More like the rest than like the US? David D. Wolf Head of Canadian Economics & Chief Strategist...
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Transcript of More like the rest than like the US? David D. Wolf Head of Canadian Economics & Chief Strategist...
More like the rest than like the US?
David D. WolfHead of Canadian Economics & Chief StrategistMerrill Lynch Canada Inc.May 2007
Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.Refer to important disclosures on page 13.
Canada’s Economic & Financial Outlook
May2007
2
Key points
Theme - Canada leaning more towards stronger world than weaker USEconomy - Growth, inflation moving above US after three-year undershoot- Real GDP 2.3% ‘07, 2.6% ‘08, core inflation 2.2% ’07, 2.0% ’08Rates & FX - Canada-US rate convergence required given economic ‘cross’- CAD has borne adjustment so far, seen 1.09 – 1.14 v USD- Convergence eventually through BoC lagging Fed cuts, producing broadly steady yields & steeper curveEquities- TSX following global multiple expansion as earnings soften- Market particularly vulnerable to reassessment of risk
May2007
3
US growth, inflation shifting down
The slowdown Not just housing anymore
Source: Haver Analytics, Merrill LynchSource: Haver Analytics, Merrill Lynch
Core inflation set to ebb
Source: Haver Analytics, Merrill Lynch
Notes:
-2
0
2
4
6
8
10
97 98 99 00 01 02 03 04 05 06
US real GDP growth, q/q% saar
US real GDP growth, y/y%
-15
-10
-5
0
5
10
15
20
25
97 98 99 00 01 02 03 04 05 06 07-2
-1
0
1
2
3
4US non-farm payrolls, y/y% (RHS)
US real capital equipment investment, y/y% (LHS)
45
50
55
60
65
70
93 95 97 99 01 03 05 07-1.0
-0.5
0.0
0.5
1.0
1.5US ISM supplier deliveries (LHS, advanced 9 months)
12-month change in US core CPI y/y% inflation rate (RHS)
pp
May2007
4
But rest of the world picking up
Divergence is not new… … but it is intensifying
Source: Haver Analytics, Merrill LynchSource: Haver Analytics, IMF, Merrill Lynch
Global inflation risks skewed
Source: Haver Analytics, Merrill Lynch
Notes:
-2
0
2
4
6
8
81 83 85 87 89 91 93 95 97 99 01 03 05 07
Real GDP growth: world ex US
Real GDP growth: US
y/y%
Note: 2007 ML forecasts
80
90
100
110
120
130
03 04 05 06 07
US ISMGermany IFOJapan Tankan (expectations)
Index 2003=100
Note: Indexes standardized for base year, volatility
-2
-1
-1
0
1
1
2
China Japan Eurozone UK US
Expected change in inflation, 2007/08 vs 2006, ML forecastspp
May2007
5
Ex ante, hard to know which way Canada would lean
Top three is really top one But world matters most for export values…
Source: Haver Analytics, Merrill LynchSource: Haver Analytics, Merrill Lynch
… which feed domestic demand
Source: Haver Analytics, Merrill Lynch
Notes:
0
20
40
60
80
100
70 74 78 82 86 90 94 98 02 06
USUKJapan
% of total Canadian exports
-8
-4
0
4
8
81 86 91 96 01 060
1
2
3
4
5
6
7Real global growth (RHS)
Change in Canada's terms of trade (LHS)
% %
-2
-1
0
1
2
3
76 81 86 91 96 01 060
1
2
3
4
5
6Canada final domestic demand trend* (RHS)
Canada terms of trade trend* (LHS)
* - 5-year average annual % change
May2007
6
Canada is overtaking US in growth
Opening up daylight in real GDP Leading indicator divergence I
Source: Haver Analytics, Merrill LynchSource: Haver Analytics, Merrill Lynch
Leading indicator divergence II
Source: Haver Analytics, Merrill Lynch
Notes:
0
2.5
5
7.5
04 05 06 07
US real GDP growth q/q% saar (LHS)
Canada real GDP growth q/q% saar
Note: Q2 US, Q1 & Q2 Canada ML estimates
-4
0
4
8
12
99 00 01 02 03 04 05 06 07
Canada leading indicator (StatsCan)
US leading indicator (Conference Board)
y/y%
-6
-3
0
3
6
9
12
99 00 01 02 03 04 05 06 07
Canada leading indicator (OECD)
US leading indicator (OECD)
y/y%
May2007
7
Canada consumer fundamentals better
Recent job growth impressive Canadian incomes have accelerated
Source: Haver Analytics, Merrill LynchSource: Haver Analytics, Merrill Lynch
Leverage growing less quickly
Source: Haver Analytics, Merrill Lynch
Notes:
0
1
2
3
04 05 06 07
Canada employment
US non-farm payrolls
y/y%
0
1
2
3
4
5
6
7
97 98 99 00 01 02 03 04 05 06 07
US real personal disposible income
Canada real personal disposible income
y/y%
70
80
90
100
110
120
130
90 92 94 96 98 00 02 04 06
Canada household debt as a % of disposable income
US household debt as a % of disposable income
May2007
8
Actual consumption growth has slipped, but should rebound some
Canada spending trend has been stronger Soft patch in recent months…
Source: Haver Analytics, Merrill LynchSource: Haver Analytics, Merrill Lynch
… seems to have ended with spring
Source: Haver Analytics, Merrill Lynch
1
3
5
7
97 98 99 00 01 02 03 04 05 06 07
Canada real consumer spending
US real consumer spending
y/y%
-5
0
5
10
15
04 05 06 07
Real retail sales, 3m/3m% saar
85
90
95
100
105
110
115
120
125
05 06 07
Canada motor vehicle sales
US motor vehicle sales
Index 2005=100
Note: April 2007 ML estimates
May2007
9
Housing offers most striking divergence
Higher inventories suggest softer pricing…
Source: Haver Analytics, Merrill Lynch
Notes:
US busting, Canada leveling off
Source: Haver Analytics, Merrill Lynch
… but from less frothy levels
Source: Haver Analytics, Merrill Lynch
-60
-40
-20
0
20
40
6089 91 93 95 97 99 01 03 05 07
-20
-15
-10
-5
0
5
10
15
20Unabsorbed new home inventory (LHS, inverted, advanced six months)
12-month change in new house price inflation (RHS)
y/y% pp
80
100
120
140
81 83 85 87 89 91 93 95 97 99 01 03 05 07
US house price to rent ratio
Canada house price to rent ratio
Index 1981-2006=100
-20
-10
0
10
20
30
97 98 99 00 01 02 03 04 05 06 07
Canada real residential investment
US real residential investment
y/y%
May2007
10
Fiscal policies divergent too
Coming together H2 slowdown in public spending…
Source: Haver Analytics, Merrill Lynch
… also looks temporary
Source: Finance Canada, Merrill Lynch
Notes:
Source: Haver Analytics, Merrill Lynch
-10
-7.5
-5
-2.5
0
2.5
5
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Canada government financial balance
US government financial balance
% of GDP
-10
-5
0
5
10
15
20
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
Investment growth: Public sector%
Note: 1992-2006 estimated actual, 2007 intentions
-2.5
0
2.5
5
7.5
97 98 99 00 01 02 03 04 05 06 07
Canada real government consumption & investment
US real government consumption & investment
y/y%
May2007
11
Business investment trends look more like the US
Caution! Intentions also soft, energy off the boil
Source: Haver Analytics, Merrill LynchSource: Haver Analytics, Merrill Lynch
Source: Haver Analytics, Merrill Lynch
Notes: Softer profits, CapU the cause?
-5
0
5
10
15
98 99 00 01 02 03 04 05 06 07
Private non-residential investment, oil & gas/mining
Private non-residential investment, all industries excluding oil & gas/mining
y/y%
Note: 1998-2006 actual, 2007 intentions
-16
-8
0
8
16
24
98 99 00 01 02 03 04 05 06 07
Canada real machinery/equipment investment
US real machinery/equipment investment
y/y%
-30
-20
-10
0
10
20
30
40
50
98 99 00 01 02 03 04 05 0682
84
86
88Pretax corporate profit growth (LHS)
Industrial capacity utilization (RHS)
%y/y%
May2007
12
Inventories a key question mark
Much of the needed adjustment done in Q4 I/S ratio suggests downside…
Source: Haver Analytics, Merrill LynchSource: Haver Analytics, Merrill Lynch
Source: Haver Analytics, Merrill Lynch
Notes: … but BoC forecast implies a bounce
-15000
-10000
-5000
0
5000
10000
15000
20000
25000
86 88 90 92 94 96 98 00 02 04 06
Change in business inventories97C$mn
0.6
0.625
0.65
0.675
0.7
0.725
0.75
97 98 99 00 01 02 03 04 05 06
Economy-wide I/S ratio
Linear trend
Ratio
-15
-10
-5
0
5
10
15
20
00 01 02 03 04 05 06 07 08-3
-2
-1
0
1
2
3
412-month change: ISM inventory index minus customerinventory sentiment index (LHS, advanced 3Q)
12-month inventory contribution to Canada GDP growth, withimplied BoC projection (RHS)
Index pts pp
May2007
13
Real exports can’t escape US drag
Real exports depend on US demand Canada does build US houses
Source: Bank of CanadaSource: Haver Analytics, Merrill Lynch
Source: Haver Analytics, Merrill Lynch
Notes: Manufacturing overhang still to be worked off
-4
0
4
8
12
80 82 84 86 88 90 92 94 96 98 00 02 04 06-12
-6
0
6
12
18
24Canada real exports (y/y%, RHS)
US real domestic demand (y/y%, LHS)
1700
1800
1900
2000
2100
2200
2300
2400
87 89 91 93 95 97 99 01 03 05 07 091.05
1.20
1.35
1.50
1.65USD/CAD (RHS, advanced 2 yrs)
Manufacturing employment, 000s (LHS)
May2007
14
But some resilience evident near-term
Manufacturing survey bounces in Q2… … eliminating underperformance vs US
Source: Haver Analytics, Merrill LynchSource: Haver Analytics, Merrill Lynch
Notes: Auto sector apparently through correction
Source: Haver Analytics, Merrill Lynch
35
40
45
50
55
60
65
93 95 97 99 01 03 05 07-2
0
2
4
6
8Canada real GDP growth (RHS)
Canada BCS Composite* (LHS)
q/q% saar
* ML aggregation of BCS components using US ISM mfg weights
40
45
50
55
60
65
97 98 99 00 01 02 03 04 05 06 07
Canada BCS Composite*
US manufacturing ISM
* - Weighted and standardized to ISM methodology
-25
-20
-15
-10
-5
0
5
10
15
20
00 01 02 03 04 05 06 07-0.5
-0.4
-0.3
-0.2
-0.1
0.0
0.1
0.2
0.3
0.4Transport mfg contribution to y/y GDP growth (RHS)
Canadian car and truck production (LHS)
y/y% pp
May2007
15
Near-term bounce partly reflects ebbing regional divergences
Full convergence in manufacturing Some convergence even in job growth
Source: Haver Analytics, Merrill LynchSource: Haver Analytics, Merrill Lynch
Source: Haver Analytics, Merrill Lynch
Notes: Alberta house prices off the boil
-30
-20
-10
0
10
20
30
40
50
04 05 06 07
Alberta BCS production index
Ontario BCS production index
-2
0
2
4
6
8
10
04 05 06 07
Alberta employment
Ontario employment
3m/3m ann%
0
20
40
60
80
04 05 06 07
Alberta new house price inflation
Ontario new house price inflation
3m/3m ann%
May2007
16
Canada-US ‘growth cross’ comes amid already-tighter Canadian economy…
Canadian growth seen above US in 2007… … from already higher position
Source: Haver Analytics, Merrill LynchSource: Haver Analytics, Merrill Lynch
Source: Haver Analytics, Merrill Lynch
Notes: Labour markets levels also contrast
0
1
2
3
4
5
6
7
97 98 99 00 01 02 03 04 05 06 07
US real GDP growth
Canada real GDP growth
y/y%
ML fc
3.5
4
4.5
5
5.5
6
6.5
7
99 00 01 02 03 04 05 06 076
6.5
7
7.5
8
8.5
9
9.5US unemployment rate (LHS)
Canada unemployment rate (RHS)
% %
-4
-3
-2
-1
0
1
2
3
4
97 98 99 00 01 02 03 04 05 06 07
Canada output gap
US output gap
Canada BoC conventional estimate, US CBO estimate
% of GDP
May2007
17
… promoting inflation convergence
Headline CPI differential has narrowed Core CPI differential almost gone
Source: Haver Analytics, Merrill Lynch
Source: Haver Analytics, Merrill Lynch
Notes: Producer prices have also converged
Source: Haver Analytics, Merrill Lynch
0.5
1
1.5
2
2.5
3
3.5
4
97 98 99 00 01 02 03 04 05 06 07
Canada core inflation
US core inflation
y/y%
0
1
2
3
4
5
6
97 98 99 00 01 02 03 04 05 06 07
Canada headline CPI inflation
US headline CPI inflation
y/y%
-8
-6
-4
-2
0
2
4
6
8
97 98 99 00 01 02 03 04 05 06 07
Canada finished goods IPPI inflation
US finished goods PPI inflation
y/y%
May2007
18
Capacity pressures on Canadian inflation questionable
Productivity softer, but wages too Labour market flexibility the key?
Source: Haver Analytics, Merrill Lynch
Source: Haver Analytics, Merrill Lynch
Notes: Capital deepening should help too
Source: Haver Analytics, Merrill Lynch
-1
1
3
5
7
00 01 02 03 04 05 06 07
Business sector compensation per hour
Business sector productivity
Unit labour
cost
y/y%
225
300
375
450
66 71 76 81 86 91 96 01 06
2
4
6
8
10
12
14
Interprovincial migration (LHS, 4qma)
Unemployment rate (RHS, inverted)
000s %
0
1
2
3
4
5
70 74 78 82 86 90 94 98 02 06
Canada net fixed non-residential capital stock
US net fixed non-residential capital stock
y/y%
May2007
19
Bottom-up approach sees divergent influences
House pressure coming off… … perhaps replaced by food?
Source: Haver Analytics, Merrill Lynch
Source: Haver Analytics, Merrill Lynch
Notes: Core goods contrast with core services
Source: Haver Analytics, Merrill Lynch
1
1.5
2
2.5
3
3.5
Jan-06 Apr-06 Jul-06 Oct-06 Jan-07
CPIXCPIX food components (food ex-fruit/vegetables)CPIX excluding food componentsBoC target
y/y%
0
2
4
6
8
10
00 01 02 03 04 05 06 07
CPIX: House replacementCPIX: ShelterCPIX excluding shelterBoC target
y/y%
-3
-2
-1
0
1
2
3
4
5
6
00 01 02 03 04 05 06 07
CPI inflation, durables/semi-durables ex-autosCPI inflation, services excluding shelterBoC target
y/y%
May2007
20
Money & credit indicators a marginal worry to the upside
Narrow money suggests stronger growth Broad money has accelerated
Source: Haver Analytics, Merrill Lynch
Source: Haver Analytics, Merrill Lynch
Notes: Credit growth slower but still elevated
Source: Haver Analytics, Merrill Lynch
-3
0
3
6
9
12
15
18
21
99 00 01 02 03 04 05 06 07
-1
0
1
2
3
4
5
6
7
Real GDP (2qma, LHS)
Real M1+ (LHS, 2qma, advanced 1q)
q/q% saar q/q% saar
0
4
8
12
16
00 01 02 03 04 05 06 07
Consumer creditResidential mortgage creditBusiness credit
y/y%
0
2
4
6
8
10
12
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
M2++ money supply
Gross M3 money supply
y/y%
May2007
21
Canada inflation outlook mixed vs downside in US
CPIX likely to come down to target… … but not as fast as in the US
Source: Haver Analytics, Merrill Lynch
Source: Haver Analytics, Merrill Lynch
Notes: Reversing the recent differential
Source: Haver Analytics, Merrill Lynch
0
1
2
3
4
5
02 03 04 05 06 07 08
BoC target
ML forecastsy/y%
CPI
CPIX
0.5
1
1.5
2
2.5
3
3.5
03 04 05 06 07 08
Canada core inflation
US core inflation
y/y%
ML forecasts
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
97 98 99 00 01 02 03 04 05 06 07 08
Canada-US headline inflation differential
Canada-US core inflation differentialpp
ML forecasts
May2007
22
Canada growth, inflation rising above US
Real, nominal interest rates remain below US
Something has to give
May2007
23
So far, it’s been the currency that’s borne the brunt of adjustment…
An abrupt reversal in trend Mostly Type I?
Source: Haver Analytics, Merrill Lynch
Source: Haver Analytics, Merrill Lynch
Notes: Or Type II?
Source: Haver Analytics, Merrill Lynch
1.075
1.100
1.125
1.150
1.175
1.200
Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07
USD-CADBoC assumption range, April MPR 170
180
190
200
210
220Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07
1.075
1.100
1.125
1.150
1.175
1.200BoC commodity price index (LHS, inverted)
USD/CAD (RHS)
104
106
108
110
112
Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-071.075
1.100
1.125
1.150
1.175
1.200USD broad index (Fed, LHS)
USD/CAD (RHS, inverted)
May2007
24
… more than enough, if the US does what we expect
Stronger CAD path… … tilts down economic profile…
Source: Haver Analytics, Merrill Lynch
Source: Haver Analytics, Merrill Lynch
Notes: … even with lower rates, assuming Fed cutting
Source: Haver Analytics, Merrill Lynch
1.05
1.10
1.15
1.20
1.25
1.30
1.35
1.40
04 05 06 07 08
USD-CAD with ML assumption
USD-CAD with former ML assumption
0
1
2
3
4
5
6
7
00 01 02 03 04 05 06 07 08
Canada overnight target
US Fed funds target
%ML forecasts
-2
0
2
4
6
00 01 02 03 04 05 06 07 08-1
0
1
2
3Real GDP growth (q/q% SAAR, LHS)
Output gap (% of GDP, RHS)
ML forecasts
May2007
25
Leaving higher CA-US base case on mixed rates, steeper curve
Positive spreads seen by 2008 Canadian yields seen higher on net
Source: Haver Analytics, Merrill Lynch
Source: Haver Analytics, Merrill Lynch
Notes: A steeper curve
Source: Haver Analytics, Merrill Lynch
2
3
4
5
6
7
00 01 02 03 04 05 06 07 08
Canada 2-year yield
Canada 10-year yield
%ML forecasts
-150
-100
-50
0
50
100
150
200
250
300
00 01 02 03 04 05 06 07 08
Canada-US 2-year spread
Canada-US 10-year spread
bps
ML forecasts
2
3
4
5
6
7
00 01 02 03 04 05 06 07 08
Canada 10-year yield
US 10-year yield
%ML forecasts
May2007
26
Most confident aspect of rate forecast is Canada-US convergence
Spreads have followed inflation gap… … and jobs gap
Source: Haver Analytics, Merrill Lynch
Source: Haver Analytics, Merrill Lynch
Notes: If Fed on hold, expect convergence up
Source: Haver Analytics, Merrill Lynch
-2.5
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
97 98 99 00 01 02 03 04 05 06 07-0.8
-0.4
0.0
0.4
0.8
1.2
1.6Canada-US headline inflation y/y differential (LHS)
Canada-US 10-year yield spread (RHS)pp pp
-2
-1
0
1
2
3
4
5
97 98 99 00 01 02 03 04 05 06 07-1
-0.5
0
0.5
1
1.5
2Canada-US y/y employment growth differential (LHS)
Canada-US 10-year yield spread (RHS)
pppp
0
1
2
3
4
5
6
7
00 01 02 03 04 05 06 07 08
Canada overnight target
US Fed funds target
%Alternate scenario
May2007
27
Canadian equities have attended the global party
TSX has built on 2002-06 doubling… Concentration in high beta sectors has helped
Source: Haver Analytics, Merrill Lynch
Source: Haver Analytics, Merrill Lynch
Notes: As has M&A/private equity boom
Source: Haver Analytics, Merrill Lynch
50
100
150
200
250
97 98 99 00 01 02 03 04 05 06 07
Canada TSX Composite
World Composite (DJ)
Index Jan1/97=100
0
10
20
30
40
50
60
Canada TSX Composite US S&P 500
Share of index in low-beta sectors (consumer staples, health care & utilities)
Share of index in high-beta sectors (materials, energy and info tech)
%
0
20
40
60
80
100
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
FDI into Canada: All other industries
FDI into Canada: Energy/mining
C$bn
Note: Four quarter moving sums shown
May2007
28
Multiple expansion has taken over as earnings flatten outTrailing earnings flat, forward earnings falling Macro factors suggest further softness
Source: Haver Analytics, Merrill Lynch
Source: Haver Analytics, Merrill Lynch
Notes: But higher valuations have more than made it up
Source: Haver Analytics, Merrill Lynch
600
700
800
900
Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07
Trailing 12-month TSX Composite EPS
2007 consensus TSX Composite EPSC$
11000
12000
13000
14000
Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-0713.0
14.0
15.0
16.0
17.0TSX Composite index (LHS)
TSX Composite FY1 P/E ratio (RHS)
-6
-3
0
3
6
9
12
85 88 91 94 97 00 03 06 09-60
-30
0
30
60
90S&P TSX trailing 12m earnings per share (RHS)
ML Canada CMI (LHS, 4qma, advanced 1Q)
pp y/y%
ML fc
May2007
29
Has abundant global liquidity made the ‘Fed model’ apply?
Earnings yields above bond yields… … leave an apparently juicy spread
Source: Haver Analytics, Merrill Lynch
Source: Haver Analytics, Merrill Lynch
Notes: Hasn’t worked in the past, but…
Source: Haver Analytics, Merrill Lynch
0
3
6
9
12
15
18
82 87 92 97 02 07
Long Canada bond yield
TSX Composite earnings yield
%
-10
-8
-6
-4
-2
0
2
4
82 87 92 97 02 07
TSX Composite earnings yield less long Canada bond yieldpp
-10
-5
0
5
10
15
20
82 87 92 97 02 07-40
-20
0
20
40
60
80TSX Composite earnings yield less long Canada bond yield (LHS)
Subsequent 12-month TSX performance (RHS)
%pp
May2007
30
Risk of adverse shift in fund flows, too
Historic underweight in foreign assets ebbing…
… in both bonds and stocks
Source: Haver Analytics, Merrill Lynch
Source: Haver Analytics, Merrill Lynch
Notes: Foreign portfolio inflows have offset, for now
Source: Haver Analytics, Merrill Lynch
10
15
20
25
30
94 95 96 97 98 99 00 01 02 03 04 05 06
Foreign assets as a % of total Canadianregistered pension plan assets
-2
0
2
4
6
8
94 95 96 97 98 99 00 01 02 03 04 05 06
Year-over-year change in foreign equities as a share of total RPP equities held
Year-over-year change in foreign bonds as a share of total RPP bonds held
pp
-18
-9
0
9
18
27
36
93 95 97 99 01 03 05 07-35
0
35
70Foreign purchases of outstanding Canadian equities* (LHS)
TSX Composite Index (RHS)
C$bn y/y%
* - 12 month rolling sum
May2007
31
Canada among markets vulnerable to reassessment of risk
Volatility is low… … and risk appetite is high
Source: Haver Analytics, Merrill Lynch
Source: Haver Analytics, Merrill Lynch
50
100
150
200
250
300
350
400
450
97 98 99 00 01 02 03 04 05 06 07
Chinese equities (DJ Shanghai Composite Index)
8
16
24
32
40
48
97 98 99 00 01 02 03 04 05 06 07
S&P VIX Index
Lowered risk premiums – the apparent consequence of a long period of economic stability –coupled with greater productivity growth have propelled asset prices higher… this vast increase in the market value of asset claims is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent. To some extent, those higher values may be reflecting the increased flexibility and resilience of our economy. But what they perceive as newly abundant liquidity can readily disappear. Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums.
- Alan Greenspan, Reflections on Central Banking, August 26, 2005
May2007
32
Key economic & financial forecasts
Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 2005 2006 2007 2008Real GDP (q/q % ann) 3.8 2.0 2.0 1.4 2.7 2.8 2.1 1.9 2.9 2.7 2.3 2.6
Consumption 5.4 3.7 5.1 3.1 2.2 4.0 3.4 3.6 3.9 4.4 3.6 3.5Government 4.0 4.4 2.0 1.8 3.2 3.8 4.4 4.4 3.2 3.8 3.3 4.2Housing Investment 13.1 -4.7 -6.9 0.3 -3.0 -2.0 -4.0 -4.0 3.2 2.4 -3.0 -3.6Business Investment 10.1 6.9 9.4 6.0 3.4 4.1 3.8 3.8 9.4 9.2 5.0 4.8Exports -4.8 -1.3 3.5 4.8 3.0 1.0 0.0 1.0 2.1 1.4 2.2 2.1Imports -1.9 9.0 5.1 -0.6 -2.0 6.0 5.0 5.0 7.1 5.2 2.6 5.6Inventory (C$bn) 11.0 18.1 13.9 1.0 -5.0 -2.0 0.0 0.0 15.5 11.0 -1.8 3.4Final Dom. Demand 6.1 3.7 4.0 3.0 2.8 3.6 3.2 3.3 4.3 4.5 3.3 3.3
CPI (y/y%) 2.4 2.6 1.7 1.3 1.8 2.0 2.4 2.9 2.2 2.0 2.3 2.1CPI-X (y/y%) 1.7 1.8 2.1 2.2 2.3 2.3 2.1 2.0 1.6 1.9 2.2 2.0Overnight Target (eop. %) 3.75 4.25 4.25 4.25 4.25 4.25 4.25 3.75 3.25 4.25 3.75 4.502-yr GoC 3.99 4.40 3.91 4.02 3.98 4.25 4.15 4.00 3.85 4.02 4.00 4.6010-yr GoC 4.26 4.58 4.00 4.08 4.11 4.25 4.20 4.20 3.98 4.08 4.20 4.80USD-CAD 1.17 1.12 1.12 1.17 1.15 1.17 1.20 1.18 1.16 1.17 1.18 1.12TSX Composite 11,272 12,908 12,900 13,200TSX EPS 603 750 735 790
Memo:US GDP 5.6 2.6 2.0 3.5 1.3 2.0 2.0 2.0 3.2 3.4 2.0 2.6US Core CPI (y/y %) 2.1 2.5 2.8 2.7 2.5 2.3 2.0 2.0 2.1 2.5 2.2 1.9Fed Funds (eop. %) 4.75 5.25 5.25 5.25 5.25 5.25 4.75 4.25 4.25 5.25 4.25 4.002-yr UST 4.82 5.16 4.71 4.82 4.58 4.55 4.35 4.15 4.40 4.82 4.15 4.2010-yr UST 4.85 5.15 4.64 4.70 4.65 4.50 4.30 4.20 4.39 4.70 4.20 4.45EUR-USD* 1.21 1.28 1.27 1.32 1.34 1.34 1.33 1.33 1.18 1.32 1.33 1.29USD-JPY* 117 115 118 119 118 114 107 107 118 119 107 97S&P 500** 1248 1418 1590 --S&P 500 Operating EPS 76.5 87.7 93.0 97.0*ML FX Strategy Team; **12-mth fwd; Shaded regions represent ML forecasts; Source: Merrill Lynch, Haver Analytics, CPMS
Quarterly Annual
May2007
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