 Note: CIBC, based on Issa, Lafrance, Murray, BOC (2005) | Source: CIBC 21

Title Canada 15% More Costly as of Mid-2014, But Only Small Gap Remains 140 Manufacturing Costs, US=100 130 120 110 100 90 80 70 60 S K a a a y U U n i d n l a i a a h r m n C t a s r u C e A G Early 2014 At Jan 2015 Exch Rates | Source: Boston Consulting Group 22

Weaker C$ Starting to Help Factory Exports (L), But Capacity Barriers Hit After Prior Closures (R) Manufacturing Capacity Use (%) 90 $bn 19 18 85 17 16 80 15 14 75 Avg Last 13 Expansion 12 70 11 65 10 Mar-95 Sep-97 Mar-00 Sep-02 Mar-05 Sep-07 Mar-10 Sep-12 07 08 09 10 11 12 13 14 C$ Sensitive Non-Sensitive | 23

-15 -10 10 15 -5 0 5 Petroleum Prod Few Currency-Sensitive Sectors Have Slack Electrical equip etc Printing etc Latest Capacity Use vs Pre-Recession Average (%-pts) Nonmetallic Min. Prod Clothing Primary Metal Chemical Gold = Low Exchange Rate Sensitivity Plastic & Rubber Red = Exchange Rate Sensitive Fab. Metal Machinery Food Paper Beverage & Tobacco Textiles Computer Furniture Wood Prod. Trans Equip. | 24

Québec Winning Among National Losses (L), as Province is More Levered to US Growth (R) 2015 Real GDP Growth, % 3.0 Correlation With Real US GDP Growth (1982-2013) Ont 0.88 2.5 0.73 Qué 2.0 BC 0.58 Man 0.57 1.5 Alta 0.52 NB 0.43 1.0 0.41 NS PEI 0.38 0.5 N&L 0.29 0.0 Sask 0.26 Canada Québec 0.0 0.2 0.4 0.6 0.8 1.0 Jun-14 Now

Quebec Highly Indebted, But Deficit Smaller than Others

Title TSX: Low Yields Limit Near-Term Downside Risk (L); Oil's Rebound to Help Energize 2016 Earnings (R) %-pts 6 % chg 20 18 5 15 13 4 3 10 5 2 5 2 1 0 0 -1 TSX Earnings Current Spread Spread with Yield minus GOC at 2.5% -5 10-yr GOC, Avg (yr-ahead 12 13 14 15 16 since 1986 forecast) | Source: Bloomberg, Thomson Reuters, CIBC 27

Title What a Complicated World Means for You Canadian growth sub-2% in 2015, while US tops 3%, gap  tied in part to oil. Fed hikes 125 bps while BoC likely to cut again, sending  C$ to 77 cents US. Bonds will over-react to Fed tightenings. Canada 10 yrs  see smaller sell-off but still reach 2½% in mid-2016. Equities still have some room to run with eye on 2016.  Yield plays and leverage to US consumer favoured for now.  Late in the year: The Dawn of the Dead for resources.  Risks: 10 plagues hit, no Moses to save us.  | | 28 28