the oil shock cbic
TRANSCRIPT
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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$billions
Note: 2011/12 is forecast
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Budgets Based on Cautious Forecasts
3. CIBC's current national forecast
2. Weighted average of individual provincial forecasts
1. 2010 figures are estimates, differ from growth rates reported by StatCan
4.45.66.22.82.83.1CIBC3
5.05.86.22.82.93.1Federal
5.35.16.22.62.42.9Provincial2
Canada Forecasts
1.49.718.80.23.05.6N&L
NANA2.3NA1.71.9PEI
4.04.54.91.91.92.1NS
4.63.24.02.21.52.0NB
4.43.94.42.22.03.0Qu
5.14.66.12.72.42.8Ont
4.55.55.02.72.72.5Man
6.39.05.72.84.21.7Sask
7.97.19.93.23.33.5Alta
4.94.15.62.62.03.1BC
Provincial Forecasts1
2012F2011F2010E2012F2011F2010EY/Y % Chg
Nominal GDPReal GDP
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Spending Needs to Slow Across Country
0
2
4
6
8
10
12
BC Alta Sask Man Ont Qu NS N&L
History: 5Y Avg (FY03-08) Plan: 3Y Avg (FY10-13)
Growth in Provincial Expenditures, % (CAGR)
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The Continental Divide: Huge Gap in Output Gaps
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
Mar-01 Mar-03 Mar-05 Mar-07 Mar-09 Mar-11
Canada US
Output Gap, % of GDP
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Canada Sees Nearly 3% Grow th,Prime and Overnight Up 100 bps in 2nd Half
-8.0%
-6.0%
-4.0%-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
Q1-07 Q4-07 Q3-08 Q2-09 Q1-10 Q4-10 Q3-11 Q2-120.0
0.51.0
1.52.0
2.5
3.03.54.0
4.5
5.0
Real GDP Growth (L) Overnight Interest Rate (R)
GDP growth (s.a.a.r.) %Forecast
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Oil Prices Can Trump Rate Hikes for C$ 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