The Oil Shock:

How Shocking Is It?

By Avery Shenfeld, Chief Economist & Managing Director
May 2011

Global Growth Shy of Pre-Recession Pace

6
5

Annual Global Real GDP growth

5%

4
3
2
4 yrs before
recession

2010

2011

2012

CIBC Forecast
|

Oil Cost Spikes Preceded US Recessions

But Current Shock Smaller in % of OECD GDP
Source: Wall Street Journal, CIBC

$/Barrel

160
140

120
100
80
60
40
20
0
70

75

80

85

90

95

00

05

10

Net Speculative Interest in Oil Markets

Hits Record Levels
Non-C ommercials Nymex Lt. Sweet C rude,
1000 bbl contracts

300,000
250,000
200,000
150,000
100,000
50,000
0
-50,000

Source: CFTC

Jan-11

Jul-10

Jan-10

Jul-09

Jan-09

Jul-08

Jan-08

Jul-07

Jan-07

Jul-06

Jan-06

-100,000

Excess Capacity Should Stabilize Oil

Avg Near $100/bbl if No Further Dominoes Fall
160

$/bbl

Mn bbl/day

140

6
5

120
4

100

80
60

40
20

1
Source: US DOE, Bloomberg

0
0
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
OPEC Spare C apacity

West Texas Price (L)

|

US Food/Energy Inflation Gains No Longer Lead

to Wage or Core CPI Spikes
C orrelation with food & energy inflation, 12-months lag
1.00
1971-1990
1991-2010

0.80
0.60
0.40
0.20
0.00
C ore inflation

Wages
|

US Labour Market: A Long Way to Go

Before Fed Even Thinks of Hiking Rates
6

% decline in non-farm payrolls from peak

4
2
0
-2
-4
-6

2008-10
recession /recovery

-8
-24

-18

-12

-6

12

Months from Employment Trough

1948

1953

1958

2007|

Cuts Will Partly Undo Tax Stimulus (L),

Debt Path Shows Need for More Restraint (R)
300

Fiscal Injections in 2011, $Bn*

Publicly held debt without major policy

changes (% of GDP*)

120

250
100

200
80

150

60

100
50

40
*CBO Baseline with an
extension of Bush tax cuts
beyond 2012, AMT indexation
and const. Medicare rates
after 2011.

20
0

6
1

4
1

2
1

10

0
2

6
0

4
0

00
0

April Spending
Cuts

Dec Tax Deal

-100

-50

20

*com pared to
2011 Obam a
Budget

US Exporters: Going Where the Growth Lies (L),

US Dollar at Historic Lows in Real Terms (R)
160

Index Jan 2009=100

140

150

Trade-weighted US$ Index=100

(Mar1973)
Nominal (R)

140

130

130

Real (L)

400
350

120

120

300
110

110

250
100

100

200

rest of the world

90

450

emerging markets

Ja
n09
M
ar
-0
9
M
ay
-0
9
Ju
l0
Se 9
p09
N
ov
-0
Ja 9
n10
M
ar
-1
0
M
ay
-1
0

80

90
80
Dec74

150

Dec92

100
Dec10

No Flood of US Dollars:
Quantitative Easing No Risk to US$ or Inflation
16

M2, y/y % chg

14
12
10
8
6
4

US M2 avg 2000-10

2
0
Jan07

Jul07

Jan08

Jul08
C anada

Jan09

Jul09

Jan10

Jul10

Jan11

US
|

10

QE1 More Effective

in Restraining Bond Yields Than QE2
80

Reduction in 10-yr bond yields, bps

(average of research results*)

60
40
20
0
QE1

QE2

* Swanson (2011), Gagnon/Raskin/Remache/Sack (2011),

Hamilton/Wu (2011)
|

11

Bond Yields to Rise, But Gently

6

10-yr bond yields (%)

C anada

Forecast

US
5

2
Dec00

Dec04

Dec08

Dec12

12

Canadas Edge in Net Debt

Keeps 30-Year Rates Well Below US
250

General Gov't Debt, % of GDP (2010)

200

Net Debt = Gross Debt less Financial Assets

150
100
50
0
JPN

ITA

Gross Debt

FRA

UK

US

GER

C AN

Net Debt
|

13

2011/2012 Budget Balances

12
10

2011/12 Budget Deficits, % of GDP

Deficit

* Based on CBO estimates for FY2011

6
4
2
0
-2

Surplus
US* Ont NB Alta Qu NS
C anada Federal Gov't

PEI Man BC N&L Sask

Provincial Governments
|

14

Net New Supply of Treasuries Running More than

3X Faster than Net Canada Issuance

12

Net Bond Issuance, % of GDP

Fcst

10
8
6
4
2
0
-2
06/07

07/08
US Treasuries

08/09

09/10

10/11

11/12

Canadas

15

Gross / Net Canada Issuance: Off its Peak but

Boosted by Plans to Enhance Liquidity
Government of Canada Nominal Issuance, C$billions
100
Note: 2011/12 is forecast

80
60
40
20
0
-20
FY90

93

96
Net

99

02

05

08

11F

Gross

16

Budgets Based on Cautious Forecasts

Real GDP
Y/Y % Chg

Nominal GDP

2010E

2011F

2012F

2010E

2011F

2012F

BC

3.1

2.0

2.6

5.6

4.1

4.9

Alta

3.5

3.3

3.2

9.9

7.1

7.9

Sask

1.7

4.2

2.8

5.7

9.0

6.3

Man

2.5

2.7

2.7

5.0

5.5

4.5

Ont

2.8

2.4

2.7

6.1

4.6

5.1

Qu

3.0

2.0

2.2

4.4

3.9

4.4

NB

2.0

1.5

2.2

4.0

3.2

4.6

NS

2.1

1.9

1.9

4.9

4.5

4.0

PEI

1.9

1.7

NA

2.3

NA

NA

N&L

5.6

3.0

0.2

18.8

9.7

1.4

Provincial2

2.9

2.4

2.6

6.2

5.1

5.3

Federal

3.1

2.9

2.8

6.2

5.8

5.0

CIBC3

3.1

2.8

2.8

6.2

5.6

4.4

Provincial Forecasts

Canada Forecasts

1. 2010 figures are estimates, differ from growth rates reported by StatCan
2. Weighted average of individual provincial forecasts
3. CIBC's current national forecast

17

Spending Needs to Slow Across Country

12

Growth in Provincial Expenditures, % (C AGR)

10
8
6
4
2
0
BC

Alta

Sask

Man

History: 5Y Avg (FY03-08)

Ont

Qu

NS

N&L

Plan: 3Y Avg (FY10-13)

|

18

The Continental Divide: Huge Gap in Output Gaps

4.0

Output Gap, % of GDP

2.0
0.0
-2.0
-4.0
-6.0
-8.0
Mar-01

Mar-03

Mar-05
C anada

Mar-07

Mar-09

Mar-11

US
|

19

Canada Sees Nearly 3% Growth,

Prime and Overnight Up 100 bps in 2nd Half
GDP growth (s.a.a.r.)

5.0
4.5
6.0%
4.0
4.0%
3.5
2.0%
3.0
2.5
0.0%
2.0
-2.0%
1.5
-4.0%
1.0
-6.0%
0.5
0.0
-8.0%
Q1-07 Q4-07 Q3-08 Q2-09 Q1-10 Q4-10 Q3-11 Q2-12
8.0%

Real GDP Growth (L)

Forecast

Overnight Interest Rate (R)

|

20

Impact of a 25% Oil Price Shock

on Canadian GDP
0.3

% chg, SAAR

Pre-shock = 100 100.1

0.2

100.0

0.1
0.0

99.9

-0.1
99.8

-0.2
-0.3

Growth (L)

-0.4

Level (R )

-0.5
1

3
4
5
6
7
8
9
Quarters from start of shock

99.7
99.6

10

21

Oil Prices Can Trump Rate Hikes for C$ Direction

C $ (reverse scale)

$/bbl

0.96

Second
rate hike

90

1.00

First rate
hike

1.04

80

C$
depreciation
Third rate
hike

70
Feb10

May10

Aug10

WTI C rude Oil (L)

Nov10

1.08

Feb11

C AD (R)

C$ cooled in 2010 despite rate hikes

Could see a replay of that story towards mid-2011

22

Real Incomes: Advantage Canada

Index of Real Gross National Income (1999 Q4 = 100)
140

120

100

C anada

4
Q
20

09
-

Q
07
20

05
20

4
-Q

4
-Q
03
20

01
20

19

99
-

80

US
|

23

Cdn Household Leverage Reaching US Levels

200

debt as a % of Personal Disposable Income

150

100

50

0
Q1-90

Note: both measures include

unincorporated businesses
Q1-94

Q1-98

United States

Q1-02

Q1-06

Q1-10

C anada
|

24

Why the Bank of Canada Will Hike:

Current Debt Trend Leads to Trouble
15

13
11
9
7
5
3
Q1-90

Q1-94

Q1-98

Debt Service Ratio

Q1-02

Q1-06

Q1-10

Q1-14

Average Interest Rate on Debt

25

Gasoline Bills Take Bite out of Spending Power

As a Sha re of
Re ta il Sa le s

As a Sha re of
Disposa ble Income
6.2
5.7

5.2

13

12
11

4.7

10

4.2
3.7

3.2

2.7

2.2
1.7

1.2

5
91 94 97 00 03 06 09

Source: Statistics Canada

Note: Data for 1st quarter estimated by CIBC

91

95

99

03

07

11
|

26

Strong Fundamentals For Capital Expenditures

0.20

Record High Corporate

Cash Position

0.18
0.16
0.14

0.40

0.35

0.30

0.12

0.25

0.10

0.20

0.08

0.15

0.06

0.10

0.04
0.02

0.05

0.00

0.00
88 91 94 97 00 03 06 09
cash & deposits / total equity (L)
cash & deposits / Sales of Goods &
Services (R)
Source: Statistics Canada, CIBC

Real Return on Capital

Employed (%)
Long-term
average

6
5
4
3
2
1
0
-1
93 95 97 99 01 03 05 07 09
|

27

Business Investment on a Steeper Climb

And Faster Recovery

A Normal Recession
105

Peak-to-trough in the
past 3 recessions (index)

100

10
8

Avg q/q growth (ar) in the

1st 5 qtrs of recovery (%)

95

4
90

2
0

85
81-82
89-90
08-09

80

-2
-4

75
1

3
4
Quarters

Source: Statistics Canada, CIBC

-6
84

92

current
|

28

Canadian Exports Recovering

But Lose US Share As C$ to Stay Near Parity
140
135

Index,
Q2 98 = 100

Index,
Q2 98 = 100

135
130

130

125

125

120
gap

120

115

115

110

110

105

105

100

100

95

95

90

90
Q2-98 Q3-00 Q4-02 Q1-05 Q2-07 Q3-09

85

Real C dn Exports (L)

US Activity Index (BoC ) (R)

29

House Prices Still Rising

But Rate Hikes Likely to Prompt a Correction
Major Markets
25

y/y % chg

20
15
10
5
0
-5
-10
-15
Ja

0
n-

07 -07 -08 -08 -08 -09 -09 -09 -10 -10 -10 -11
n
p
ay ep Jan ay ep Jan ay ep Jan ay
a
e
J
M
S
M
S
M
S
M
S

Weighted residential avg. price

Source: CIBC

Residential avg. price

|

30

Asset Class Performance and Oil Shocks

70%

% probability each asset class will

outperform others in quarter, 1956-date

60%
TSX Composite

50%

Long Canada
Cash

40%
30%
20%
10%
0%
-30

50

% change in oil prices during quarter

31

Interest and Exchange Rate Outlook

2011
END OF PERIOD:

2012

27-Apr

Jun

Sep

Dec

Mar

Jun

Sep

Dec

CDA Overnight target rate

98-Day Treasury Bills
2-Year Gov't Bond
10-Year Gov't Bond
30-Year Gov't Bond

1.00
0.99
1.78
3.27
3.74

1.00
1.00
2.00
3.50
3.80

1.50
1.55
2.15
3.55
3.90

2.00
1.90
2.50
3.50
3.85

2.00
1.85
2.40
3.60
4.00

2.00
1.85
2.75
3.85
4.10

2.00
1.85
2.85
3.95
4.25

2.25
1.90
3.00
4.00
4.25

U.S. Federal Funds Rate

91-Day Treasury Bills
2-Year Gov't Note
10-Year Gov't Note
30-Year Gov't Bond

0.08
0.05
0.64
3.36
4.45

0.20
0.15
0.75
3.55
4.60

0.20
0.15
0.65
3.50
4.55

0.20
0.15
0.65
3.40
4.40

0.20
0.15
0.85
3.50
4.65

0.20
0.15
0.90
3.80
4.75

0.20
0.15
0.90
3.85
4.80

0.20
0.20
1.00
3.95
4.80

0.94
-0.09

0.85
-0.05

1.40
0.05

1.75
0.10

1.70
0.10

1.70
0.05

1.70
0.10

1.70
0.05

1.96
3.81

1.80
3.85

1.75
3.90

1.35
3.75

1.60
3.80

1.35
3.85

1.40
3.90

1.25
3.80

1.05
0.95
82
1.48
1.66
1.09
0.87
1.57
11.52

1.00
1.00
86
1.49
1.66
1.02
0.89
1.54
11.55

1.02
0.98
87
1.36
1.60
0.98
0.95
1.62
11.80

1.03
0.97
89
1.34
1.62
0.97
0.96
1.65
12.00

1.01
0.99
88
1.30
1.62
0.98
0.97
1.62
12.00

1.02
0.98
90
1.35
1.67
1.03
0.95
1.60
11.85

1.02
0.98
92
1.34
1.65
1.01
0.97
1.58
11.75

1.03
0.97
94
1.32
1.65
1.00
1.01
1.56
11.50

Canada - US T-Bill Spread

Canada - US 10-Year Bond Spread
Canada Yield Curve (30-Year 2-Year)
US Yield Curve (30-Year 2-Year)
EXCHANGE RATES

CADUSD
USDCAD
USDJPY
EURUSD
GBPUSD
AUDUSD
USDCHF
USDBRL
USDMXN

32