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DOES QE3 = ECONOMIC GLEE?
September 25, 2012
Douglas Porter, CFA Deputy Chief Economist & Managing Director, BMO Capital Markets
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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)
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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
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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%
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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
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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
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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
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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
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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
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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)
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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
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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%
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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
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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
$236,000
48%
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Credit(y/y % chng)
05 06 07 08 09 10 11 12-5
0
5
10
15
Debt(ratio to personal disposable income)
90 95 00 05 100.8
1.0
1.2
1.4
1.6
1.8
Households
Debt Burdens Now SimilarHousehold Credit = Consumer Credit and Residential Mortgages Household Debt includes household and unincorporated business debt
Canadian Consumers: Still Borrowing
Canada
US Canada
USCrossover
Charts 13-14
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Is the Commodity “SuperCycle” Over?
China Slowing
US Growing
Middle East Turmoil
European Risk
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Global GDP: The Great Divide
Real GDP ChinaIndia
MexicoAustralia
JapanCanada
USKoreaBrazil
UKEurozone
-1 0 1 2 3 4 5 6 7 8
7.65.5
4.13.7
3.32.5
2.32.3
0.5-0.5-0.5
Real GDP ChinaIndia
MexicoAustralia
JapanCanada
USKoreaBrazil
UKEurozone
-1 0 1 2 3 4 5 6 7 8
2012:Q210 11 12 13
World 5.3 3.9 3.0 3.5
(y/y % chng)
Charts 15-16
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Commodity Trends: Moving Parts
Metals & Energy
Gold
Oil
Natural Gas
Copper
Materials & Foodstuffs
Lumber
Coffee
Wheat
Corn
(as of September 20, 2012) (as of September 21, 2012)
Commodity Price Range
336.80
3.32
12.97
8.49
(5-yr range)
(US$/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$/lb)
1,895.00
145.29
13.31
4.60
Low High
7.52
[Current] 277.60
1.92
8.62
92.61
2.76
3.76
1,784.50
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95 97 99 01 03 05 07 09 11 13200
400
600
800
1,000
60
70
80
90
100
110
120
Canada (as of September 21, 2012)
BoC Commodity Price Index
(lhs)
C$(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
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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
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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
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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
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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)
-$19.5 bln
Canada – FY12/13
Ontario Downgraded
0.0
Charts 21-22
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Investment Wave Ebbing Only SlightlyCanada (C$ 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
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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
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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%
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What Does This Mean for Financial Markets?
Interest Rates: Low for Long
Loonie Stays Strong
Stocks: US/Canada Turnabout
Charts 25-26
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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)
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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
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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