the oil shock cbic

8/3/2019 The Oil Shock CBIC

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The Oil Shock:

How Shocking Is It?By Avery Shenf e ld , Ch ie f Econom is t & Manag ing Di r ec tor

May 2011


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Global Grow th Shy of Pre-Recession Pace

2

3

4

5

6

4 yrs before

recession

2010 2011 2012

5%

Annual Global Real GDP growth

CIBC Forecast


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Oil Cost Spikes P receded US RecessionsBut Current Shock Smaller in % of OECD GDP

Source: Wall Street Journal, CIBC

020

40

6080

100

120140

160

70 75 80 85 90 95 00 05 10

$/Barrel

?


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Net Speculative Interest in Oil MarketsHits Record Levels

Source: CFTC

-100,000

-50,000

050,000

100,000

150,000

200,000

250,000

300,000

Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

Jul-10

Jan-11

Non-Commercials Nymex Lt. Sweet Crude,1000 bbl contracts


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Excess Capacity Should Stabilize OilAvg Near $100/ bbl if No Further Dominoes Fall

0

20

40

60

80

100

120

140

160

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11

0

1

2

3

4

5

6

OPEC Spare Capacity West Texas Price (L)

$/bbl Mn bbl/day

Source: US DOE, Bloomberg


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US Food/ Energy Inflation Gains No Longer Leadto Wage or Core CPI Spikes

0.00

0.20

0.40

0.60

0.80

1.00

Core inflation Wages

1971-1990

1991-2010

Correlation with food & energy inflation, 12-months lag


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US Labour Market: A Long Way to GoBefore Fed Even Thinks of Hiking Rates

-8

-6

-4

-2

0

2

4

6

-24 -18 -12 -6 0 6 12Months from Employment Trough

1948 1953 1958 2007-

% decline in non-farm payrolls from peak

2008-10

recession /recovery


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Cuts Will Partly Undo Tax Stimulus (L),Debt Path Shows Need for More Restraint (R)

0

20

40

60

80

100

120

2000 0

204

06

08

2010 1

214

16

18

2020

Publicly he ld debt without major policy

changes (% of GDP*)

*CBO Baseline with an

extension of Bush tax c uts

beyond 2012, AMT indexation

and const. Medicare rates

after 2011.

-100

-50

0

50

100

150

200

250

300

Dec Tax Deal April Spending

Cuts

Fiscal Injections in 2011 , $Bn*

* co m p ar e d t o

2 0 1 1 Oba m a Budget


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US Exporters: Going Where the Growth Lies (L),US Dollar at Historic Lows in Real Terms (R)

80

90

100

110

120

130

140

150

160

Jan-09

Mar

-09

May

-09

Jul-0

9

Sep-09

Nov-09

Jan-10

Mar

-10

May

-10

rest of the world

emerging markets

Index Jan 2009=100

80

90

100

110

120

130

140

Dec74 Dec92 Dec10

100

150

200

250

300

350

400

450

Trade-weighted US$ Index=100

(Mar1973)

Nominal (R)

Real (L)


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No Flood of US Dollars:Quantitative Easing No Risk to US$ or Inflation

0

2

46

8

1012

14

16

Jan-07

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

Jul-10

Jan-11

Canada US

M2, y/y % chg

US M2 avg 2000-10


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QE1 More Effectivein Restraining Bond Y ields Than QE2

0

20

40

60

80

QE1 QE2

Reduction in 10-yr bond yields, bps(average of research results*)

* Swanson (2011), Gagnon/Raskin/Remache/Sack (2011),

Hamilton/Wu (2011)


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Bond Y ields to Rise, But Gently

2

3

4

5

6

Dec00 Dec04 Dec08 Dec12

Canada

US

10-yr bond yields (%)Forecast


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Canadas Edge in Net DebtKeeps 30-Year Rates Well Below US

0

50

100

150

200

250

JPN ITA FRA UK US GER CAN

Gross Debt Net Debt

Net Debt = Gross Debt less Financial Assets

General Gov't Debt, % of GDP (2010)


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2011/ 2012 Budget Balances

-2

0

24

6

8

10

12

US* Ont NB Alta Qu NS PEI Man BC N&L Sask

Canada Federal Gov't Provincial Governments

2011/12 Budget Deficits, % of GDP

* Based on CBO estimates for FY2011

Deficit

Surplus


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Net New Supply of Treasuries Running More than3X Faster than Net Canada Issuance

-2

0

2

4

6

8

10

12

06/07 07/08 08/09 09/10 10/11 11/12

US Treasuries Canadas

Net Bond Issuance, % of GDP

Fcst


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Gross / Net Canada Issuance: Off its Peak butBoosted by P lans to Enhance Liquidity

-20

0

20

40

60

80

100

FY90 93 96 99 02 05 08 11F

Net Gross

Government of Canada Nominal Issuance, C$billions

Note: 2011/12 is forecast


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Budgets Based on Cautious Forecasts

3. CIBC's current national forecast

2. Weighted average of individual provincial forecasts

1. 2010 figures are estimates, differ from growth rates reported by StatCan

4.45.66.22.82.83.1CIBC3

5.05.86.22.82.93.1Federal

5.35.16.22.62.42.9Provincial2

Canada Forecasts

1.49.718.80.23.05.6N&L

NANA2.3NA1.71.9PEI

4.04.54.91.91.92.1NS

4.63.24.02.21.52.0NB

4.43.94.42.22.03.0Qu

5.14.66.12.72.42.8Ont

4.55.55.02.72.72.5Man

6.39.05.72.84.21.7Sask

7.97.19.93.23.33.5Alta

4.94.15.62.62.03.1BC

Provincial Forecasts1

2012F2011F2010E2012F2011F2010EY/Y % Chg

Nominal GDPReal GDP


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Spending Needs to Slow Across Country

0

2

4

6

8

10

12

BC Alta Sask Man Ont Qu NS N&L

History: 5Y Avg (FY03-08) Plan: 3Y Avg (FY10-13)

Growth in Provincial Expenditures, % (CAGR)


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The Continental Divide: Huge Gap in Output Gaps

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

Mar-01 Mar-03 Mar-05 Mar-07 Mar-09 Mar-11

Canada US

Output Gap, % of GDP


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Canada Sees Nearly 3% Grow th,Prime and Overnight Up 100 bps in 2nd Half

-8.0%

-6.0%

-4.0%-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

Q1-07 Q4-07 Q3-08 Q2-09 Q1-10 Q4-10 Q3-11 Q2-120.0

0.51.0

1.52.0

2.5

3.03.54.0

4.5

5.0

Real GDP Growth (L) Overnight Interest Rate (R)

GDP growth (s.a.a.r.) %Forecast


21/32


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Oil Prices Can Trump Rate Hikes for C$ Direction

70

80

90

Feb10 May10 Aug10 Nov10 Feb11

0.96

1.00

1.04

1.08

WTI Crude Oil (L) CAD (R)

C$ (reverse scale)

First ratehike

Third ratehike

Secondrate hike

C$depreciation

$/bbl

C$ cooled in 2010 despite rate hikes

Could see a replay of that story towards mid-2011


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Real Incomes: Advantage Canada

80

100

120

140

199

9-Q4

2001

-Q4

2003

-Q4

2005

-Q4

2007

-Q4

2009

-Q4

Canada US

Index of Real Gross National Income (1999 Q4 = 100)


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Cdn Household Leverage Reaching US Levels

0

50

100

150

200

Q1-90 Q1-94 Q1-98 Q1-02 Q1-06 Q1-10

United States Canada

debt as a % of Personal Disposable Income

Note: both measures include

unincorporated businesses


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Why the Bank of Canada Will Hike:Current Debt Trend Leads to Trouble

3

5

7

9

11

13

15

Q1-90 Q1-94 Q1-98 Q1-02 Q1-06 Q1-10 Q1-14

Debt Service Ratio Average Interest Rate on Debt

%


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Gasoline Bills Take Bite out of Spending Power

As a Share of

Disposable Incom e

1.2

1.7

2.2

2.7

3.2

3.7

4.2

4.7

5.2

5.7

6.2

91 94 97 00 03 06 09

%

As a Share o f Retai l Sale s

5

6

7

8

9

10

11

12

13

91 95 99 03 07 11

%

Source: Statistics Canada

Note: Data for 1st quarter estimated by CIBC


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Strong Fundamentals For Capital Expenditures

Source: Statistics Canada, CIBC

0.00

0.02

0.040.06

0.08

0.10

0.12

0.14

0.16

0.18

0.20

88 91 94 97 00 03 06 09

0.00

0.05

0.10

0.15

0.20

0.250.30

0.35

0.40

cash & deposits / total equity (L)

cash & deposits / Sales of Goods &Services (R)

Reco rd High Corpo rate

Cash Position

Rea l Return on Capital

Employed (%)

-1

0

1

2

3

4

5

6

7

8

9

93 95 97 99 01 03 05 07 09

Long-termaverage


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Business Investment on a Steeper Climb

Source: Statistics Canada, CIBC

A Normal Recession

75

80

85

90

95

100

105

1 2 3 4 5 6

Quarters

81-82

89-90

08-09

Peak-to-trough in thepast 3 recessions (index)

And Faster Recove ry

-6

-4

-2

0

2

4

6

8

10

84 92 current

Avg q/q growth (ar) in the

1st 5 qtrs of recovery (%)


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Canadian Exports RecoveringBut Lose US Share As C$ to Stay Near Parity

90

95

100

105

110

115

120

125130

135

140

Q2-98 Q3-00 Q4-02 Q1-05 Q2-07 Q3-09

85

90

95

100

105

110

115

120125

130

135

Real Cdn Exports (L) US Activity Index (BoC) (R)

Index,Q2 98 = 100

Index,Q2 98 = 100

gap


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House P rices Still RisingBut Rate Hikes Likely to Prompt a Correction

Source: CIBC

Major Marke ts

-15

-10

-50

5

10

15

20

25

Jan-07

May-07

Sep-07Jan-08

May-08

Sep-08

Jan-09

May-09

Sep-09Jan-10

May-10

Sep-10Jan-11

Weighted residential avg. price Residential avg. price

y/y % chg


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Asset Class Performance and Oil Shocks

0%

10%

20%

30%

40%

50%

60%

70%

-30 0 50

TSX Composite

Long Canada

Cash

% probability each asset class will

outperform others in quarter, 1956-date

% change in oil prices during quarter


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Interest and Exchange Rate Outlook

2011 2012

END OF PERIOD: 27-Apr Jun Sep Dec Mar Jun Sep Dec

CDA Overnight target rate 1.00 1.00 1.50 2.00 2.00 2.00 2.00 2.25

98-Day Treasury Bills 0.99 1.00 1.55 1.90 1.85 1.85 1.85 1.90

2-Year Gov't Bond 1.78 2.00 2.15 2.50 2.40 2.75 2.85 3.00

10-Year Gov't Bond 3.27 3.50 3.55 3.50 3.60 3.85 3.95 4.00

30-Year Gov't Bond 3.74 3.80 3.90 3.85 4.00 4.10 4.25 4.25

U.S. Federal Funds Rate 0.08 0.20 0.20 0.20 0.20 0.20 0.20 0.20

91-Day Treasury Bills 0.05 0.15 0.15 0.15 0.15 0.15 0.15 0.20

2-Year Gov't Note 0.64 0.75 0.65 0.65 0.85 0.90 0.90 1.00

10-Year Gov't Note 3.36 3.55 3.50 3.40 3.50 3.80 3.85 3.95

30-Year Gov't Bond 4.45 4.60 4.55 4.40 4.65 4.75 4.80 4.80

Canada - US T-Bill Spread 0.94 0.85 1.40 1.75 1.70 1.70 1.70 1.70

Canada - US 10-Year Bond Spread -0.09 -0.05 0.05 0.10 0.10 0.05 0.10 0.05

Canada Yield Curve (30-Year 2-Year) 1.96 1.80 1.75 1.35 1.60 1.35 1.40 1.25

US Yield Curve (30-Year 2-Year) 3.81 3.85 3.90 3.75 3.80 3.85 3.90 3.80

EXCHANGE RA TES CADUSD 1.05 1.00 1.02 1.03 1.01 1.02 1.02 1.03

USDCAD 0.95 1.00 0.98 0.97 0.99 0.98 0.98 0.97

USDJPY 82 86 87 89 88 90 92 94

EURUSD 1.48 1.49 1.36 1.34 1.30 1.35 1.34 1.32

GBPUSD 1.66 1.66 1.60 1.62 1.62 1.67 1.65 1.65 AUDUSD 1.09 1.02 0.98 0.97 0.98 1.03 1.01 1.00

USDCHF 0.87 0.89 0.95 0.96 0.97 0.95 0.97 1.01

USDBRL 1.57 1.54 1.62 1.65 1.62 1.60 1.58 1.56

USDMXN 11.52 11.55 11.80 12.00 12.00 11.85 11.75 11.50

the oil shock cbic

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