rebound july 2015 presented by: eric lascelles, chief economist
TRANSCRIPT
Rebound
July 2015
Presented by:Eric Lascelles, Chief Economist
2
Report card
Negative Developments: Grexit risks still loom
Higher yields highlight “taper tantrum” risks
China slows / EM growth challenges persist
Positive Developments: Tailwind of low oil, low rates, low FX diminishes somewhat
Evidence of reviving economic growth in U.S.
Japanese reforms finally underway
TPP trade deal prospects improve
Inflation bottoming off of very low levels
Canadian employment surprisingly robust
Interesting Developments: China’s growth/equity disconnect
Fed tightening still on track for autumn
Productivity problem debate
U.K. wage growth accelerates
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Equities undisturbed by material downside risks
600
800
1000
1200
1400
1600
1800
2000
2200
1999 2001 2003 2005 2007 2009 2011 2013 2015
S&
P 5
00 In
dex
U.S. equities into 7th year of bull market
Source: WSJ, Haver Analytics, RBC GAM
Near all-time high despite Greek worries
4
Global growth bottoming?
47
48
49
50
51
52
53
54
55
Jan-12 Nov-12 Sep-13 Jul-14 May-15
Man
ufa
ctu
ring
PM
ISome weakness in manufacturing sector globally
JP Morgan Global PMI Developed markets PMIEmerging markets PMI
Note: PMI refers to Purchasing Managers Index for manufacturing sector, a measure for economic activity. Source: Haver Analytics, RBC GAM
Contraction
Expansion
5
U.S. data disappointments starting to fade
-120
-80
-40
0
40
80
120
Oct-10 Jun-11 Feb-12 Oct-12 Jun-13 Feb-14 Oct-14 Jun-15
Eco
nom
ic S
urp
rise
Inde
x (1
std
dev
=1
00)
U.S. hit by negative surprises
Source: Citigroup Economic Surprise Index, RBC GAM
Positive Surprises
Negative Surprises
6
U.S. housing market picks up
-20
-15
-10
-5
0
5
10
15
20
2001 2003 2005 2007 2009 2011 2013 2015
Hom
e pr
ice
ind
ex (
YoY
% c
han
ge)
U.S. home prices rising at faster clip
S&P/Case-Shiller HPI CoreLogic National HPISource: CoreLogic, S&P, Haver Analytics, RBC GAM
7
Is oil shock’s back-loaded benefit finally materializing?
Lower oil sector profits
Diminished oil sector cap-ex
Lower profits in related industries
More consumer spending
More (non-oil) business investment
Immediate Medium termNear termTIME
Source: Bank of Canada, IMF, RBC GAM
8
U.S. productivity growth deceleration mostly just normalization
0.8
1.2
1.6
2.0
2.4
2.8
3.2
1980 1985 1990 1995 2000 2005 2010 2015
U.S
. bus
ines
s-se
ctor
rea
l out
put p
er h
our
(10
-yea
r %
cha
nge
annu
aliz
ed)
U.S. productivity reverts to more normal growth rate
Note: Real output per hour of all persons of business sector.Source: BLS, Haver Analytics, RBC GAM
Unusual productivity
spike
Reversionto more normal growth
9
Bond yields rise on inflation / Fed / valuations
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15
10-y
r G
erm
an g
over
nmen
t bon
d y
ield
(%
)German yields took off from rock bottom
Bond selloff
Source: Reuters, Haver Analytics, RBC GAM
10
Cautious rate hikes are coming
0
1
2
3
4
5
6
7
2000 2002 2004 2006 2008 2010 2012 2014 2016
U.S
. Fed
fund
s ta
rget
rat
e (
%)
Fed anticipates first rate hike in 2015
Fed forecast
Note: Fed fund target rates at year end. Fed forecast from projections released on 6/17/2015. Source: Federal Reserve Board, RBC GAM
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Japan reforms
Source: RBC GAM
▪ Efforts underway to reduce two-tier nature of labour market
▪ Underutilized pools of potential workers being tapped
Governance ▪ Tokyo Stock Exchange mandates independent directors on boards
Trade ▪ Trans-Pacific Partnership implementation now likely
Labour
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Evaluating debt hot spots
Near-term risk Medium-term risk Long-term risk(0-2 years) (3-10 years) (11+ years)
Developed-world public debt Normal Elevated High High
Greek public debt High High Elevated Low
Japanese public debt Normal High High Medium
Emerging-market external debt Elevated Normal Normal High
Corporate debt Elevated Elevated Normal Medium
Chinese credit High High Elevated High
Oil-oriented debt Elevated Normal Normal Low
Housing exuberance High Elevated Normal Low
Source: RBC GAM
Global significance
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China’s perplexing performance
0
1000
2000
3000
4000
5000
6000
7000
0
2
4
6
8
10
12
14
16
18
20
2000 2005 2010 2015
Sha
ngha
i Sto
ck E
xcha
ng
e C
om
po
site
In
dex
(De
c 19
, 199
0 =
10
0)
Chi
na's
re
al G
DP
gro
wth
(Qo
Q %
an
nual
ize
d)Chinese stocks surged on reforms and stimulus
Source: CNBS, Bloomberg, Haver Analytics, RBC GAM
GDP growth(LHS)
Shanghai Stock Exchange Composite Index (RHS)
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Canadian employment surprisingly robust
-5
0
5
10
15
20
25
30
35
40
2011 2012 2013 2014 2015
Can
adi
an
em
plo
ymen
t(6
mm
a o
f Mo
M %
ch
ange
)Canada's curious employment strength
Note: 6-month moving average (6mma) of month-over-month % change of Canadian employment. Source: Statistics Canada, Haver Analytics, RBC GAM
Normal hiring
Surprising resilience despite oil
shock
15
Greek deposit outflows could lead to capital controls
-22
-18
-14
-10
-6
-2
2
6
10
14
18
2005 2007 2009 2011 2013 2015
Gre
ek
ban
k d
epos
its (
YoY
% c
han
ge)
Greek banks bleeding deposits
Note: Bank deposits of households and nonfinancial corporations.Source: ECB, Haver Analytics, RBC GAM
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Greek debt composition good news / bad news
IMFCentralbanks
EFSFEU
bilateralloans
Marketdebt
Other
Very little Greek debt is privately held
Note: Share of total outstanding Greek debt (%) held by various stakeholders.Source: Financial Times Jan 2015, RBC GAM
17%
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Greek contagion risks
Channel Impact Rationale
Economic Very small ▪ Greece is just 2% of Eurozone GDP
Banking Small ▪ Most foreign banks have drastically cut their exposure to Greece
Private investors
Small▪ Private investors now hold less than 20% of Greek sovereign bond▪ Those that cannot afford Greek risks have long since fled
Official lenders
Medium▪ Official lenders now hold the bulk of Greek debt▪ A default or Grexit would impose significant though manageable losses on other European sovereigns
Confidence Medium
▪ It is difficult to gauge the effect of an uncoordinated Greek default or Grexit on market confidence▪ Markets have so far taken a casual attitude to the risk, but there remains the possibility of a more negative response should Grexit actually transpire
Short-term precedent
Medium▪ Greek default or Grexit would raise the risk of other highly indebted countries being pressured by markets to do the same▪ Fortunately, evidence so far suggests this contagion effect is limited
Long-term precedent
Medium▪ A Greek Eurozone exit would leave lingering questions about the long-term viability of the Eurozone, particularly in the event of future crises
Source: RBC GAM
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Can the Eurozone continue to function over the long run?
Source: RBC GAM
Eurozone U.S.Language/culture Different languages and cultures Fewer geographic variations, but significant cultural ones
Labour mobility Imperfect given geographic variations Good labour mobility, but impeded by two-income families
Economic similarities Eurozone economies are quite similar U.S. states are quite varied
Central bank / currency Yes Yes, though central bank formed quite late
Legislative Yes, on certain matters Yes, on certain matters
Fiscal affairs Only basic fiscal rules with little EU spending Substantial, but still significant share left in state hands
Fiscal transfers Yes, but quite limited Yes, but minimal over first century-plus of existence
Bank regulation Yes Yes
Speed bumps Sovereign debt crisis Civil War; a history of separatist movements
Separatist movements Perpetual conflict between state and federal rights
Prognosis Workable union Functioning union
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