DOES QE3 = ECONOMIC GLEE? · 2015-06-24 · Core CPI 1.6% (y/y % chng : as of August 2012) Deflationary Natural Gas Home Entert. Equip. Computers Household Furniture Clothing Vegetables

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DOES QE3 = ECONOMIC GLEE?

September 25, 2012

Douglas Porter, CFA Deputy Chief Economist & Managing Director, BMO Capital Markets

© BMO Capital Markets www.bmocm.com/economics

QE3 and ECB Provide Boost

Financial Markets Trying to Look Past Europe

Commodities

08 09 10 11 12

30

60

90

120

150

0.75

1.50

2.25

3.00

3.75

4.50

5.25Stocks

08 09 10 11 12

600

800

1000

1200

1400

1600

6000

8000

10000

12000

14000

16000Currencies(US$/currency)

08 09 10 11 12

0.70

0.80

0.90

1.00

1.10

1.2

1.3

1.4

1.5

1.6

1.7

(as of September 21, 2012)

Oil(US$/bbl:

lhs)

Copper(US$/lb: rhs)

TSX(rhs)

S&P 500(lhs)

Record

Euro(rhs)

C$(lhs)


Global Outlook:What Is the Biggest Risk?

Euro Sovereign Debt CrisisEurope in RecessionUS Fiscal IssuesHard Landing for China?Iran and Oil PricesCanadian Household Debt

Charts 1-2


European Sovereign Debt Crisis Rattles On(January 4, 2010 = 100 : as of September 21, 2012)

Stock Indices

10 11 12

20

40

60

80

100

120

140

Spain, Italy Now the Focus

US [S&P 500]

GermanyItaly

Greece Spain

+28.9%

-32.1%-32.2%

-64.6%

Canada

+4.4%

+23.2%


US Consumers Cautious, China Slowing

Retail Sales(y/y % chng)

07 08 09 10 11 12-15

-10

-5

0

5

10

Consumer Confidence

07 08 09 10 11 1220

40

60

80

100

120China’s Exports

(y/y % chng : 2-mnth ma)

07 08 09 10 11 12-25

0

25

50

Canada

US

Canada US

Charts 3-4


Modest Growth Ahead

Double Dip Avoided

Real GDP

04 05 06 07 08 09 10 11 12 13

-9

-6

-3

0

3

6

9

(q/q % chng : ar)10 11 12 13

CanadaUS

3.22.4

2.41.8

2.02.2

2.02.3

Canada US

forecast


Will the US Economy Help or Hurt Obama?

Unemployment Remains HighForeclosuresGas Prices Still HighFiscal Tightening

TaxesSpending

Policy Gridlock: Fiscal Cliff Ahead?

Modest Job Growth

Charts 5-6


Modest Growth in Both Economies

Job Growth: Tables Turn(y/y % chng)

Employment

06 07 08 09 10 11 12

-6

-4

-2

0

2

4

Canada

US

Crossover


Jobless Rates: Record Gap Narrows

06 07 08 09 10 11 12 134

5

6

7

8

9

10

8.1%

7.3%

4.4%

33-year Low5.9%

MontrealQuebec CityQuebec

8.4% 5.2% 7.6%

SpainGreecePortugalIrelandItalyFranceUKBelgiumGermanyAustraliaJapan

25.124.415.714.910.710.38.17.25.55.14.3

Unemployment Rate (percent)

7.8% at Obama Inauguration

(Jan ’09)

10.0%

8.7%

forecast

US

Canada

US Participation Rate at 30-year Low

Charts 7-8


Big Positive: Auto Recovery

Production

03 05 07 09 110.2

0.4

0.6

0.8

1.0

1.2

0.04

0.08

0.12

0.16

0.20

0.24

Canada: Aug = estimate

Vehicles (mlns : ar)

Sales

03 05 07 09 119

12

15

18

21

0.9

1.2

1.5

1.8

2.1

Canada(rhs)

US(lhs)

Canada(rhs)

US(lhs)


Will Canadian Housing Crash?

Macleans, March 2012

Canadian Business,12 January 2012

Report on Business,March 2012

Prices Double in 10 YearsToronto Condo Boom

But...Affordability NormalMarkets Balanced

Charts 9-10


US Turning the Corner

Existing Home Prices(January 2000 = 100)

03 05 07 09 11

120

140

160

180

200

220

240

Housing Starts(000s : ar)

03 05 07 09 11

400

800

1,200

1,600

2,000

2,400

2,800

40

80

120

160

200

240

280

Existing Home Sales(mlns : ar)

03 05 07 09 11

3

4

5

6

7

8

0.2

0.3

0.4

0.5

0.6

Canada(rhs)

US(lhs)

US(lhs)

Canada(rhs) Canada

Canadian Housing Stays Warm

US

Change from Peak

-31.6%


Canadian House Prices: Vancouver ManoeuvreCanada (y/y % chng : January-August 2012)

Existing Home PricesToronto

WinnipegQuebec City

MontrealHalifax

EdmontonOttawaCalgaryCanada

Vancouver

-10 -8 -6 -4 -2 0 2 4 6 8 10 12

7.76.0

5.74.2

4.03.1

2.21.9

1.8-7.3

(weighted)

$500,000$254,000$259,000$325,000$273,000$337,000$354,000$412,000$366,000$737,000

AverageHome Price

Charts 11-12


Average Home Price

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 1250

100

150

200

250

300

350

400

($000s : local currency : nsa)

US = single-family homes

Bargain Hunters Take Note (and a Passport)

Canada

US

$350,000

$236,000

48%


Credit(y/y % chng)

05 06 07 08 09 10 11 12-5

0

5

10

15

Debt(ratio to personal disposable income)

90 95 00 05 100.8

1.0

1.2

1.4

1.6

1.8

Households

Debt Burdens Now SimilarHousehold Credit = Consumer Credit and Residential Mortgages Household Debt includes household and unincorporated business debt

Canadian Consumers: Still Borrowing

Canada

US Canada

USCrossover

Charts 13-14


Is the Commodity “SuperCycle” Over?

China Slowing

US Growing

Middle East Turmoil

European Risk


Global GDP: The Great Divide

Real GDP ChinaIndia

MexicoAustralia

JapanCanada

USKoreaBrazil

UKEurozone

-1 0 1 2 3 4 5 6 7 8

7.65.5

4.13.7

3.32.5

2.32.3

0.5-0.5-0.5

Real GDP ChinaIndia

MexicoAustralia

JapanCanada

USKoreaBrazil

UKEurozone

-1 0 1 2 3 4 5 6 7 8

2012:Q210 11 12 13

World 5.3 3.9 3.0 3.5

(y/y % chng)

Charts 15-16


Commodity Trends: Moving Parts

Metals & Energy

Gold

Oil

Natural Gas

Copper

Materials & Foodstuffs

Lumber

Coffee

Wheat

Corn

(as of September 20, 2012) (as of September 21, 2012)

Commodity Price Range

336.80

3.32

12.97

8.49

(5-yr range)

(US$/1000 sq ft)

(US$/lb)

(US$/bu)

138.10

1.24

3.88

2.70(US$/bu)

Low High

712.50(US$/oz)

31.41(US$/bbl)

1.84(US$/mmbtu)

1.26(US$/lb)

1,895.00

145.29

13.31

4.60

Low High

7.52

[Current] 277.60

1.92

8.62

92.61

2.76

3.76

1,784.50


95 97 99 01 03 05 07 09 11 13200

400

600

800

1,000

60

70

80

90

100

110

120

Canada (as of September 21, 2012)

BoC Commodity Price Index

(lhs)

C$(US¢ : rhs)

forecast

BoC Commodity Price Index = (January 1972 = 100) forecast = BMO Capital Markets forecasts, monthly averages

Parity

102

Loonie and Commodities: Ties Loosen

Charts 17-18


US Budget Deficit: Fiscal Cliff Ahead?

Source: CBO 2012 = forecast

S&P Downgrades US to AA+

– 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

ObamaBush

World War II

World War I

-6.0%-9.9%

-1,413Record

-1,294

-8.9%

-1,297

-8.7%

-1,128 f

-7.3% f


Do the Right Thing

“You can always count on Americans to do the right thing - after they’ve tried everything else.”

Winston Churchill

“A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”

Winston Churchill

Charts 19-20


Ottawa’s Finances Better

forecast

– C$ Blns –

89 94 99 04 09 14

-60

-40

-20

0

20

– % of Nominal GDP –

62 72 82 92 02 12

-10

-8

-6

-4

-2

0

2

Source: Federal Budget FY11/12 = estimate

Prior Trough

Federal Budget Balance – Canada

2012 Budget: Spending Cuts Not “Draconian”– Minister of Finance Jim Flaherty


Alberta indicated larger deficit risk in Q1 update

Budget Balance

BC AB SK MB ON QC NB NS PE NL Combined-2.5

-2.0

-1.5

-1.0

-0.5

0.0

-0.5-0.3

-0.8

-2.2

-0.4-0.6 -0.5

-1.4

-0.8

-1.1

Provincial Deficits Swell, As Well

Provincial

deficit

(% of GDP)

-$19.5 bln

Canada – FY12/13

Ontario Downgraded

0.0

Charts 21-22


Investment Wave Ebbing Only SlightlyCanada (C$ blns)

Direct Investment Flows(4-qtr ms)

90 95 00 05 10

-50

-25

0

25

50

75

100

125

Portfolio Investment Flows(12-mnth ms)

90 95 00 05 10

-50

-25

0

25

50

75

100

125

Inflows

InflowsOutflows

Tech

Commodities

Outflows

Record

Mostly Fixed Income


Quebec 2.0%

Canada

09 10 11 12 13

-2

0

2

4

1.2%

United States

09 10 11 12 13

-2

0

2

4

Consumer Price Index (y/y % chng)

forecast

Core

Total

1.7%

Core

Total

1.9%

Total CPI(latest month)

IndiaBrazil

EurozoneUK

ChinaUS

CanadaJapan

-3 0 3 6 9 12

9.9

5.3

2.6

2.5

2.0

1.7

1.2

-0.4

Inflation Easing

1.6%

Charts 23-24


Consumer Price Index – Canada

Core CPI 1.6%

(y/y % chng : as of August 2012)

DeflationaryNatural GasHome Entert. Equip.ComputersHousehold FurnitureClothingVegetablesBooksTools

-13.9-9.1-5.4-3.0-2.5-2.0-1.6-0.2

Inflation and Deflation

InflationaryBeefEggsTuition FeesElectricityGasolineHome InsuranceNew CarsBeer

7.76.24.23.42.22.02.01.8

Overall CPI 1.2%


What Does This Mean for Financial Markets?

Interest Rates: Low for Long

Loonie Stays Strong

Stocks: US/Canada Turnabout

Charts 25-26


10-year Bonds

07 08 09 10 11 12 13

1

2

3

4

5

6

2.00%

Overnight Rate

01 03 05 07 09 11 13

0

1

2

3

4

5

6

7

US at Zero for 7 Years? Historic Lows

Interest Rates: Low for Long

US

Canada

forecast

’12)(Year-end

1.70%

US

Canada

Record Lows 0% - 0.25%

1.00%1.85%Canada1.75%US

2.15%(Year-end

’13)

1.65%

(% : as of September 21, 2012)


Global Equities: Year of Reversal

GermanyNasdaq

IndiaS&P 500

DJIARussia

AustraliaJapan

UKTSX

China

-10 0 10 20 30

26.322.1

21.316.1

11.210.2

7.87.7

5.03.6

-6.3

Equity Markets (% chng)

20112012 Year-to-Date

(as of September 21, 2012)

DJIAS&P 500Nasdaq

UKTSX

GermanyAustralia

JapanRussiaChinaIndia

-30 -20 -10 0 10

5.5

-1.8-5.6

-11.1-14.7-15.2

-17.3-21.9

-23.4-24.6

0.0

TSX Lagging after 7 Years of Outperformance

Charts 27-28


Opportunities:Emerging Economy DemandForeign Investment InflowsStrong Corporate Balance SheetsLow Borrowing Costs

Global Outlook: Challenges & Opportunities

Stop and Start Expansion

Challenges:Global Government DebtStrong C$High Household DebtDemographics

Charts 29-30

Documents

DOES QE3 = ECONOMIC GLEE? · 2015-06-24 · Core CPI 1.6% (y/y % chng : as of August 2012) Deflationary Natural Gas Home Entert. Equip. Computers Household Furniture Clothing Vegetables