the great escape?€¦ · (chng since credit crisis erupted : ppts) 3.0 canada 3.5 y calgary...
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Douglas Porter, CFA Deputy Chief Economist & Managing Director, BMO Capital Markets
The Great Escape?
© BMO Capital Markets www.bmocm.com/economics
Financial Markets Revive
Commodities
08 09 10
30
60
90
120
150
0.75
1.50
2.25
3.00
3.75
4.50Stocks
08 09 10
600
800
1000
1200
1400
1600
6000
8000
10000
12000
14000
16000
(as of May 3, 2010)
Canadian Dollar(US¢)
08 09 10
75
80
85
90
95
100
105
Oil(US$/bbl:
lhs)
Copper(US$/lb:
rhs)TSX(rhs)
S&P 500(lhs)
Recovery Trumps New Concerns
© BMO Capital Markets www.bmocm.com/economics
Major Indicators On the Mend
Retail Sales(y/y % chng)
07 08 09 10-12
-9
-6
-3
0
3
6
9
US Employment(m/m chng : 000s)
07 08 09 10-900
-600
-300
0
300Canada
US
China’s Exports(y/y % chng : 2-mnth ma)
07 08 09 10-30
-15
0
15
30
45
© BMO Capital Markets www.bmocm.com/economics
Recession Ends
Real GDP
04 05 06 07 08 09 10 11-8
-6
-4
-2
0
2
4
6
(q/q % chng : ar)
Canada
US
forecast
Recession Gauges:Length Depth
USCanada
~19 mnths3 qtrs
08 09 10 11CanadaUS
0.40.4
-2.6-2.4
3.43.1
3.23.1
-3.8%-3.6%
(last 4 qtrs)
© BMO Capital Markets www.bmocm.com/economics
Canadian Housing Markets Rebound
Housing Starts(2005 = 100 : 2-mnth ma)
03 05 07 0920
40
60
80
100
120
Home Sales: Canada = Existing US = Existing + New
Home Sales(mlns : ar)
03 05 07 094
5
6
7
8
9
0.2
0.3
0.4
0.5
0.6Canada
(rhs) CanadaCanada
USUS
US(lhs)
Existing Home Prices(y/y % chng : 3-mnth ma)
03 05 07 09-20
-10
0
10
20
© BMO Capital Markets www.bmocm.com/economics
Canadian House Prices
Existing Home Prices
VancouverToronto
Major MarketsOttawa
Quebec CityMontreal
CalgaryWinnipeg
0 5 10 15 20 25 30 35 40
30.7
20.1
16.1
14.9
13.2
10.7
9.0
7.5
(y/y % chng : as of March 2010)Canada – Major Markets
(weighted)
AverageHome Price$693,000
$435,000
$374,000
$331,000
$206,000
$278,000
$406,000
$227,000
© BMO Capital Markets www.bmocm.com/economics
Source: BMO Capital Markets
Canada (January 1988 = 100)
Affordability: Back Below Average... Before Rate Hikes
Housing Affordability Index
88 90 92 94 96 98 00 02 04 06 08 1060
80
100
120
140
160
180
mean
© BMO Capital Markets www.bmocm.com/economics
US Recession Much Worse
Employment
75 80 85 90 95 00 05 10
-6
-4
-2
0
2
4
6
(y/y % chng)
Job Losses in Perspective
% Level-2.4%-5.9%
-417,000-8.4 mln
CanadaUS
Cumulative Chng in Recession
US recession
Canada
US-1.8%
0.9%
-2.4%
Record-4.7%
© BMO Capital Markets www.bmocm.com/economics
Unemployment Rate
98 99 00 01 02 03 04 05 06 07 08 09 10 113
6
9
12
(percent)
Canada
US
forecast
Unemployment to Remain High
9.7%
8.2%Quebec
8.0%
© BMO Capital Markets www.bmocm.com/economics
Ontario, Alberta and BC Hit Hardest
[September ’08 to March ’10]
Change in Unemployment Rate (chng since credit crisis erupted : ppts)
3.0
Canada
3.5
Calgary
3.7Victoria
3.4
VancouverWinnipeg
1.0 5.3
Sudbury
1.2
Edmonton
3.8
1.9Regina
0.0Saskatoon
1.7
Montreal
Quebec City
1.2Saint John
Ottawa
Halifax
2.3Windsor
3.4
Oshawa2.6
London 2.4
Hamilton
St Catharines
Kitchener
SouthwesternOntario
St John’s-0.2
Sherbrooke
Toronto
4.2 1.0
2.0
WindsorToronto
1.2
Thunder Bay
2.7
1.8
0.1
© BMO Capital Markets www.bmocm.com/economics
Provincial Outlook: Broad Recovery
ManQue
BCAtlan
OntAltaSask
-8 -6 -4 -2 0
-0.2
-1.0
-2.3
-3.1
-3.1
-5.1
-6.3
SaskBC
AltaOnt
ManQue
Atlan
0 2 4 6 8
4.2
3.9
3.6
3.4
3.0
2.9
2.8
Real GDP – Canada (y/y % chng)
Source: [2010] BMO Capital Markets forecasts
2009 2010
08 09 10 11Canada 0.4 -2.6 3.4 3.2
© BMO Capital Markets www.bmocm.com/economics
Consumers Retrench
Personal Savings Rate(% of disposable income)
06 07 08 09 10 111
2
3
4
5
6
Real Consumer Spending
(y/y % chng)
06 07 08 09 10 11-3
0
3
6
US
Canada
forecast
US
Canada
08 09 10 11CanadaUS
3.0-0.2
0.2-0.6
3.22.4
3.53.1
© BMO Capital Markets www.bmocm.com/economics
Employment Ratio(% of population)
05 06 07 08 09 1058
59
60
61
62
63
64
Confidence, Cash and Credit Are KeyHousehold Credit = Consumer Credit and Residential Mortgages
Canadian Consumers: Holding Up Better
Consumer Confidence Index(January 2007 = 100)
07 08 09 1015
30
45
60
75
90
105
Household Credit(y/y % chng)
05 06 07 08 09 10-5
0
5
10
15
Canada
US
Canada
US
Canada
US
© BMO Capital Markets www.bmocm.com/economics
Net Worth(ratio to personal disposable income)
95 00 05 104.5
5.0
5.5
6.0
6.5
Total Debt includes unincorporated businesses
Canadian Household Sector in Better Shape
Tech Stock Bubble
Canada
US
Housing Bubble
Loan-to-House Value(%)
95 00 05 1020
30
40
50
60
70
US
Canada
Subprime Malaise
Total Debt(ratio to personal disposable income)
95 00 05 101.00
1.25
1.50
1.75
2.00
Canada
US
© BMO Capital Markets www.bmocm.com/economics
Vehicle Sales (mlns : ar)
Changing Gears
05 06 07 08 09 10
8
12
16
20
24
0.8
1.2
1.6
2.0
2.4
Canada: Mar & Apr = estimate
(3-mnth ma)05 06 07 08 09 10
5
10
15
20
China
US
Crossover
US(lhs)
Canada(rhs)
© BMO Capital Markets www.bmocm.com/economics
Global GDP: World of Difference
[Q1]
[Q1]
[Q1]
[Q1] -0.3[Q1]
Real GDP China
TaiwanKoreaIndia
BrazilAustralia
USJapan
CanadaEurozone
MexicoUK
Russia
-6 -3 0 3 6 9 12 15
11.99.2
7.86.0
4.32.7
2.6
4.5
-1.0-1.2
-2.2-2.3
-3.1-3.8
2009:Q4 (y/y % chng)08 09 10 11
World 3.1 -0.8 4.1 4.3
10.76.0
0.1
© BMO Capital Markets www.bmocm.com/economics
Loonie & Commodities: So Happy Together Again
95 97 99 01 03 05 07 0980
120
160
200
240
280
320
60
70
80
90
100
110
120
Canada (as of May 3, 2010)
BoC Commodity Price Index
(lhs)
C$(US¢ : rhs)
© BMO Capital Markets www.bmocm.com/economics
Australian $Canadian $Swiss FrancEuroJapanese YenChinese YuanUK PoundTrade-weighted US$Mexican Peso
79.559.257.452.742.421.37.6
-21.3-25.8
3.24.2-4.6-7.8-1.60.0-5.70.06.8
(as of May 3, 2010)
US Dollar Still Vulnerable
Broad Trade-weighted US$
00 02 04 06 08 10
90
100
110
120
130
140February 27,
2002 Peakforecast
July 15, 2008 Trough
March 9,2009
2010Y-T-D
Peak toPresent
Feb ’02
% Chng (vs US$)
Sovereign Risks
© BMO Capital Markets www.bmocm.com/economics
US Budget Deficit: Record Shortfall
– US$ Blns –
81 89 93 01 09-1,600
-1,200
-800
-400
0
400
– % of Nominal GDP –
1900 1925 1950 1975 2000-32
-24
-16
-8
0
8
Budget Balance – United States
Reagan BushClinton
Source: OMB 2010-12 = forecast
AAA Rating “At Risk”
ObamaBush
World War II
World War I
-1,413
-6.0% -9.9%-10.6%
-8.3%-5.1%
-1,342Record-1,500
-914
© BMO Capital Markets www.bmocm.com/economics
Priming the Fiscal Pump in Canada
– % of Nominal GDP –
62 72 82 92 02 12
-10
-8
-6
-4
-2
0
2
– C$ Blns –
89 94 99 04 09 14
-60
-40
-20
0
20
Attention Will Soon Turn to RestraintSource: Federal Budget 2009/10 = estimate
forecastPrior Trough
Budget Balance – Canada
© BMO Capital Markets www.bmocm.com/economics
Dots represent countries in the OECD, except Norway, which has huge assets
OECD Fiscal Landscape
Deficit vs Debt
-60 -30 0 30 60 90 120-3
0
3
6
9
12
15
Net Debt
2010 (% of nominal GDP)
Deficit
Surplus
Australia
New Zealand
Japan
US
Canada
Greece
UKIreland
Italy
SpainPortugal
TROUBLE
Germany
France
© BMO Capital Markets www.bmocm.com/economics
10-year Spreads vs Germany
Europe: Sovereign Risk
07 08 09 100
2
4
6
8
10
07 08 09 100
1
2
3
4
Portugal
Spain
Greece
Ireland
(as of May 3, 2010)
© BMO Capital Markets www.bmocm.com/economics
Europe & Emerging Markets
75 80 85 90 95 00 05 104
6
8
10
12
14
16
Canadian Exports (% of total)
Canadian Exports: Where now?
United States
75 80 85 90 95 00 05 1060
65
70
75
80
85
Europe
Emerging Markets
© BMO Capital Markets www.bmocm.com/economics
Loonacy
Canadian Dollar
03 04 05 06 07 08 09 10 11
60
70
80
90
100
110
Parity Beckons
(US¢ : as of May 3, 2010)
Parity
Current 98.96¢
forecast
© BMO Capital Markets www.bmocm.com/economics
Headline Inflation Bounces Back
Canada
04 05 06 07 08 09 10 11
-3
0
3
6
Consumer Price Index (y/y % chng)
HST: Short-term Bump for Inflation
United States
04 05 06 07 08 09 10 11
-3
0
3
6
Core
TotalTotal
Core1.4%
forecast
2.3%
1.1%
1.7%
© BMO Capital Markets www.bmocm.com/economics
Core CPI 1.7%
(y/y % chng : as of March 2010)
Deflationary
Natural GasVideo EquipmentAir FaresMortgage InterestClothingFurniture/AppliancesVegetables
-22.4-16.6-10.9-6.0-4.2-2.1-1.5
Inflation and Deflation
Inflationary
GasolineWater ChargesAuto InsuranceTelephone ServicesChild CareProperty TaxTuition Fees
17.25.65.55.04.84.34.1
Consumer Price Index – Canada
Overall CPI 1.4%
© BMO Capital Markets www.bmocm.com/economics
Canadian Rate Hikes Coming
Overnight Rate
01 02 03 04 05 06 07 08 09 10 11
0
1
2
3
4
5
6
7
(% : as of May 3, 2010)
US
Canada
0% - 0.25%
forecast
Can Canada Go It Alone?
Record Lows
0.25%
© BMO Capital Markets www.bmocm.com/economics
Current spread-4 bps
10-year Bonds
06 07 08 09 10 11
2
3
4
5
6
US
Canada
(% : as of May 3, 2010)
Fed Quantitative Easing Finished
Long-term Yields Will Rise a Bit
’11)(Year-end4.70%
’10)(Year-end4.05%
forecast
3.65%Canada3.69%US 4.15%
5.00%
© BMO Capital Markets www.bmocm.com/economics
NasdaqRussia
S&P 500DJIA
JapanTSX
GermanyUK
IndiaAustralia
China-30 -15 0 15
10.18.9
7.86.9
4.83.83.52.6
-0.5-1.6
-14.4
RussiaChinaIndia
NasdaqAustralia
TSXGermanyS&P 500
UKJapan
DJIA0 50 100 150
128.695.0
81.043.9
33.430.7
23.923.522.119.018.8
UKDJIATSX
S&P 500Germany
NasdaqJapan
AustraliaIndia
ChinaRussia
-100 -75 -50 -25 0
-31.3-33.8-35.0
-38.5-40.4-40.5-42.1-43.0
-52.5-65.7
-72.4
Equity Markets (% chng)
Global Equities: From Worst to First
2010 Year-to-Date(as of May 3, 2010)20092008
© BMO Capital Markets www.bmocm.com/economics
A Long Way Back
TSX
07 08 09 10
6000
8000
10000
12000
14000
16000
S&P 500
07 08 09 10
600
800
1000
1200
1400
1600
March 9, 2009
June 18, 2008October 9, 2007
March 9, 2009
(as of May 3, 2010)
+77.7%
-56.8%
+23.6%
+61.2%
-49.8%
+30.2%
© BMO Capital Markets www.bmocm.com/economics
(± one standard deviation)
Valuations in CheckUnited States
Overvalued
Undervalued
S&P 500 Price/Trend Earnings
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 20100
10
20
30
40
50
© BMO Capital Markets www.bmocm.com/economics
Worst Is Over
Massive Rate CutsFiscal Stimulus
Financial Markets Heal
But...Sovereign Risks
US Deleveraging ContinuesStrong Canadian Dollar Threat
Canada Outperforms, But Challenges Remain
Douglas Porter, CFA Deputy Chief Economist & Managing Director, BMO Capital Markets
The Great Escape?
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