Transcript Slide 1

Rebound
July 2015
Presented by:
Eric Lascelles, Chief Economist
Report card
Positive Developments:
 Tailwind of low oil, low rates, low FX diminishes somewhat
 Evidence of reviving economic growth in U.S.
 Japanese reforms finally underway
 TPP trade deal prospects improve
 Inflation bottoming off of very low levels
 Canadian employment surprisingly robust
Negative Developments:
 Grexit risks still loom
 Higher yields highlight “taper tantrum” risks
 China slows / EM growth challenges persist
Interesting Developments:
 China’s growth/equity disconnect
 Fed tightening still on track for autumn
 Productivity problem debate
 U.K. wage growth accelerates
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Equities undisturbed by material downside risks
U.S. equities into 7th year of bull market
2200
Near all-time high
despite Greek worries
2000
S&P 500 Index
1800
1600
1400
1200
1000
800
600
1999
2001
2003
2005
2007
2009
2011
2013
2015
Source: WSJ, Haver Analytics, RBC GAM
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Global growth bottoming?
Some weakness in manufacturing sector globally
55
Expansion
Manufacturing PMI
54
53
52
51
50
49
48
Contraction
47
Jan-12
Nov-12
JP Morgan Global PMI
Emerging markets PMI
Sep-13
Jul-14
Developed markets PMI
May-15
Note: PMI refers to Purchasing Managers Index for manufacturing sector, a measure for
economic activity. Source: Haver Analytics, RBC GAM
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U.S. data disappointments starting to fade
Economic Surprise Index (1 std dev=100)
U.S. hit by negative surprises
120
Positive Surprises
80
40
0
-40
-80
Negative Surprises
-120
Oct-10 Jun-11 Feb-12 Oct-12 Jun-13 Feb-14 Oct-14 Jun-15
Source: Citigroup Economic Surprise Index, RBC GAM
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U.S. housing market picks up
U.S. home prices rising at faster clip
Home price index (YoY % change)
20
15
10
5
0
-5
-10
-15
-20
2001
2003
2005
2007
S&P/Case-Shiller HPI
2009
2011
2013
2015
CoreLogic National HPI
Source: CoreLogic, S&P, Haver Analytics, RBC GAM
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Is oil shock’s back-loaded benefit finally materializing?
TIME
Immediate
 Lower oil sector
profits
Near term
Medium term
 Diminished oil
sector cap-ex
 More consumer
spending
 Lower profits in
related industries
 More (non-oil)
business
investment
Source: Bank of Canada, IMF, RBC GAM
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U.S. productivity growth deceleration mostly just normalization
U.S. business-sector real output per hour
(10-year % change annualized)
U.S. productivity reverts to more normal growth rate
3.2
Unusual
productivity
spike
2.8
2.4
Reversion
to more
normal
growth
2.0
1.6
1.2
0.8
1980
1985
1990
1995
2000
2005
2010
2015
Note: Real output per hour of all persons of business sector.
Source: BLS, Haver Analytics, RBC GAM
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Bond yields rise on inflation / Fed / valuations
10-yr German government bond yield (%)
German yields took off from rock bottom
1.6
1.4
1.2
1.0
0.8
0.6
0.4
Bond
selloff
0.2
0.0
Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15
Source: Reuters, Haver Analytics, RBC GAM
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Cautious rate hikes are coming
Fed anticipates first rate hike in 2015
U.S. Fed funds target rate (%)
7
Fed forecast
6
5
4
3
2
1
0
2000 2002 2004 2006 2008 2010 2012 2014 2016
Note: Fed fund target rates at year end. Fed forecast from projections released on
6/17/2015. Source: Federal Reserve Board, RBC GAM
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Japan reforms
Labour
Governance
Trade
▪ Efforts underway to reduce two-tier nature of labour market
▪ Underutilized pools of potential workers being tapped
▪ Tokyo Stock Exchange mandates independent directors on
boards
▪ Trans-Pacific Partnership implementation now likely
Source: RBC GAM
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Evaluating debt hot spots
Near-term risk
(0-2 years)
Medium-term risk
(3-10 years)
Long-term risk
(11+ years)
Global
significance
Normal
Elevated
High
High
High
High
Elevated
Low
Normal
High
High
Medium
Emerging-market external debt
Elevated
Normal
Normal
High
Corporate debt
Elevated
Elevated
Normal
Medium
Chinese credit
High
High
Elevated
High
Elevated
Normal
Normal
Low
High
Elevated
Normal
Low
Developed-world public debt
Greek public debt
Japanese public debt
Oil-oriented debt
Housing exuberance
Source: RBC GAM
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China’s perplexing performance
Chinese stocks surged on reforms and stimulus
China's real GDP growth
(QoQ % annualized)
18
7000
GDP growth
(LHS)
6000
16
5000
14
12
4000
10
3000
8
6
2000
4
Shanghai Stock Exchange
Composite Index (RHS)
2
0
2000
2005
2010
1000
Shanghai Stock Exchange Composite
Index (Dec 19, 1990 = 100)
20
0
2015
Source: CNBS, Bloomberg, Haver Analytics, RBC GAM
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Canadian employment surprisingly robust
Canada's curious employment strength
40
Canadian employment
(6mma of MoM % change)
35
30
25
Normal hiring
Surprising
resilience
despite oil
shock
20
15
10
5
0
-5
2011
2012
2013
2014
2015
Note: 6-month moving average (6mma) of month-over-month % change of Canadian
employment. Source: Statistics Canada, Haver Analytics, RBC GAM
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Greek deposit outflows could lead to capital controls
Greek bank deposits (YoY % change)
Greek banks bleeding deposits
18
14
10
6
2
-2
-6
-10
-14
-18
-22
2005
2007
2009
2011
2013
2015
Note: Bank deposits of households and nonfinancial corporations.
Source: ECB, Haver Analytics, RBC GAM
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Greek debt composition good news / bad news
Very little Greek debt is privately held
Other
17%
Market
debt
EU
bilateral
loans
IMF
Central
banks
EFSF
Note: Share of total outstanding Greek debt (%) held by various stakeholders.
Source: Financial Times Jan 2015, RBC GAM
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Greek contagion risks
Channel
Impact
Rationale
Economic
Very small
Banking
Small
▪ Most foreign banks have drastically cut their exposure to Greece
Private
investors
Small
▪ Private investors now hold less than 20% of Greek sovereign bond
▪ Those that cannot afford Greek risks have long since fled
▪ Greece is just 2% of Eurozone GDP
Medium
▪ Official lenders now hold the bulk of Greek debt
▪ A default or Grexit would impose significant though manageable losses on
other European sovereigns
Medium
▪ It is difficult to gauge the effect of an uncoordinated Greek default or Grexit on
market confidence
▪ Markets have so far taken a casual attitude to the risk, but there remains the
possibility of a more negative response should Grexit actually transpire
Short-term
precedent
Medium
▪ Greek default or Grexit would raise the risk of other highly indebted countries
being pressured by markets to do the same
▪ Fortunately, evidence so far suggests this contagion effect is limited
Long-term
precedent
Medium
▪ A Greek Eurozone exit would leave lingering questions about the long-term
viability of the Eurozone, particularly in the event of future crises
Official
lenders
Confidence
Source: RBC GAM
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Can the Eurozone continue to function over the long run?
Language/culture
Labour mobility
Economic similarities
Eurozone
U.S.
Different languages and cultures
Fewer geographic variations, but significant cultural ones
Imperfect given geographic variations
Good labour mobility, but impeded by two-income families
Eurozone economies are quite similar
U.S. states are quite varied
Central bank / currency Yes
Yes, though central bank formed quite late
Legislative
Yes, on certain matters
Yes, on certain matters
Fiscal affairs
Only basic fiscal rules with little EU spending
Substantial, but still significant share left in state hands
Fiscal transfers
Yes, but quite limited
Yes, but minimal over first century-plus of existence
Bank regulation
Yes
Yes
Speed bumps
Sovereign debt crisis
Civil War; a history of separatist movements
Separatist movements
Perpetual conflict between state and federal rights
Workable union
Functioning union
Prognosis
Source: RBC GAM
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