scotiabank jul 23 capital points weekly

8/9/2019 ScotiaBank JUL 23 Capital Points Weekly

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Capital Points A weekly look ahead at Canadian and U.S. financial markets

Global Economic Research

Capital Pointsis available on: Bloombergat SCOE and Reuters atSM1C

Derek Holt (416) [email protected]

Gorica Djeric (416) [email protected]

Why the BoC Can Sustainably Jump The FedThe BoC has a solid case for raising rates ahead of the Fed perhaps more thanwhat many may believe and more than what markets are pricing while perhapscasting doubt upon any pause arguments. That would be a significant departurefrom past monetary policy cycles in the two countries.

But one doesnt forecast the future path of the two central banks by justextrapolating past relationships between their target rates that rarely departedfrom one another (chart 1) and when they did, like early last decade, sometimesonly to see the BoC back peddle. What may well be sharply different about thecurrent context has to be explored by zeroing the clock, and thinking forward.Doing so coughs up two principal reasons why the BoC can raise spreads over the

Fed significantly higher from this point, in addition to the BoCs inflationthoughts (page 7).

Canada Leveraging Past the USOne reason is that as the US deleverages, Canada continues to leverage higherapoint weve been emphasizing for some time. Canada is on a fundamentallydifferent debt cycle and that translates into profound differences for the twocountries monetary policy cycles. As US households pay down debt, Canadianhouseholds are racking it up by the minute. The US household debt-to-incomeratio has already fallen to about the 153% mark from a peakof 166% in 2008Q1, Canadas is still climbing and sits at148% now. In arriving at these figures, ignore reportsproduced by some accounting firms that Canadians are

already deeper in hock than Americans. To compare applesto apples, all household debt products have to be includedin both countries (not just a comparison of a subset ofconsumer debt products), and use flow of funds accountsproduced by the Fed and Statistics Canada by accuratelycombining household with unincorporated business debtgiven no limited liability on unincorporated business debts.Chart 2 is the result, and Canadian households could wellovertake their US counterparts in the indebtedness leaguesas soon as year-end.

Further, its not just the level of debt, it is that thecomposition of borrowing behaviour in Canada is being

distorted by low rates with a pronounced shift towardinterest-only revolving debt via secured and unsecuredpersonal lines of credit that have cannibalized fixed andvariable rate installment loans. That amounts tohouseholds going for maximum bang for the buck on short-term debt payments via substituting very low interest-onlypayments for debt products that required principalrepayment mixed into an amortization schedule in pastcycles. Drawn balances on personal lines of credit at justbanks have risen by $52 billion since Lehman blew up, andnow account for about 46% of total consumer loansincluding card balances, fixed and variable rate loans, andlines, but excluding mortgages. The figure would be well

Capital Pointsis available on: Bloombergat SCOE and Reuters atSM1C

July 23, 2010

Commentary

Canadian Preview

U.S. Preview

International Preview

U.S. Macro Comment

U.S. Monetary Policy

Canadian Monetary Policy

Canadian Macro Comment

Foreign Exchange Markets

International Markets

Commodity Markets

Fiscal Policy

Indicator Preview Tables

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Index

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BoCOvernight

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Source: Global Insight & Scotia Capital Econo mics.

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Often - But Not Always - in Lock-Step


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Global Economic Research July 23, 2010

over 50% if personal lines at credit unions and other financial intermediaries wereincluded. The installment loan business has been largely killed. Over this samepost-Lehman period, balances on installment loans and cards at banks haveeach risen by only $5-6 billion. Such balance growth on industry-widepersonal credit lines also equates to about two-thirds of the increase inresidential mortgage debt over this same post-Lehman period.

In our opinion, this reflects monetary policy working all too well, and on that,Canada remains far apart from conditions in the US. There are no demand orsupply constraints on household borrowing behaviour in Canada. The Fed isstuck in a liquidity trap where low interest rates are failing to stoke inelasticdemand for money, and faces limited ability to offer further stimulus (see page6). The US also faces an exceptionally bleak summer-time housing marketenvironment (page 5). In Canada, however, money multipliers are high andtrending higher while in the US they are falling as the Feds frenzied pace ofhigh-powered money creation (or the monetary base) fails to work itself furtherup the money supply aggregates (chart 3).

Whats more is that the business loan picture is also different in Canada thanthe US. Small- and medium-sized businesses have not experiencedanywhere near the kind of contraction in business borrowing in Canada

during this past recession that they did in the prior two recessions ofthe early 1980s and early 1990s, nor did they come close to thecontraction witnessed in the United States over the crisis period so far.Virtually all of the contraction in total short-term business lending atbanks in Canada has been at larger businesses that have substitutedtoward capital market issuance in a classic play. In addition, the Bankof Canadas Senior Loan Officer Survey is already pointing to a netoutright easing of price and non-price terms on business loans.

Over-Stated Impact of Global Risks on CanadaThe second reason why the BoC can jump the Fed is that concernsover global growth risks and their impact on Canada are over-rated inour opinion. As one observation, consider that the Canadian economy

has outperformed despite the fact that net trade has been a drag on theeconomy. It has been for the better part of the past ten years, remainsas such for each of the past four quarters (chart 4), and is forecast toremain that way in future. Yet Canada chalked up annualized 2010Q1growth at a pace double that of the US. Why? Because of the domestic economy. Yes housing is flattening out as a driverof GDP growth, but lets not discount the already evident expansion in business investment. Further, we think the Canadianconsumer can remain on a positive upward trend in making solid contributions to overall GDP growth (see page 8).

As for concerns over the impact upon the Canadian dollar stemming from the BoC hiking ahead of the Fed, we repeat threeconsiderations. One is that if fundamentals dictate both a rise in overnight rates and CAD appreciation, then CADs risefalls within the classic type 1 factors that do not reflect a net tightening of conditions on the Canadian economy. Two isthat even if that is not fully the caseand CAD is already pricing in a portion of material rate hikesthen the Canadianeconomy arguably needs a combination of tightening through rates and the currency. That is our core view on furthermodest appreciation in CAD into next year. Finally, we refer readers to our earlier paper, CAD Parity Doesnt Mean Whatit Used To, Tuesday April 6th 2010, for our views on how the Canadian economy has reduced its sensitivities to anelevated value of the currency now compared to pre-NAFTA.

Whereas a year ago the policy response of the BoC made sense and had broad agreement, today and with the benefit ofhindsight, we see that Canadian rates went too low and Canadian money supply growth went too high. The way to addressthat is not to cling to past arguments or past relationships to cycles, but instead be open to new options in circumstances thatare very different from past cycles. The peer group the BoC resides within during this cycle may well be populated bycentral banks in Asia and Oceania and South America, and less so by the Fed, ECB, BofE and especially the BoJ that isgrappling with exceptional Yen strength coupled with deflationary pressures that make it the least likely to hike within ourforecast horizon. All told, the BoC is operating within a fundamentally different domestic context such that we think it canfairly aggressively hike rates while other major central banks remain sidelined.

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Source: Statistics Canada, Scotia C apital Economics.

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Next Weeks Key Market Risks

Only two central bank monetary policy meetings are slated for next week: Reserve Bank of New Zealand (RBNZ) andReserve Bank of India (RBI), both of which are expected to raise key overnight rates by 25bps to 3.00% and 5.75%,respectively. The euro-zone will release two key fundamental indicators, June unemployment rate and July CPI.However, Japan leads with the number of updates, which include June construction orders, industrial production, retailsales, trade balance and unemployment rate as well as July CPI. In North America, the highlight will be the release of

GDP numbers in both Canada and the United States. In Canada, the May report on real GDP is due out next Friday, withheadline growth expected to have picked up pace to 0.1% m/m. In the United States, we get the preliminary update on theeconomy on Friday, with our forecast looking for a gain of 2.8% q/q annualized in the second quarter.

CANADA

The May report on real GDP is due out next Friday. We predict headline growth will pick up to 0.1% m/m, from a flatreading in April. Gains in price-adjusted retail and manufacturing sales volumes as well as a surge in aggregate hoursworked will be only partly offset by declines in housing starts and wholesale trade volumes as well as a wider real tradedeficit.

Industrial prices are likely to have continued to push higher in June for the third straight month, as commodity pricesincreased. Over the course of the month, Thomson Reuters/Jefferies Commodity Research Bureau (CRB) Index was

broadly higher, up 1.5% m/m. Crude oil added 2.2% m/m to finish the month at US$75.63/bbl. In contrast, the Canadiandollar shed 1.8% m/m against its U.S. counterpart, posting a third straight month of depreciation. As a result, we expect theheadline producer price index to have climbed by 0.5% m/m in June, up from 0.3% in the previous month, with the cost ofraw material goods advancing at a faster clip of 0.8% m/m.

The Teranet Home Price Index (THPI) showed that home prices advanced at the fastest clip in four months in April, up

12.9% m/m from 11.6% in March. The THPI measures price changes in repeat sales of single-family homes in six majorCanadian cities, three of which are in Ontario and British Columbia. We expect home prices to have increased by 12.5% y/y, a slight moderation from April due to base effects; home prices bottomed in April 2009 such that Mays Teranet reportwill no longer be keyed off falling house prices a year ago. The HST's more sizeable impact on new home prices may helpinsulate against what might have been harsher downsides to resale prices by encouraging some substitution away from newhomes toward resales that are less affected by the HST. In its most recent Monetary Policy Report, the Bank of Canada saidthat it expects the housing market to weaken further through the remainder of 2010 and well into 2011, in line with our

view. Recent data from the Canadian Real Estate Association indicate that the home resale market is starting to show signsof cooling.

UNITED STATES

Data released to date suggest that real GDP growth is likely to have remained in the high-two per cent zone in the secondquarter. Our forecast predicts a gain of 2.8% q/q annualized, relative to 2.7% in the previous quarter. Most support is stilllikely to have come from household consumption, although less so than in the first quarter. Trend over the recent monthsprovides evidence that companies are ramping up business investment and across a broadening set of categories whichwill also add to the GDP headline. Following the expiry of the first-time homebuyers tax credit at the end of April, thecontributions from residential investment will likely be flat to modestly positive, as will that of inventories, given that theinventory restocking cycle is beginning to wear off. Historically, inventory restocking would add the most to the economy inthe first two quarters of the recovery, and would thereafter revert to its long-term trend of neutral contribution. Finally, trade is

expected to shave about 0.5 percentage points from the headline print, on strong demand for imported goods.

New home sales are likely to have remained in the low-300,000 range in June. Leading indicators point to weak activity.Mortgage purchase applications, even after last weeks gain, are 42% below their peak in the final week of April, when thefirst-time homebuyers tax credit expired. According to the National Association of Home Builders, traffic of prospectivebuyers has been falling for two months now, registering a decline of 18.8% m/m in June and 23.1% in July. For an updateon the U.S. housing market, refer to the article entitled U.S. Housing Market Heading for a Major Correction on page 5 ofthis weeks Capital Points.

Last week, the University of Michigan confidence index posted a sharp disappointment dropping to 66.5 in July, from76.0 in the previous reading as consumer confidence has been ratcheted back to where it stood at the end of last summer


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before the recovery took hold. Both current conditions and forward-looking expectations retrenched sharply. Despite thedisappointment, confidence measures do not perform terribly well as predictors of actual spending. We expect a slowdownin growth over 2010H1-2011 on a quarterly annualized basis, but not a double dip. In any event, we predict a more modestdecline for the Conference Boards consumer confidence index to 52.0 in July, from 52.9 in the previous month. Thetwo surveys differ in a number of ways. The former asks respondents to comment on big-ticket purchases and to assesschanges in their own finances, while the latter puts more weight on the labour market. Turning to the expectationscomponent, the former asks questions on expected future conditions both over the next year and the next five years, while

the latter tries to gauge the six-month horizon. For more information on the differences between the two measures and theirability to capture true economic conditions refer to a paper by NYUs Bram and Ludvigson (http://www.econ.nyu.edu/user/ludvigsons/698jbra.pdf).

The headline print for June durable goods report is likely to reverse the previous months decline, with our in-houseforecast looking for a 1.0% m/m gain as compared to a 0.6% retreat in the previous reading. Industry data suggest that thedemand for both aircraft and vehicles was higher in June, with Boeing locking in 49 new orders as compared to only 5 inMay. However, the top print is likely to be misleading, distorted by the sizeable and volatile transportation segment. Weexpect growth in core orders which exclude transportation to have moderated to 0.5% m/m, from 1.6% in May.According to May ISM manufacturing index, growth in shipments and new orders decelerated to a pace seen at thebeginning of the year, with new export orders reentering concretionary territory for the first time since February. That said,order backlog remained at a historically high level, and inventory sentiment favourable. Watch out for business investment bookings for non-defense capital goods ex-aircraft act as a proxy for future business spending and manufacturing

inventories, to see whether the inventory restocking cycle continued to firm up in June.

There are no notable speeches scheduled in the United States. The Treasury Department will auction US$38 billion of 2son Tuesday, US$37 billion of 5s on Wednesday and US$29 billion of 7s on Thursday.

INTERNATIONAL

Two central bank monetary policy meetings are slated for this week: Reserve Bank of New Zealand (RBNZ) and ReserveBank of India (RBI). Both are expected to raise key overnight rates by 25bps to 3.00% and 5.75%, respectively. TheRBNZ began tightening rates in June, with a 25bps hike, a first since mid-2007. The RBNZ Governor indicated thateconomic growth is becoming more broad based. Should the RBI raise rates on Tuesday, this would be the fourth increasefor the RBI so far this year. While economists unanimously expect further tightening in July, beyond that point forecastsdiverge on uncertainty over inflation, global economic outlook and liquidity in the banking sector.

Two top-tier releases are on the European fundamental docket: June unemployment rate and July CPI. These reportswill be released on an aggregate and country-by-country basis. The former is expected to have remained unchanged for thefourth straight month at 10.0%. Headline consumer prices across the 16 countries that use the euro are predicted tohave increased, up 1.7% y/y versus a 1.4% gain in June, as commodity prices temporarily move higher. However, coreinflation is likely to remain subdued over the medium term, well below ECBs target rate of below, but close to, 2%.Rate hikes by the ECB remain a distant prospect. The European Commission will also release its comprehensiveconfidence report for July, made up of views on developments in the consumer, industrial and services sectors. Economicsentiment is expected to have continued to edge up higher, to 99.1 from 98.7 in the previous month. Germany and Spainare scheduled to publish June retail sales numbers. A handful ofU.K. housing data series (Hometrack Housing Survey,Nationwide House Prices,Mortgage Approvals) will get revised to include July figures.

It is going to be a major release week in Japan, as updates to a number of top-line fundamental indicators get printed,including June construction orders, industrial production, retail sales, trade balance and unemployment rate as well

as July CPI. South Korea will publish its second-quarter GDP numbers with the consensus expecting growth to havemoderated to 1.3% q/q from 2.1% in the previous quarter as well as services and manufacturing output for June.


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U.S. Housing Market Heading for a Major Correction

Existing home sales fell less than expected in June, retreating 5.1% m/m to 7.37 million. However, what was gained on a stronger print

in June is likely to vaporize on reports over the rest of the summer. The rush to buy in April before the first-time homebuyers taxcredit expired not only boosted existing home sales in the first quarter, but is still supporting resale activity since pending contractsclose and show up in resales only 30-60 days later for the most part.

Looking to July, leading indicators point to a significant decline. Pending home salescollapsed 30% m/m in May (June data has yet to be released). Mortgage purchaseapplications, even after last weeks gain, are 42% below their peak in the final weekof April. The first-time homebuyers accounted for 43% of overall existing home salesin June. Brace yourself. Closed resale transactions are heading for a three-handledprint of perhaps around 3.7 million units sold at an annualized rate later this summer.That would be a record low in modern times, and far below the previous low of 4.53million units sold in late 2008. As a result, initial enthusiasm will probably stumbleon harder evidence of deep problems in the U.S housing markets.

In the years ahead, we expect generally flat house prices to result from the gradual release of shadow inventories. Basel III willamplify this risk, as a greater emphasis gets placed on capital preservation. S&P/Case-Shiller home price futures and the HomePrice Expectations Survey reaffirm this view. The latter is produced by Robert Shiller's firm, MacroMarkets LLC, and polls aboutone hundred economists, including Scotia Economics. The medium-term median forecast is for house prices to be flat by the end of2011, with a 5% standard deviation, and to rise by a cumulative 9.5% by the end of 2015. Then the key implication here would beto expect no wealth effect for U.S. consumer spending for years to come, and perhaps delayed recognition that house prices are notgoing to recover a material portion of losses, such that the emphasis on balance sheet repair remains intact. Most of the literature onwealth effects distinguishes between temporary versus permanent wealth effects in this regard.

In June the U.S. Department of Housing and Urban Development began publishing a new monthly report entitled The Scorecard onAdministrations Comprehensive Housing Initiative, which focuses on the progress made by the Administration to stabilize thehousing market. While the report highlights that historically low interest rates are promoting affordability and that the loanmodification programs are helping restructure mortgages and stem foreclosures, it concludes that the recovery in the housingmarket remains fragile and that it will take time to work through...large inventory of homes on and off the market. Benefits of

the Administrations US$75-billion Home Affordable Modification Program (HAMP) are showing signs of slowing down. In Junealone, more than 93,000 loan modifications were cancelled, while only about 15,000 new trial modifications started. Whats more,some 11 million mortgages are estimated to be underwater and foreclosures remain elevated, at about 300,000 per month. TheHAMP is plagued by a cumbersome and complex administrative process. An interestingpaper by Cordell et al. argues that whileHAMP has its benefits, it is not effective on two accounts. It does not deal well with restructuring associated with loss ofemployment, as financial institutions remain hesitant to restructure mortgages, in part because default fees often exceed governmenincentives that banks receive for loan modification. Also, the focus of the program on reducing mortgage payments (rather than theprincipal) limits its appeal to borrowers, as the outlook for home prices in the medium-term is unlikely to elevate manyhomeowners back above water, making it easier to just walk away from mortgages in states where that is possible.

U.S. Macro CommentGorica Djeric (416) 862-3080 Derek Holt (416) 863-7707

[email protected] [email protected]

U.S. Home Prices - Market vs Economists' Expectations

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S&P/Case-Shiller Home Price Futures

S&P/Case-Shiller Home Price Expectation Survey of Economists

Sources: S&P/Case-Shiller Home Price Index, MacroMarkets LLC , Scotia Capital

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millions

Sales

Tota l Sha re Sales Sh are Sa les

(m ns) (% ) (m ns) (%) (m ns)

October 5.98 50 3.0 50 3 .0

Novem ber 6.49 51 3.3 49 3 .2Dece mber 5.44 43 2.3 57 3 .1

January 5.05 40 2.0 60 3 .0Febru ary 5.01 42 2.1 58 2 .9

March 5.36 44 2.4 56 3 .0

April 5.79 49 2.8 51 3 .0May 5.66 46 2.6 54 3 .1June 5.37 43 2.3 57 3 .1

Source: Realtors, Scotia Econom ics.

F irst-Time Repeat

Ho m e bu y er s H o me b uy er s
http://www.federalreserve.gov/pubs/feds/2009/200943/200943pap.pdfhttp://www.federalreserve.gov/pubs/feds/2009/200943/200943pap.pdfhttp://www.federalreserve.gov/pubs/feds/2009/200943/200943pap.pdfhttp://www.federalreserve.gov/pubs/feds/2009/200943/200943pap.pdf


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Bernankes Options are Very Limited

The US remains stuck in a liquidity trap and there is precious little the Fed can do about it by way of additional easing options.

While Federal Reserve Chairman Ben Bernanke's semi-annual testimony on monetary policy to the US senate this past week heldout its willingness to act, we think many of its options are likely to be ineffective over time.

The core challenge is that the demand for money in the US economy remains interest inelastic, or insensitive to low rates. It's avery dangerous spot for a central bank to wind up. Cutting interest on reserves won't do a thing, as a quarter point difference on idlcash parked at the Fed won't do much to the attractiveness of lending and could well foul up the proper functioning of short-termmoney markets all over again. We at least hope that a bank would expect to earn more on loans than a miserly quarter pointalternative in slipping it in the Feds mattress such that cutting the interest on excess reserves would do nothing to stoke creditcreation. It also won't force people to borrow. Ditto for buying more Treasuries, agencies or MBS, as an extra modest reduction inlonger rates will be shaken like water off a dog's back, assuming markets understand were in an environment with a zero inflationthreat for years and dont penalize such a policy shift through allowing inflation fears to push up the curve on concerns that the Fedis acting as the lender of last resort to Washington.

Extending the rate promise in order to push the Feds influence further up thecurve won't help either. With US 2s trading just over a paltry half point inyields and 5s at about 1.7%, even an explicit message to markets that the Fedwill not hike for years wont materially impact rates. Thus, extending theexceptionally low and for an extended period language wont effectivelyadd any further Fed influence up the curve than what is already baked in.

After all, what don't we really get about the fact that US home prices are still30% lower than their peak in the summer of 2006, and US household networth is still down US$11 trillion from its peak in 2007Q2? Sure, it hascome back from the loss of US$17.6 trillion that had been booked by2009Q1, but thats almost entirely due to higher stock prices that are focusedupon the upper income segments that hold the vast majority of stock wealth.More important to the mainstreet economy is that US$7.2 trillion in home

equity has been lost, and that is showing no signs of coming back. If thelatest survey of over 100 economists by Robert Shillers firm MacroMarketsLLC is any guide, US home prices might rise a cumulative 10% over thenext five years. Yes, economists have been known to be wrong on occasion(humour us), but massive sidelined shadow inventories that have an all-time record high inventory overhang of unsold listed and unlisted excess housing isnt an environment within which to reasonablyexpect material house price appreciation. With this as the operative backdrop for the Fed, you simply can't pay people to borrow.Theyre worried about their retirement. About footing the college bills for the boom-echo kids of the boomers. About the futurestatus of their pensions. They spent too much in the party years, and now the reckoning begins. Thats why economy-wide debt inthe US economy is flat despite enormous government issuance as the private sector is mired in pay down mode (see chart). It isalso why a dicey experiment in building inflation expectations wouldnt work. Would minus 5% real rates make US consumers feebetter about borrowing more against their fallen retirement nest eggs? Deeper negative real rates are likely to be even lessinfluential now in an aging population than in the past, given the harm that would be done to the fixed income cohorts that are abou

to blossom in a fundamentally different age structure of the US population than that which has existed in the past.

In fact, operating at the zero bound on rates is part of the problem in facilitating deleveraging. There is zero incentive for people tospend when they can take enormous amounts of idle liquidity on household balance sheets that is earning zilch, and use it to paydown high-cost credit. Where else to put that liquidity when public mistrust of stock markets has been justified on a largely lostdecade for such investments, and the bond market is offering stale peanuts in exchange for your paycheque assuming you have oneIt is also part of why banks are buying up massive lots of Treasuries. Banks' asset-liability choices have them skewed towardlending for short- to medium-term horizons, and that currently earns them nothing after admin costs at today's low rates. So lendwithin a medium-term horizon that doesnt compensate for risk and transactions costs? Or lend for minimal risk further up thecurve to at least pad something into net interest income? Yes, ZIRP (zero interest rate policy) has backed central banks into acorner but its difficult to see what else they could have done.

U.S. Monetary PolicyGorica Djeric (416) 862-3080 Derek Holt (416) 863-7707



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Canadian Monetary PolicyGorica Djeric (416) 862-3080 Derek Holt (416) 863-7707


The Bank of Canada Explains its Inflation Reasoning

The key to the July Monetary Policy Report (MPR) that was released just this past week was the BoCs effort toward explaining

why it thinks that despite pushing out the point at which spare capacity is absorbed in the Canadian economy two additional quar-ters until 2011Q4, it has chosen to leave its inflation views largely unchanged over its forecast horizon.

While the June inflation readings softened with core CPI coming it at 1.7% y/y, the BoC is forecasting that inflation will rest onits 2% target over the 12-18 month time horizon of maximum relevance to making monetary policy decisions into next year (seechart). It explained several effects that trade off in terms of upsides and downsides.

Downside influences to headline CPI include lower commodityprices than previously forecast since the BoC uses an average ofoil futures contracts over the two weeks ending July 16th thathave pushed lower than in the April MPR. Another downsideinfluence is the BoCs expectations regarding the pass-througheffect of refunded tax credits related to the implementation of the

HST in Ontario and British Columbia that they estimated willknock 0.3% off core and total CPI over the second half of theyear. The BoC argues that this transitory effect reverses later inthe forecast horizon so as to put inflation back at the 2% target.Another downside influence the BoC is expecting is for dissipat-ing wage growth relative to productivity gains to draw down unitlabour costs and reduce cost-push types of inflation pressures.Finally, the added downside to inflation pressures is what theBoC is telling markets in terms of adjusting monetary policy:This projection includes a gradual reduction in monetary stimulus consistent with achieving the inflation target.

Upside influences on inflation compared to the prior MPR include a lower assumed value for the Canadian dollar that lessens thepotential import price pass-through effect of lower prices. Expectations also remain sticky. The BoC is also betting that inflation

upsides will come through a gradual closing off of excess capacity.

From our viewpoint, this is a fair balancing of projected influences that supports the further withdrawal of excess monetarystimulus. The arguments presented in our front page article in this weeks Capital Points ultimately need to be interpreted withinthe context of the BoCs inflation views that entail a non-emergency policy setting marked by substantial increases in the over-night rate. We think an overnight rate forecast range of 2 % to 2 % with upside risks by next summer is reasonable inde-pendently of what the Federal Reserve does over this period.

The BoC's Inflation Forecast

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Canadian Macro CommentGorica Djeric (416) 862-3080 Derek Holt (416) 863-7707


Canadian Consumers Could Out-Perform US Consumers

While our front page article spoke to reasons why a profoundly different leverage

cycle in the United States versus Canada represent cause for the BoC to hike itsovernight rate fairly aggressively while the Fed stands pat, its important to con-sider other elements of Canadian household finances that remain supportive of con-sumer spending. In fact, such conditions may well come to support out-performance in Canadian consumer spending compared to the US.

First is clearly the jobs picture (chart 1). Canada didnt cut as aggressively as theUS for as long a period, and has witnessed a strong rebound in job creation sincelast summer. Canada has gained 308,000 jobs since July of last year, and about aquarter million over just the past quarter. We have our doubts that job growth istruly that strong, but it isnt to be dismissed as out-performance of the US job mar-ket. The comparable pace of job creation in the United States would have had tohave been on the order or 3 million to 3.5 million nonfarm payroll jobs since last

July. However, over this period, the US is up only 176,000 jobs. Further, most ofthe recent gain in the US that is shown in chart 1 consists of temporary Censusjobs; private payrolls remain 78,000 lower than July of last year.

Second, Canadian home equity remains vastly superior to the US (chart 2). Thischart, however, mildly overstates the advantage. Part of this is because Home Eq-uity Lines of Credit (HELOCs) are included in the US definition of mortgage debtthat is subtracted from housing assets, but are not included in the Canadian defini-tion. Thats partly because of a lack of industry-wide data on the secured portion ofpersonal lines of credit in Canada. Regardless, Canadian home equity would re-main vastly superior than in the US. That somewhat overstates the advantage inCanadian household finances, however, because mortgage interest deductibilityencourages Americans to make much more use of mortgages within the mixture ofhousehold debt than is the case in Canada.

Finally, liquidity on Canadian household balance sheets remains very high andtempting to consumers (chart 3). Even the run-up in the Tax Free Savings Accountis principally concentrated upon very low yielding and highly liquid savings depos-its (chart 4).

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-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

08 09 10

m/m %change

Canada's Job Marke t

a World Beate r

Source: BLS, Statistics Canada,

Scotia Capital Econo mics.

Canada

U.S.

Chart 1

Chart 2

Chart 3 Chart 4


9/15

Capital Points

9


The New Renminbi Basket

With Chinas decision to once again allow flexibility in the renminbi, there

is a diversity of opinion regarding the pace of appreciation that will beallowed against the USD (we target 6.60 in USDCNY by the end of2010 and 6.20 by the end of 2011). Additionally, one may wonder howpolicymakers will manage the renminbis newfound flexibilityconsidering their intention to once again target a basket of currencies ina managed floating currency regime. We have published a researchpiece (please see Global FX Strategy: Estimating the RenminbiTarget Basket, available upon request) that looks at the 2005 to 2008floating period and estimates the shape of the basket of currencies thatthe renminbi could be managed against, in order to understand theimportance that policymakers will place on the USD versus othercurrencies. We also look at the degree of flexibility that policymakersallowed in CNY over the previous managed floating period, assessing

the factors that influence the decision to allow a more rapid appreciation(or not as the case may be) in lieu of additional reserves accumulation. Wepresent a brief summary of our results below, with greater detailcontained in the above mentioned research piece.

It appears that the USD was by far the most important currency in ourbasket of USD, EUR, JPY and GBP, accounting for 84% of the basketweight over the entire period. EUR was the second most importantcurrency, accounting for 13% of the target basket weight, while JPYand GBP were estimated to be only marginally important in therenminbi target basket, accounting for no more than 4% of the basketweight at best (when statistically significant). Generally, the renminbiwas estimated to be on the inflexible side of spectrum, with aflexibility estimate of 0.21 on a scale of 0 (completely inflexible) to 1

(perfectly flexible/market determined), suggesting that Chinesepolicymakers were very reliant on utilizing reserves accumulationin order to resist appreciatory pressures, even as the pace ofrenminbi appreciation against the USD increased. We alsoconducted a period-by-period analysis of the target basket,breaking the 2005 to 2008 range into 3 sub-periods based on thedifferent rates of renminbi appreciation against the USD. Theresults broadly match those from the overall period as far asbasket weightings go; the USD retains a consistent weight of wellover 80% while the EUR weight is normally the second highest in the renminbi target basket. One interesting result however is thatas the pace of renminbi appreciation against the USD increased, the flexibility measure decreased. This implies that the morerapidly CNY appreciated against the USD, the more active monetary authorities were in resisting additional appreciatory pressure.Also, the greater the pace of broad based USD depreciation (against all major currencies), the less flexibility was allowed in CNY.

Ultimately, we suspect that this is due to the need to ensure cost competitiveness against other major currencies as CNY appreciatedagainst the USD during a period of rapid and broad based USD depreciation. Additionally, the sheer size of USD reserve holdingsmaintained by the Chinese necessitated a cautious approach to pursuing CNY strength, as Chinese policymakers seemed to favoureven more rapid reserves accumulation in lieu of realizing too rapid a capital loss on USD-denominated FX reserves.

The results imply that going forward, the USD will continue to be the prime focus for Chinese policymakers in their renminbi targebasket, and that the amount of flexibility that is allowed will be dependent on the state of Chinas trade balance and the evolution inthe USD. The more rapid the depreciation in the USD, the more likely the flexibility in CNY will be reduced, and the higher theweight placed on EUR will be in order to support the cost competitiveness of Chinese exports.

Please contact us should you wish to see the full renminbi research piece.

Foreign Exchange MarketsCamilla Sutton (416) 866-5470 Sacha Tihanyi (416) 862-3154


RenminbiBasketParameterEstimates

CNYvs.USD:ThreePacesofCNYAppreciation

ParameterEstimates

Period First Second Third Entire StatisticalSignif.Lev

USD 0.81 0.88 0.84 0.84 Highlysignific

EUR 0.11 0.04 0.150 0.13 2.5

JPY 0.04 0.01 0.020 0.02

GBP 0.04 0.09 0.010 0.01 1

Flexibility 0.36 0.07 0.09 0.21 Insignific


10/15

Capital Points

1


Markets Require Time to Digest EU Bank Stress Test Results; Seven Out of 91 Banks Require More Capital

The process of financial stabilization in Europe is gathering speed following the release of the European bank stress test results on

July 23rd

by the Committee of European Banking Supervisors (CEBS). While the results imply that the banking sector in theEuropean Union (EU) is fairly resilient, they revealed some weaknesses as well. The CEBS together with the European CentralBank (ECB) and national supervisory authorities conducted stress tests on 91 European financial institutions that represent 65% ofthe EUs banking sector. In addition to testing major cross-border banking groups, the coverage also included many domestic creditinstitutions, such as the Spanish cajas that have been considered to be among the most vulnerable.

The objective of the exercise was to assess the banking sectors resilience in 2010 and 2011, and its capacity to weather possiblecredit shocks, such as those stemming from sovereign risks related to highly-indebted euro zone countries, and to assess the banksdependence on public support measures. If a banks financial strength i.e. its ability to sustain future losses is not adequate, asmeasured by a Tier 1 capital ratio (core equity capital / total assets) of at least 6% (the regulatory minimum is 4%), it will need toraise more capital.

The tests included two macro-economic scenarios: the benchmark scenario assumes a modest economic recovery in the euro zone

(GDP growth at 0.7% in 2010 and 1.5% in 2011) while an adverse scenario is based on a double-dip recession (with real GDPgrowth of -0.2% in 2010 and -0.6% in 2011). The adverse scenario had two components: the first included a global confidenceshock affecting demand worldwide, and the second added an EU-specific shock stemming from a worsening of the sovereign debtcrisis. An upward shift was implemented for the yield curve at both the short-end to capture interbank liquidity problems andthe long end of the curve to depict deteriorated perceptions regarding the countries sovereign creditworthiness. The tests alsoincluded valuation haircuts to sovereign bond holdingsfor each country, ranging between 4.2% (Slovenia) and 23.1% (Greece),however an outright sovereign default was not considered. In addition, sovereign-debt losses were mapped for those bonds thatbanks trade, rather than those that are held to maturity.

The impact of the sovereign debt shock varied by country, according to their respective international public sector exposure. Withthe addition of the sovereign debt shock, seven European banks saw their Tier 1 capital ratios fall below 6% in 2011, up from fivein the case with the global demand shock only. Furthermore, there were 10 institutions with capital ratios that fell in the 6.0-6.9%range under the initial adverse scenario, increasing to 17 with the inclusion of the sovereign debt shock. One of the failedinstitutions is German, which is already owned by the government, while one is a Greek bank, and the remaining five are Spanish

(one bank and four cajas). To date, the Spanish government has already promised sizable funds for recapitalization purposes. TheSpanish banking sector faces sizable challenges; in addition to its large domestic exposure, it is the main foreign lender to Portugal,accounting for 35% of total international claims on that country, according to BIS data.

As noted beforehand by European authorities, transparency of the testing mechanism is a key element in building credibility andimproving investor confidence. Indeed, with plenty of details published regarding testing procedures, investors will be able toscrutinize the credibility of the tests easily, though it will take some time; presumably, this was one of the reasons for publishing theresults at the end of the trading week. Nevertheless, investor concerns will likely remain in place regarding the stringency of thetests; macro-economic assumptions fall short of the economic contraction of more than 4% in 2009, though two consecutive yearsof economic decline can be considered a fairly pessimistic assumption.

Following a relatively neutral initial market reaction to the stress test results (the euro remained virtually unchanged on the day vis--vis the US dollar, while the yield of the Spanish 5-year bond increased only by 1 basis point to 3.22%), we expect that the

European sovereign debt crisis has now passed one of the key hurdles and signs of stabilization will start to emerge. Nevertheless,with the turmoil mainly driven by rapidly changing investor confidence, uncertainty remains high at least in the near term. Whilefinancing conditions for many of the countries in the euro zone periphery remain tough and achieving fiscal sustainability is vital inorder to maintain investor confidence, the stress test results support our view that sovereign debt issues will not cause anyunprecedented difficulties for the European banking sector. Nevertheless, potential for a Greek debt restructuring remains in place.According to BIS data, the French banking sector is the largest lender to Greece, accounting for 35% of total international claims(as of Q1 2010) on the country, though these claims on Greece account for only 2% of the French banking sectors internationalexposure. With the Greek public sector accounting for 46% of all international borrowing, a debt restructuring would have anadverse though limited impact on French banks. Nevertheless, the results of the stress tests, that cover nearly 80% of theFrench banking sector, indicate that the countrys financial institutions are among the most resilient in Europe.

International MarketsSarah Howcroft (416) 607-0058 Tuuli McCully (416) 863-2859



11/15

Capital Points

1


Outlook on Copper and Oil Market Dynamics

Excerpts from Scotiabank Commodity Price Index report, July 21, 2010.

LME copper prices (a bellwether) have surged in recent days and remain exceptionally lucrative in mid-July at US$3.14 per pound yielding a 57% profit margin over average world breakeven costs. While Chinas refined copper imports have fallen back in thepast three months, the decline likely reflected negative arbitrage several months ago (i.e. higher prices on the LME than on theShanghai Futures Exchange SHFE), rather than any significant decline in consumption (as incorrectly assumed by manyobservers). Demand for copper was still very high and climbing in China at least through May, as indicated by a rising pricepremia for copper (currently at 6.8 US cents at bonded warehouses in Shanghai). The arbitrage has also turned positive again infavour of Shanghai and Chinese traders have resumed buying partly accounting for strong prices in recent days. Inventories onthe SHFE have dropped by 38% since late April with buyers probably taking stocks off the Exchange to meet strong demand.Tight copper scrap supplies have increased the demand for primary metal, with Chinese smelters running their mills virtually at fullcapacity in June. LME copper stocks have also dropped by 23% since mid-February reflecting a noticeable improvement in U.Sand overall G7 demand in 2010:Q2.

While Chinas copper consumption will likely ease in 2010:Q3, for seasonal as well as fundamental reasons, demand should pickup again moderately later in the year. Beijings recent renewal of the home appliance subsidy scheme through late 2012, Chinasplan to encourage production of electric vehicles and the ongoing upgrade of the countrys power infrastructure will underpincopper demand. Chinas copper consumption should grow by 10% in 2010 and 8% in 2011, after 2009s extraordinary 28%.Global supply/demand conditions may shift into genuine deficit in 2011 (the first since 2006) even with weak Euro zone demandand stepped-up mine production (after this years -1.6% decline and an increase of only 1.1% p.a. since 2006) keeping averagecopper prices around US$3.

Turning to oil, the Obama Administration issued a new moratorium on exploratory & development drilling in the U.S. Gulf ofMexico on July 12 to replace the original six-month ban struck down by a federal court as well as an appeals court. The newmoratorium will apply to all floating rigs using subsea blowout preventers or surface blowout preventers (not just drilling in morethan 500 feet of water). The ban will remain in place until November 30 (after the November 2 Congressional elections), thoughthere may be conditions for resuming certain deepwater activities sooner if safety appears ensured. While producing wells arenot affected, injection wells to boost existing output are. The ban is intended to give a Presidential commission time to investigate

the causes of the BP accident and for new safety regulations to be designed.

Meanwhile, the exodus of drilling rigs from the GOM has begun, with Diamond Offshore Drilling relocating two deepwater rigs toEgypt and the Congo (Brazzaville), two other companies considering a shift to West Africa and Rowan working on relocating twoshallow-water rigs. U.S. oil production will be cut by 45,000 b/d in 2010 and as much as 195,000 b/d in 2011 due to moratoriumdelays, tightening U.S. domestic oil supplies and posing a significant drag on the U.S. Gulf Coast economy (50,000 jobs linked tothe offshore E&P industry). The Federal Gulf of Mexico accounts for more than one-third of U.S. oil production, 80% of which isin the deepwater. WTI oil is expected to average US$79 per barrel in 2010 and US$80 in 2011.

Commodity MarketsPatricia Mohr(416) [email protected]
http://www.scotiacapital.com/English/bns_econ/bnscomod.pdfhttp://www.scotiacapital.com/English/bns_econ/bnscomod.pdfhttp://www.scotiacapital.com/English/bns_econ/bnscomod.pdfhttp://www.scotiacapital.com/English/bns_econ/bnscomod.pdf


12/15

Capital Points

1


Japan: Looking Towards Longer-Term Constraints

The loss of an upper house majority by the ruling Democratic Party of Japan potentially delays but does not alter the advantages of

proceeding with major, longer-term fiscal reforms. Entering 2009, Japan was already burdened with a structural general governmendeficit averaging 3.6% of GDP from 2005 to 2008 and gross debt equal to 195% of GDP. In 2009, with the slide in governmentreceipts as Japans real GDP dropped 5.2% and the introduction of significant two-year stimulus, the IMF estimates that thestructural shortfall expanded to more than 7.0% of GDP and the actual general government deficit widened beyond 10% of GDP.By December 2010, Japans gross general government debt according to IMF estimates is expected to top 225% of GDP. Yet thepolitical and economic challenges are formidable in sustaining Japans economic growth while embarking upon extended fiscalconsolidation that realistically includes entitlement program reforms, non-social security spending restraints and rising taxes, mostnotably in the consumption tax rate.

What has made Japans fiscal situation sustainable to date has been the ample domestic demand for Japans government debt,severing the typical connection between government bond yields and widening deficits (see chart). Japan, even with the sharpdecrease in its personal saving rate this decade, still boasts a massive pool of household assets with individuals appetite for riskyassets remaining weak with the global downturn. Through the banking sector (including the Japan Post Bank), a large share of

Japanese households savings parked in deposits is invested in JGBs. For the corporate sector, financial assets held with banks alsohave been funneled to JGBs. As well, Japans other institutional investors have been large and stable purchasers of governmentbonds. And finally, government reform of the Fiscal Investment and Loan Program (FILP) has reduced the programs liabilitiessince 2000, making room for other government debt.

Looking forward, Japans older population with its rising share of seniors points to pension andother asset drawdowns, a trend long foreseen in Japan. For the year ending this past March,Japans public pension funds were a small net seller of government bonds, though life assurersand commercial banks purchases more than compensated for the small decline. However, Japansreforms offering more flexibility to its institutional investors could have more impact as thecurrent attractiveness of safe havens wanes. Moreover, much of the FILP reform is completed.Although the government has raised its average debt maturity (including short-term financingbills) to an estimated 5-5 years, Japans annual financing requirements remain substantial roughly 30% of GDP for government bonds and 20% of GDP for short-term bills in FY10

underlining the importance of ongoing public debt management. The risk of a rise in governmentyields for Japanese bank portfolios is recognized in the banks risk management requirements. Inshifting to a negative outlook on Japans long-term AA sovereign rating in January 2010,Standard & Poors indicated the need for a credible mid-term growth and fiscal consolidationstrategy, recommendations that were echoed in the IMFs recent Article IV consultation.

Fiscal PolicyMary Webb (416) 866-4202

[email protected]

-12

-8

-4

0

4

8

90 94 98 02 06 1

* General government basis. ** 2010

average: January 1 - July 22. Source: IMF,

Bloomberg, Scotia Economics.

Japan's Borrowing Costs

%

10-Year Gov't

Bond**

Deficit/GDP*


13/15

Capital Points

1


Estimates for the week of July 26 30

Canada

United States

Date ET Indicator Period BNS Consensus Latest

07/28 (09:00) Teranet - National Bank HPI (y/y) May 12.5 -- 12.9

07/29 (08:30) IPPI (m/m) Jun 0.5 0.5 0.3

07/29 (08:30) Raw Materials Price Index (m/m) Jun 0.8 1.0 -7.2

07/30 (08:30) Real GDP (m/m) May 0.1 0.2 0.0


07/26 (10:00) New Home Sales (mn a.r.) Jun 0.31 0.32 0.30

07/26 Treasury's Brainard Delivers Address in Washington (12:00)

07/27 (07:45) ICSC Chain Store Sales - Weekly (w/w) Jul. 24 -- -- 1.407/27 (09:00) S&P/Case-Shiller Home Price Index (y/y) May 3.7 3.8 3.8

07/27 (10:00) Richmond Fed Manufacturing Index Jul -- 14.5 23.0

07/27 (10:00) Consumer Confidence (index) Jul 52.0 51.0 52.9

07/27 (17:00) ABC Consumer Confidence (index) Jul. 25 -- -46 -45

07/28 (07:00) MBA Mortgage Applications (w/w) Jul. 23 -- -- 7.6

07/28 (08:30) Durable Goods Orders (m/m) Jun 1.0 1.0 -0.6

07/28 (08:30) Durable Goods Orders ex. Trans. (m/m) Jun 0.5 0.4 1.6

07/28 (14:00) Beige Book --

07/29 (08:30) Initial Jobless Claims (000s) Jul. 24 480 460 464

07/29 (08:30) Continuing Claims (mn) Jul. 17 4.40 4.53 4.49

07/29 Fed's Fisher Speaks on U.S. Economy in San Antonio (13:20)

07/30 (08:30) GDP Deflator (q/q a.r.) Q2-A 1.5 1.1 1.1

07/30 (08:30) GDP (q/q a.r.) Q2-A 2.8 2.5 2.707/30 (08:30) Employment Cost Index (q/q) Q2 -- 0.5 0.6

07/30 (09:45) Chicago PMI (index) Jul -- 56.0 59.1

07/30 (09:55) U. of Michigan Consumer Sentiment Jul-F -- 67.0 66.5


14/15

Capital Points

1


Estimates for the week of July 26 30

Europe

Asia/Oceania


07/27 (04:00) EC M3 (3 mth avg.) Jun -- -0.2 -0.2

07/28 (02:00) GE CPI (m/m) Jul -- 0.3 0.1

07/28 (02:00) GE CPI - EU Harmonized (m/m) Jul -- 0.2 0.0

07/29 (02:00) UK Nationwide House Prices (m/m) Jul -- -0.3 0.1

07/29 (02:45) FR Producer Prices (m/m) Jun -- 0.3 0.0

07/29 (03:55) GE Unemployment (000s) Jul -- -20.0 -21.0

07/29 (03:55) GE Unemployment Rate (%) Jul -- 7.6 7.7

07/29 (04:30) UK M4 Money Supply (m/m) Jun -- -- 0.0

07/29 (04:30) UK Net Consumer Credit (GBP bn) Jun -- 0.2 0.0

07/29 (05:00) EC Economic Confidence Jul -- 99.1 98.7

07/29 (05:00) EC Consumer Confidence Jul -- -14.0 -14.1

07/29 (05:00) EC Business Climate Indicator Jul -- 0.4 0.4

07/29 (05:00) EC Industrial Confidence Jul -- -5.0 -6.0

07/29 (19:01) UK GfK Consumer Confidence (index) Jul -- -20.0 -19.0

07/30 (02:00) GE Retail Sales (m/m) Jun -- -0.2 3.0

07/30 (05:00) IT CPI (y/y) Jul -- 1.5 1.3

07/30 (05:00) EC Unemployment Rate (%) Jun -- 10.0 10.0


07/26 (00:00) VN Exports (y/y) Jul -- -- 15.7

07/26 (00:00) VN Imports (y/y) Jul -- -- 29.4

07/26 (21:00) PHI Imports (y/y) May -- -- 45.3

07/26 (21:00) PHI Trade Balance (US$ mn) May -- -- -846.007/27 (04:30) HK Trade Balance (HK$ bn) Jun -- -24.9 -25.1

07/27 (04:30) HK Imports (y/y) Jun -- 25.2 29.7

07/27 (04:30) HK Exports (y/y) Jun -- 22.7 24.4

07/27 Bank of Japan Board Member Kamezaki to Speak in Sapporo City (22:00)

07/28 (17:00) NZ RBNZ Official Cash Rate (%) -- 3.00 2.75

07/28 (19:50) JN Large Retailers' Sales (y/y) Jun -- -4.0 -4.0

07/28 (19:50) JN Retail Trade (m/m) Jun -- 0.4 -2.0

07/28 (19:50) JN Retail Trade (y/y) Jun -- 3.2 2.8

07/29 (19:30) JN Household Spending (y/y) Jun -- -0.8 -0.7

07/29 (19:30) JN Jobless Rate (%) Jun -- 5.2 5.2

07/29 (19:30) JN National CPI (y/y) Jun -- -0.7 -0.9

07/29 (19:30) JN Tokyo CPI (y/y) Jul -- -0.8 -0.9

07/29 (19:50) JN Industrial Production (m/m) Jun -- 0.2 0.107/30 (01:00) JN Housing Starts (y/y) Jun -- 1.8 -4.6

07/30 (03:30) TH Trade Balance (US$ mn) Jun -- -- 2299

07/30 (03:30) TH Imports (y/y) Jun -- -- 53.5

07/30 (03:30) TH Exports (y/y) Jun -- -- 42.5


15/15

Capital Points


Scotia Economics

Scotia Plaza, 40 King Street West, 63rd Floor Toronto, Ontario Canada M5H 1H1

Tel: (416) 866 6253 Fax: (416) 866 2829 Email: scotia economics@scotiacapital com

This report has been prepared by SCOTIA CAPITAL INC. Opinions, estimates and projections contained herein are our own as of the date hereofand are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believedreliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither Scotia Capital Inc., nor itsaffiliates accept liability whatsoever for any loss arising from any use of this report or its contents. This report is not, and is not to be construed as,an offer to sell or solicitation of an offer to buy any securities and/or commodity futures contracts. Scotia Capital Inc., its affiliates and/or theirrespective officers, directors or employees may from time to time acquire, hold or sell securities and/or commodities and/or commodity futurescontracts mentioned herein as principal or agent. This report may not be reproduced in whole or in part, or referred to in any manner whatsoever,nor may the information, opinions, and conclusions contained in it be referred to without in each case the prior express consent of Scotia Capital.SCI is authorized and regulated by The Financial Services Authority. U.S. residents: Scotia Capital (USA) Inc., a wholly owned subsidiary of ScotiaCapital Inc., accepts responsibility for the contents herein, subject to the terms and limitations set out above. Any U.S. person wishing furtherinformation or to effect transactions in any security discussed herein should contact Scotia Capital (USA) Inc. at 212-225-6500.

Each research analyst named in this report or any subsection of this report certifies that (1) the views expressed in this report in connection withsecurities or issuers that he or she analyzes accurately reflect his or her personal views; and (2) no part of his or her compensation was, is, or will

be directly or indirectly, related to the specific recommendations or views expressed by him or her in this report.

The Research Analyst's compensation is based on various performance and market criteria and is charged as an expense to certain departmentsof Scotia Capital Inc., including investment banking.

Scotia Capital Inc. and/or its affiliates: expects to receive or intends to seek compensation for investment banking services from issuers covered inthis report within the next three months; and has or seeks a business relationship with the issuers referred to herein which involves providingservices, other than securities underwriting or advisory services, for which compensation is or may be received. These may include servicesrelating to lending, cash management, foreign exchange, securities trading, derivatives, structured finance or precious metals.

For Scotia Capital Research Analyst standards and disclosure policies, please visit www.scotiacapital.com/disclosures

Economics

Derek Holt, [email protected]

Karen Cordes Woods, Financial Markets Economist(Currently on maternity leave)

Gorica Djeric, Financial Markets [email protected]

Mary Webb, Senior Economist/[email protected]

Corporate Bonds

Robert Follis, Managing [email protected]

Stephen Dafoe, [email protected]

Francesco Sorbara, Associate [email protected]

Emerging Markets Strategy

Joe Kogan, [email protected]

Equity Markets

Vincent Delisle, Director, Portfolio [email protected]

Hugo Ste-Marie, Assistant [email protected]

Equity Research

John Henderson, Managing Director, Head of Equity [email protected]

Fixed Income

Roger Quick, [email protected]

Foreign Exchange

Camilla Sutton, [email protected]

Sacha Tihanyi, Associate [email protected]

ScotiaMcLeod Portfolio Advisory GroupPaul Danesi, [email protected]

Geoff Ho, [email protected]

Joey Mack, [email protected]

Steve Uzielli, [email protected]

Gareth Watson, [email protected]

ContactsContacts

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