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Weekly commentary on economic and financial market developments May 3, 2013

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Except For Bernanke, US Markets Will Be Watching The World Next Week ............................................... Derek Holt

Global Forecast Update: Hope Springs Eternal ..................................................................................Aron Gampel

Three Challenges Facing Bank Of Canada Governor-Designate Poloz .......................................Derek Holt & Dov Zigler

ECB Cuts Rates, Potential For Further Action ................................................................................ Sarah Howcroft

Provincial Progress On Fiscal Repair ................................................................................................. Mary Webb

Gold Price Selloff In Mid-April Was Triggered By Potential Cyprus Gold Sale ..........................................Patricia Mohr

What Does Repsol Mean For Peru? .................................................................................................. Joe Kogan

Central Bank Policy Proves Important Driver Of FX .......................................................................... Camilla Sutton

Asset Mix And Model Portfolios — May Update ............................................................................... Vincent Delisle

2-10 Economics

Key Data Preview.................................................................................................................................... A1-A2

Key Indicators ......................................................................................................................................... A3-A5

Global Auctions Calendar ............................................................................................................................ A6

Events Calendar ..................................................................................................................................... A7-A8

Global Central Bank Watch .......................................................................................................................... A9

Forecasts ................................................................................................................................................... A10

Latest Economic Statistics .................................................................................................................. A11-A12

Latest Financial Statistics ........................................................................................................................... A13

A1-A13 Forecasts & Data

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15-17 Portfolio Strategy

13-14 Foreign Exchange Strategy

11-12 Emerging Markets Strategy

Global Views

Economics

2 May 3, 2013

THE WEEK AHEAD

Except For Bernanke, US Markets Will Be Watching The World Next Week

Please see our full indicator, central bank, auction and event calendars on pp. A3-A9. Canadian markets face some domestic sources of risk next week, much of which will arrive on Friday when the jobs print for April lands. What Statistics Canada’s Labour Force Survey (LFS) has had to say about Canadian job markets has followed a wickedly erratic pattern since last Fall. Job growth accelerated in August of last year through to year end and 184,000 jobs were created in the Canadian economy within a five-month period. The usual ten or eleven to one ratio would make that equivalent to over 1.8 million jobs created in the US over this same period. That far exceeded the US performance over this period using the comparable household survey-based pace of job creation that equaled about 1 million US jobs created. The nonfarm payrolls report depicted a similar pace of job growth over that period. The problem is that the wheels then fell off in Canada and the first three months of this year registered a drop of 26,000 jobs particularly skewed toward a bad March print (-54,500). We present this context because it demonstrates why markets will be very sensitive to LFS readings over the next couple of months in order to test the theory that last Fall was the aberration that was marked by strong job growth amid very weak economic growth, and now Okun’s ‘law’ that relates mean reverting trends between the two variables may be catching up by way of putting downside pressure on job growth. Our call for the print is a mild 10k gain in jobs during April, but we have little conviction not least of which because of the highly volatile nature of the report. This is true across all of consensus given the remarkable stability in the median consensus estimate for each month’s report over time, versus the volatility in the actual month’s print (see chart). Canadian housing starts may also garner attention. We think the risk is to the downside and we’re forecasting an annualized rate of homebuilding equal to about 165,000 starts. That would be down from 181k in March, and well down from the 253k peak of a year ago. Residential building permits for the number of dwellings fell by 12% in February over January and suggest waning momentum into the Spring. A more timely advance indicator is new home sales in Toronto which have been utterly crushed so far this year. March’s new home sales fell 47% compared to March of 2012, and the entire first quarter of 2013 was the second weakest quarter for Toronto new home sales on record since the start of the housing cycle’s upturn at about year 2000 and second only to the crisis-induced lows of 2009Q1. Falling sales suggest fewer shovels going into the ground within 30-90 days. Canada also auctions $3.4 billion in 5s next Wednesday. Asian markets face a mixture of key data, central bank decisions, and an election next week. Malaysia’s election on Sunday will pose risk to the ringgit. That’s because the election is too tight to forecast, and because it may well have a united opposition toppling the governing party that has ruled since the country’s independence over six decades ago. It is against the backdrop of potential political uncertainty next week that Bank Negara Malaysia will make a rate decision. The central bank forecasts growth of 5-6% in 2013 and warns of modestly building inflationary pressures with a forecast for inflation to rise to the 2-3% range this year. No rate change is expected next week. The RBA may provide a more interesting risk to the A$, however, in that consensus is somewhat divided on whether or not to expect a rate cut next Tuesday. A minority of 8 shops within Bloomberg’s consensus of 29 estimates expect a 25bps cut in the 3% cash target rate, while the rest expect no change. That will be preceded by Monday’s retail sales figures which are expected to come in flat following a large gain in February. Australian trade and jobs figures also land in an active week for A$ risk, and consensus expects improvements on both fronts with a move back toward a balanced trade account accompanied by some recovery from the 36,000 jobs lost in March.

Derek Holt (416) 863-7707 [email protected]

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Volatile Canadian Jobs Report

Source: Statistics Canada, Bloomberg, Scotiabank Economics.

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Global Views

Economics

3 May 3, 2013

THE WEEK AHEAD

… continued from previous page

Key Asian data will be focused upon China. It will report export growth, CPI inflation, and aggregate company financing figures. Some moderation in financing growth is expected, but such has been the expectation for some time now. After a record year for aggregate company financing in 2012, China’s financing appetite has accelerated in 2013 with the months of January and March setting new records for company financing across all products including new yuan loans, FX loans, bonds, short-term paper and limited equity financing. If China is attempting to cool its credit cycle through tighter macroprudential rules applied to the housing finance sector, then it is not resulting in a broader cooling in the pace of credit growth. This makes us skeptical toward the need for a rate cut in China amid building market rumours. Export figures for China, Philippines, India, Malaysia and Taiwan will provide important updates on Asian trading dynamics. An expected policy hold by the Bank of Korea, Q1 GDP growth for Hong Kong and Indonesia, and New Zealand job growth round out the releases, while South Korean President Park Geun Hye visits President Obama in Washington to discuss the North Korean threat. The UK will be stealing the headlines in Europe in the week ahead with the BoE due to make an interest rate announcement on Thursday. Chatter regarding BoE QE prospects has died down ever since the UK narrowly missed a dreaded ‘triple dip’ recession when Q1 GDP came in above the zero mark (revisions for the latter are due out on Thursday). The UK also hosts another meeting of G7 finance ministers and central bank chiefs next Friday and Saturday. Aside from Sir Mervyn King’s final monetary policy report before handing the baton to outgoing BoC Governor Carney, European markets will get a slew of economic data with an emphasis on trade and industrial production figures that are expected to continue to reflect the sluggish pace of economic growth in the world’s largest common market. France, Germany, and Italy will release industrial production figures this week and the former two will also have trade figures out for the month of March. After U.S. export and import volumes plummeted on the month, it’s interesting to see that expectations for German trade as well as UK and French numbers are on the rosy side. The consensus in Europe is less optimistic when it comes to industrial production, with the Bloomberg forecasts implying a negative skew in Germany, France, and Italy (and soft factory orders in Germany as well). Rounding things out, European retail sales numbers will be released on Monday to start the week and the Norges bank will make a rate announcement on Wednesday (a bit less than 20% of the consensus is looking for a cut). US markets should be very quiet next week at least in terms of domestic developments. They will therefore spend most of the week reacting to risks from abroad. An exception is that Federal Reserve Chairman Ben Bernanke speaks at a Chicago Fed conference on bank structure and competition on Thursday. He will use prepared text and take audience Q&A, so anything is fair game. We expect the Chairman to continue to signal frustration regarding the pace and durability of the recovery in the wake of weak Q1 GDP growth of about 1.5% excluding inventory effects (2.5% on headline), and weak job growth. Even while the April nonfarm payrolls report surprised to the upside, the 165k and 138k gains in April and March, respectively, remain subpar. Further, the composition of April’s job gains was skewed toward lower than average quality jobs in elements of the services sector, and coincided with drops in both hours worked and wages that point to lower personal incomes. The May 1st FOMC statement put a twist into market expectations that were focused upon timing exit signals from the Fed by also noting that the Fed stands willing to increase the pace of asset purchases if necessary. Bernanke is likely to continue to stress this balanced approach to changes in the pace of asset purchases at the margin, but his emphasis will be skewed toward downside risks facing the economy. By way of economic indicators next week, thin gruel is being offered with only weekly jobless claims on the menu. Whether a recent five-year low will be sustained is what matters, and so does whether a low pace of firings and concomitant claims applications will coincide with a pick-up in hiring that so far has not really materialized. The US also auctions 3s, 10s and 30s next week.


Global Views

Economics

4 May 3, 2013

GLOBAL FORECAST UPDATE

For the third year in a row, a winter promise of strengthening global economic activity has given way to a spring of weakening momentum. Around the world, lacklustre growth is also visible in a number of key metrics that include softening commodity prices, low and moderating inflation trends, declining sovereign bond yields, as well as increasing pressure on corporate earnings.

Economic outperformers are generally few, with countries such as Mexico, Peru and Thailand advancing at solid rates due to their enhanced competitiveness and more buoyant domestic conditions. However, disappointing economic performances have become much more evident around the globe. Lingering, and in some countries, deepening recessions are prevalent throughout much of the euro zone. Underlying weakness in the U.K. persists, while Japan is posting marginal gains. Subdued economic activity in Canada, Singapore, and South Korea has become more visible. Gains in India and Brazil remain lacklustre and well below recent potential.

Even the twin locomotives of the global economy, the U.S. and China, underperformed in the first three months of this year, registering gains that were good but below expectations. The U.S. had mounted an impressive rebound from last year's slowdown — real GDP expanded by a 2.5% annualized rate in 13Q1 — building upon a consumer and business revival supported by the recovery in jobs, housing activity and industrial orders. However, increasing uncertainty surrounding a myriad of potentially growth-dampening international developments, a deterioration in net trade as imports bested exports, and rising taxes alongside increasing federal spending restraint combined to drag on the pace of overall economic activity.

Similarly, China's output growth expanded by a relatively solid 7.7% y/y in 13Q1, but it was unable to sustain the pick-up in activity recorded in the final three months of 2012. The contribution from net exports has been reduced against the backdrop of slower global demand and a changing competitive landscape triggered by rising wage and other domestic production costs. Other factors include the uncertainty surrounding the political and economic handover to the new Chinese leadership, as well as a reluctance to aggressively inject more stimulus. Even so, China's global growth-leading performance continues to benefit from the continuing buoyancy in consumer spending, housing activity and infrastructure expenditures.

The inability to generate and sustain a stronger pace of growth is the critical issue confronting the global economy. There are a number of reasons for the slump — fiscal restraint in the advanced economies, structural adjustments in many of the emerging market economies, ongoing consolidation and re-regulation in the financial sectors hardest hit by recession and capital losses, industrial restructuring to boost competitiveness, weather-related disruptions, or the caution induced by recurring geopolitical risks.

The flashpoint, however, is the euro zone, where a growing backlash to 'austerity-heavy' policies is gaining momentum. Even though there are some incremental signs of economic progress in the beleaguered region — the re-emergence of a primary budgetary surplus in Italy and considerable progress in Portugal and Greece, declining unit labour costs that are helping to boost competitiveness, and a revival in goods exports in Greece, Italy and Spain — persistent recessionary conditions and the steady rise in unemployment are ratcheting up the degree of social distress and unrest. The recent election losses incurred by the austerity-leaning technocrats in Italy, and the plummeting opinion poll results of elected officials in other countries, highlight the growing public backlash to the tough policy prescriptions favoured by the IMF, the EU, and Germany to resolve the sovereign debt crisis.

The conundrum is that there is no easy or definitive course of remediation. Austerity adjustments, heavier on tax hikes and lighter on spending cuts, have depressed growth because the euro zone nations have had to rely primarily on internal devaluation, not currency devaluation, to realign competitiveness and to eventually restore a current account surplus. On the other hand, there also is evidence to support the view that rapidly mounting deficits and rising debt burdens in jurisdictions pursuing austerity measures that are light on restraint eventually trigger financial market sell-offs — higher interest rates and a lower currency — which inevitably undermine growth.

Muddying the waters is the recent debate over whether sovereign debt burdens in excess of 90% of GDP go hand-in-hand with little or no growth — the argument perceived to have been the trigger for austerity-heavy

Aron Gampel (416) 866-6259 [email protected]

Hope Springs Eternal

Global Views

Economics

5 May 3, 2013

GLOBAL FORECAST UPDATE


policies that have become synonymous with economic stagnation, not revitalization. The bottom line is that chronic and large debt burdens ultimately remain a fundamental longer-term restraint on economic growth, and are unsustainable without supportive actions from central banks to underpin sovereign debt markets and currencies.

The pro-growth movement in Europe will likely continue to gain traction. Not only are unemployment rates rising into the stratosphere, but the U.S. outlook is improving, setting a benchmark for most of the moribund nations. The U.S. economy is generating moderate growth and a downward trend in the unemployment rate even as fiscal restraint, ‘austerity-light’ style, intensifies. Even so, the diverging performances on either side of the Atlantic are not directly comparable, since the U.S. Federal Reserve is aggressively implementing non-conventional monetary accommodation, the restructuring and recapitalizing of the U.S. banking system is much more advanced, and Americans voted in the November 2012 elections to maintain the status quo of gradual fiscal restraint.

The most recent sovereign debt/banking sector crisis in Cyprus highlighted the increasing burden that all stakeholders must share. Although there is no broad consensus in the euro zone to dilute the fiscal orthodoxy that has dominated agendas in recent years, the resurgence of uncertainty in the aftermath of Cyprus, reinforced by the twin problems of rising joblessness and falling wealth, suggests that the euro zone, as well as other regions and nations, may well begin to favour some fiscal leniency and more monetary accommodation.

Forecasts of strengthening global economic growth later this year and into 2014 — including that of Scotiabank Economics — largely depend upon the renewed traction in the globe’s key regions, namely the Americas, the big emerging market economies in Asia and the Pacific, and Europe. However, synchronized and stronger regional growth has been elusive, putting additional pressure on policymakers for additional stimulus, or at the least more pro-growth economic reforms if the challenge is to be met.

There are no easy answers to resolve the myriad of growth and debt-related strains around the world, just tough economic and political choices. The euro zone could and should provide additional monetary thrust — interest rate cuts and non-conventional accommodation — given the extent of the recessionary slack in the region. The restructuring of the banking sector — recapitalization and supervisory/regulatory reforms — must be sped up to help reinforce the recovery in private demand. The structural labour and productivity adjustments needed to improve competitiveness must be supported with tax changes and incentives that encourage small- and medium-sized firms to invest, innovate, and hire, reforms that require a significant overhaul of tax policy and entitlements. Suggestions that countries implementing supply-side adjustments to promote stronger long-term growth be given more flexibility to reduce their deficits should be adopted.

Around the world, the need for more co-ordinated policy initiatives is critical. For the most part, growth is too fragile to remove or reduce monetary accommodation at this time, though leadership in reducing deficits and debt burdens must persist. Officials must do their best to promote increased trade flows, and remain vigilant to barriers that could slow or restrict international sales. Currency adjustments reflecting underlying fundamentals must be differentiated from competitive devaluations that force significant deflationary conditions on other nations. Countries with large current account surpluses must be encouraged to promote stronger domestic demand, especially in the emerging market economies where the need for improved social welfare services and expanded infrastructure expenditures can support confidence and spending by businesses and individuals.

Aron Gampel (416) 866-6259 [email protected]

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The European Conundrum — Less Growth And Less Jobs

Latest Observations. Source: Bloomberg, Scotiabank Economics.

Global Views

Economics

6 May 3, 2013

CANADIAN MONETARY POLICY

The pressure will soon intensify upon the BoC’s new Governor to clarify his monetary policy bias.

Stephen Poloz was appointed to the role of Governor of the Bank of Canada this past week from his previous role as President and CEO of the Export Development Corporation. In doing so, the BoC reached out to grab back one of its own in light of Poloz’s successful decade-and-a-half stint at the central bank up to the 1990s. Alongside Senior Deputy Governor Tiff Macklem and a Governing Council that has been reinvigorated over the years, a potential dream team should keep the Bank of Canada well positioned to steer monetary policy going forward. The uncertainty surrounding Poloz’s monetary policy bias, however, may well explain some of why CAD closed off the week pretty much unchanged from where it was just prior to the 4pmET announcement on Thursday May 2nd. One might take this appointment as a dovish nod in that the government may be placing the emphasis upon Poloz’s strong background in the export sector and hence his understanding of the competitive challenges facing Canadian exporters including an elevated currency. That said, Poloz has not delivered an official speech since about a year ago on April 26th 2012 and that was about trade relationships between Canada and Japan while offering no insight into his thinking on monetary policy. I used to enjoy reading his weekly columns when he was Chief Economist at the EDC, but time and the vastly different context in which he was writing makes them less instructive toward understanding his take on things today. Poloz has generally avoided public commentary on matters of monetary policy, and by sticking to his knitting has pursued a successful career under the (Conservative) Federal Government. As such, his views as applied to the conduct of current monetary policy are not well known. Therefore, the strong caution is that Poloz’s initial speeches and MPR will be of heightened significance as his views on monetary policy are such an unknown quantity. Unfortunately, we will have to wait some time to discover Poloz’s bias as there are no scheduled speeches for BoC officials other than ones that will be delivered by Carney before his departure. Further, Governor Carney will still steer the BoC’s next policy statement on May 29th as Poloz will assume the role only in early June when Carney leaves. Poloz’s first formal test will come on July 17th when the BoC releases the next interest rate statement and Monetary Policy Report. The new Governor faces an economy at a transition point in important respects. This makes comparisons to any past policy bias he may have held and the constraints offered by the perspectives of his predecessor of limited use in determining what Governor Poloz will be communicating going forward. First, the BoC under outgoing Governor Carney has gradually softened its volatile rate hike bias in no small part because its financial stability concerns stemming from overly rapid debt growth have been addressed through a rapid decline in household debt growth to the weakest since the moribund decade of the 1990s (chart 1). I’ve argued for some time that after the current federal government eased housing finance rules far too much going into the crisis, housing finance policy has since tightened too aggressively at the resulting all-time structural peaks for virtually every measure of activity in the household sector that may well have cooled of its own volition. By over-tightening through macroprudential rules and the impact of the BoC’s hiking bias on CAD, the downside risks facing the household sector have been magnified as evidenced into 2013 by an alarming pace of retreat in sales of new single and multiple housing units and an ongoing retreat in resale markets. Thus, Poloz is inheriting the BoC at an inflection point in the debate. To date, the BoC has argued that the slowing housing market was desired and expected, and yet its forecasts have consistently erred on the overly optimistic side of the picture since the housing correction began about a year ago. Poloz will have the opportunity to turn the page by potentially acknowledging that something perhaps more insidious is unfolding

Three Challenges Facing Bank Of Canada Governor-Designate Poloz

Dov Zigler (416) 862-3080 [email protected]


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Household Credit Growth

Source: Bank of Canada, Scotiabank Economics.

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Chart 1

Global Views

Economics

7 May 3, 2013

in the household sector, or to present well crafted arguments for staying the course advocated to date by the Federal Government by continuing the BoC’s persistent forecast optimism. Second, and further to the prior point, Governor-designate Poloz will have to address the credibility of the BoC’s forward rate guidance in the eyes of the market. Fixed income markets have simply not believed the hiking bias as manifest through 5 year GoC yields sitting at about 1.25%. Inflation running at half the BoC’s 2% target and weakness in the household sector are among the reasons for this. Markets have looked through the BoC’s loose hiking guidance for much of the past year with the term structure of interest rates never really pricing in more than 25-50bps worth of tightening years into the future. Currency markets, however, have probably paid greater heed to the BoC’s warnings, thus explaining part of why the currency remains so elevated. Third, Poloz will be constrained by the Federal Reserve as much as Carney’s flexibility was limited in the extent to which he could deliver tighter monetary policy through front-running policy tightening stateside. As chart 3 demonstrates, there are limits to central bank independence in the Canadian context that are posed by the trade and capital market ties to the United States and they are presented by the spread drivers behind CAD. Learning how to operate within those confines while accommodating a sharp rebalancing in the sources of growth in the Canadian economy away from households and toward exports and capital investment will distinguish the Poloz era. Poloz is reportedly an inveterate optimist, and that may ultimately lend a clue to the direction in which he will guide the central bank going forward.

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The BoC's Fed Constraint

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CANADIAN MONETARY POLICY

Chart 3

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BoC on Hold Forever......or at Least Markets Think so

OIS, Fwd Rate One Month fromBoC Mtg.

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Source: Scotiabank Economics, Bloomberg

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Chart 2

Global Views

Economics

8 May 3, 2013

EUROPE

Central bank eases as expected amid record unemployment, low inflation and elusive economic recovery.

On Thursday, May 2nd, the European Central Bank (ECB) reduced the benchmark refinancing rate by 25 basis points to a record-low 0.50%, the first interest rate cut since last July. The marginal lending rate was also reduced, by 50 basis points to 1.00%, while the deposit rate was kept at 0%. The policy rate cut by itself may do little to stimulate economic activity, given that the transmission of monetary policy is still inhibited by remaining fragmentation in financial markets. Today’s move could be complemented in the coming months by the introduction of an asset-backed securities (ABS) program targeted at improving credit conditions for small and medium-sized firms (SMEs). However, there were few details provided on such a program, and the ECB is unlikely to introduce a Fed-style asset purchase program. Although the decision was widely anticipated in financial markets, there was some reaction following the announcement. The euro climbed by a little over 1% versus the US dollar in the week leading up to the meeting to around 1.318, and then edged higher toward 1.322 on confirmation of the rate cut. However, after President Mario Draghi acknowledged that the Governing Council maintains an “open mind” with respect to a negative deposit rate, the euro began to fall, reaching the 1.3065-mark by Thursday’s close. The currency started Friday with a positive tone. In the equities sphere, most European indices were down going into the meeting, with investors paring back risk ahead of the decision. The reaction afterwards was similar to that of the euro, with stocks jumping initially and then falling back. However, there was some subsequent recovery by the end of the day as global markets rallied. The German DAX ended the day with a 0.6% gain. Bond markets reacted favourably; sovereign bond yields declined across the euro area, continuing the recent trend. Aside from the rate cut and the decision to initiate consultations with other European institutions on fostering a market for ABS collateralized by loans to SMEs, the ECB also narrowed the rate corridor by 50 basis points and pledged to continue to conduct main refinancing operations for as long as necessary (and at least until mid-2014). These measures are intended to address remaining concerns in the banking sector of a lack of funding with specific forward guidance on enhanced liquidity provision. The hope is that with such “liquidity insurance”, credit will begin to flow to smaller firms, especially in the distressed countries. The overall statement was regarded as a shift in the dovish direction for the ECB. The bank remains concerned about the continued failure of improved financial market conditions (seen in the second half of 2012 and into 2013) to translate into a meaningful recovery on the real side of the economy. Of particular concern is the fact that economic weakness and financial market fragmentation have spread to (core) countries where they were not previously apparent. The region-wide unemployment rate reached a record-high 12.1% in March. Although the ECB judges that the risks to the inflation outlook are balanced over the medium-term (taking into account today’s rate cut), given Mr. Draghi’s flexible stance on negative deposit rates, we cannot rule out the possibility of further policy accommodation. However, we expect that if anything, the bank will opt for non-standard measures targeted at credit stimulation, rather than another rate cut in the context of an impaired monetary transmission mechanism (the rate cut was not entirely unanimous and the bank maintains that policy is already vastly accommodative). Of note, today’s statement included stepped-up rhetoric on the importance of continuing progress on structural and institutional reforms at the national and regional levels. Calling on governments to “intensify” the implementation of structural reforms, Mr. Draghi also stated that both the Single Supervisory Mechanism (SSM) and Single Resolution Mechanism (SRM) are critical in the re-integration of the European banking system. The ECB has emphasized many times in the past that within its mandate and operational environment, monetary policy can only do so much. The full restoration of the banking system is largely outside of the scope of the ECB, and is highly dependent on stronger financial and fiscal integration.

Sarah Howcroft (416) 862-3174 [email protected]

ECB Cuts Rates, Potential For Further Action

Global Views

Economics

9 May 3, 2013

FISCAL

In aggregate, the reported provincial deficit is shrinking. The 2013 provincial Budgets confirm a diminishing aggregate deficit. Reported budget balances, revised for fiscal 2012-13 (FY13) indicate a combined deficit of $14.3 billion, representing a $3½ billion improvement over FY12 and, importantly, less than 1% of GDP. Bottom line forecasts for FY14 indicate a further narrowing of $1.2 billion in the published aggregate deficit (bottom table), as British Columbia, Quebec and Nova Scotia target black ink, alongside Saskatchewan’s forecast of another modest surplus on a fully consolidated basis. Yet only Ontario has witnessed a substantial improvement in its deficit during FY13, in part due to a major one-time expense reduction, as well as favourable results from prior-year tax assessments, also a one-time event. Most other Provinces have grappled with widening budget gaps over the past year, with the recent advantage of surging resource receipts fading as commodity prices softened for Canadian producers (side chart). Non-renewable resource receipts for the three most Western Provinces plus Nova Scotia and Newfoundland and Labrador are now expected to fall by $6.0 billion in FY13 to $14.2 billion. If pre-transfer budget balances are tallied for FY13, most notably Alberta’s $3.9 billion deficit prior to its accounting changes and before an offsetting transfer from its Sustainability Fund, the aggregate provincial deficit is slightly wider than $18 billion for FY13, narrowing to roughly $15 billion in FY14. As the Provinces marked down their respective revenue forecasts, some have pushed out their deficit elimination timelines (side table), renewing their efforts to sustainably downsize their operations.

Mary Webb (416) 866-4202 [email protected]

Provincial Progress On Fiscal Repair

FY14b2010 2011 2011 2012 2012 2013

Bud. Rev. Final Ch. Bud. Rev. Final Ch. Bud. Est. Final Ch. Bud. Est. Rev. Ch. Bud. Est. FY10 FY11 FY12 FY13r FY14bNL -295 -33 262 485 594 109 59 883 824 -258 -431 -173 -564 -0.1 2.1 2.6 -1.3 -1.6PE -84 -74 10 -54 -63 -9 -42 -78 -36 -70 -69 1 -59 -1.5 -1.2 -1.5 -1.3 -1.0NS -488 -269 219 447 585 138 -390 -248 141 -211 -356 -145 16 -0.8 1.6 -0.7 -0.9 0.0NB -743 -745 -2 -740 -657 83 -449 -261 188 -183 -411 -228 -479 -2.6 -2.1 -0.8 -0.6 -1.4

QC -4,257 -3,174 1,083 -4,200 -3,150 1,050 -3,800 -2,628 1,172 -1,500 -1,500 0 0 -1.0 -1.0 -0.8 -0.4 0.0ON -21,330 -19,262 2,068 -16,686 -14,011 2,675 -16,316 -12,969 3,347 -14,820 -9,782 5,038 -11,743 -3.2 -2.2 -2.0 -1.5 -1.7

MB -555 -183 372 -467 -179 288 -438 -999 -561 -460 -583 -123 -518 -0.4 -0.3 -1.8 -1.0 -0.9SK 425 425 -1 20 48 28 383 352 -30 47 54 7 32 0.7 0.1 0.5 +0 0.04AB 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0.0BC -2,775 -1,827 948 -1,265 -249 1,016 -925 -1,840 -915 -968 -1,228 -260 197 -0.9 -0.1 -0.8 -0.5 0.1Prov. Total -30,102 -25,142 4,960 -22,460 -17,083 5,377 -21,918 -17,788 4,129 -18,423 -14,306 4,117 -13,117 -1.6 -1.0 -1.0 -0.8 -0.7

Federal -53,800 -55,598 -1,798 -36,200 -33,372 2,828 -32,300 -26,220 6,080 -21,100 -25,000 -3,900 -18,000 -3.6 -2.0 -1.5 -1.4 -1.0____________

The Provinces' Budget Balances*$ millions unless otherwise noted

FY10 FY11 FY12 FY13r % of GDP

* As reported by the Provinces. Ontario's FY13 Budget estimate includes April 2012 adjustments. Source: Budget documents; Statistics Canada; nominal GDP and federal deficit forecasts: Scotiabank Economics.

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Source: Budget documents.

The Provinces' UpdatedBalanced Budget Targets

Global Views

Economics

10 May 3, 2013

COMMODITIES

However, physical demand picked up strongly at lower prices, providing considerable underlying support.

Gold prices (London PM Fix) eased from US$1,628 per ounce in February to US$1,593 in March and plunged as low as US$1,321 in intra-day trading on April 16, before partially recovering to US$1,469 (as of today). However, physical demand for coins and bullion then picked up markedly — especially in Hong Kong, China, Singapore and India — providing considerable support. The U.S. Mint sold the most gold coins in April since late 2009. The sharp selloff in gold prices on Friday, April 12 and Monday, April 15 (the steepest two-day decline in thirty years) was triggered by news that Cyprus might sell about 10 tonnes of gold to raise 400 million euros towards its bailout package. (The latest information seems to indicate that Cyprus will not go ahead with the sale.) While 10 tonnes is small compared with world central bank holdings of 31,694.8 tonnes (please see table below), financial markets were concerned that this might set a precedent for sales by other distressed Euro-zone countries. Italy holds 71.3% of its foreign exchange reserves as gold (under the control of central banks rather than national finance departments). While we doubt that euro-zone countries will sell gold, the Central Bank Gold Agreement between European countries or CBGA (effective until September 2014), would limit gold sales — in any case — to 400 tonnes annually (the total for all signatories). A suggestion by several investment banks that investors ‘short’ gold also contributed to the correction from April 12-16. Gold prices were already languishing in early 2013, as investors shifted from gold to U.S. equities, anticipating that the U.S. economy would start to pick up in 2013:H2 and that the Fed would not need to apply even more ‘quantitative easing’ to kick start the U.S. economy. (The S&P500 has soared to a new record today.) The January FOMC minutes revealed discussion by some participants over the merits of the Fed’s ‘asset purchase program’ (the monthly purchase of US$85 bn of mortgage-backed securities and longer-dated Treasury securities). While the Fed is unlikely to begin withdrawing this program for some time, the mere discussion of its withdrawal was enough to unnerve some gold investors. In addition, the failure of Basel III to include gold in the revamped ‘Liquidity Coverage Ratio’ for banks also hurt gold, as did the concern by some mutual funds that world economic risks were shifting from inflation to deflation (we are not of this view). Gold prices are likely to trade in a US$1,350-1,500 range over the next 18 months.

Patricia Mohr (416) 866-4210 [email protected]

Gold Price Selloff In Mid-April Was Triggered By Potential Cyprus Gold Sale

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Scotiabank Commodity Price Index

Shaded areas represent U.S. recession periods.Source: Scotiabank Economics.

index: Jan. 2007=100

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* April 2013 estimate

Dec/2001 Bottom

July 2008 Record High

Global Recession

-46%

+233%

Apr/2011 Euro Zone Slowdown

-15.7%

Rank in World Tonnes% of Foreign

Exchange Reserves

1) United States 8,133.5 75.12) Germany 3,391.3 72.13) IMF 2,814.0 NM4) Italy 2,451.8 71.35) France 2,435.4 69.56) China 1,054.1 1.611) India 557.7 9.614) Portugal 382.5 89.620) Spain 281.6 28.2 WORLD 31,694.8 100%

Central Bank Gold Holdings

Memo Items: 33) Greece 111.9t, 82%. 61) Cyprus 13.9t, 61.9%. 78) Ireland 6.0t, 18.3%. 29) Mexico 124.3t, 3.7%. Canada 3.2t, 0.2%. Source: IMF & World Gold Council, April 2013.

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Sharp Selloff In Gold Prices

London PM Fix on May 3, 2013: US$1,469.25.Source: Scotiabank Economics.

US$ per ounce

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Gold PricesLondon PM Fix

New Record:Sept. 9, 2011 spot US$1,921.15

Jan 21, 1980 peak US$850

March 17, 2008 US$1,032.70, following

collapse of Bear Stearns

+

Emerging Markets Strategy Global Views

11 May 3, 2013

This article was originally published on Thursday, May 2. After this article was published, Petroperu announced that upon completing a technical, economic, and financial evaluation of Repsol’s assets in Peru, it had decided not to pursue the purchase. The direction of Peruvian politics is once again dominating the local business news, and affecting some financial markets. Over the last week and a half, Soberanos widened 20-30bp and the currency depreciated about 2%, whereas in Mexico, Mbonos were unchanged, and MXN strengthened slightly. Just as at the time of President Humala’s election two years ago, local investors seem more concerned than foreigners, as evidenced by the fact that CDS was largely unchanged and external bonds moved in line with Treasuries. The events leading up to the current situation have developed quickly. Last Tuesday, President Humala had an unscheduled meeting with the president of Repsol. On Wednesday, President Humala spoke at the Latin American Economic forum about the need for a balanced approach to the economy, where the government would play a smaller role than it did in the 1970s, but a greater role than it plays today. On Saturday, the government approved a law, originally enacted by Congress in July 2006 under President Toledo, permitting Petroperu to participate in all upstream and downstream activities; that law, critics say, will facilitate the government’s purchase of Repsol. All of this happened just a week after President Humala travelled to Caracas to attend President Maduro’s swearing-in ceremony. The business community interpreted the news in the worst possible light. Not only was it a waste of government resources that should be spent on education or infrastructure, but also many critics, including former presidential candidates defeated by Humala, drew strong comparisons with the economic policies of former President Chavez. While the former criticism seems quite reasonable to us, the latter seems to go too far. It is true that Chavez’s control over PDVSA gave him large financial resources which he used to further his agenda and build political support; however, it is PDVSA’s upstream activities in oil extraction that Chavez relied upon. In contrast, the reported purchase covers only downstream activities—Repsol’s refinery (La Pampilla) and 118 retail gasoline stations. Oil refining is a globally competitive industry with low margins and high capital intensity. According to recent financial statements, Repsol’s refinery in Peru had only $29mn in net income for 2012 but news reports suggest it requires $900mn in new capex for modernization. While it is true that this purchase would give Petroperu a monopoly in oil refining within Peru, we don’t think that monopoly has much value unless they also plan to ban imports of refined products and raise gasoline prices to consumers. Thus, it is hard to see how this refinery could generate significant financial resources for the State, although it could generate high-paying jobs and increase the government’s control in the economy. We doubt it is worth it from the government’s perspective. Consider the headache that losses at Chile’s state refinery, ENAP, cause for the government. We suspect the Chilean government would be happy to privatize that company if it could. We suspect that the gasoline stations in Peru are profitable, because in many countries this industry is controlled by just a few players with some ability to set market prices. Yet, how would the government use its market power here? Presumably, it has no intention to exercise monopoly power and raise gasoline prices, like a private sector entity might. We imagine they could lower prices slightly, whether to win points during the next presidential election or to lower reported inflation, but the benefits here seem to be minor. The comparison with ENAP is again relevant, as one of the methods under discussion for making ENAP profitable and offsetting the losses at the refinery, is to allow the state-run firm to enter into the Chilean retail gasoline market. We mention ENAP also as evidence that government involvement in the downstream oil business is not so unusual in Latin America and that investors should not overreact. In Chile, ENAP’s role is normally justified by the need to have one strong company to coordinate the country’s energy needs, even though ENAP is

What Does Repsol Mean For Peru?

Joe Kogan (212) 225-6541 [email protected]

Emerging Markets Strategy Global Views

12 May 3, 2013

involved mostly in the downstream portion of the energy business and produces little crude oil of its own. Nevertheless, there is a trend among the countries that are investor favorites to decrease rather than increase state participation. Consider, for example, that Mexico hopes to open up its oil sector while Brazil has been moving toward reversing some of the earlier privatization of Petrobras. In Belize, nationalization of foreign owned telecom and electric companies, which the government argues were one-off events, eventually led to a default on foreign debt. Thus, while there is certainly the possibility of a shift in priorities, there is not yet enough evidence. In fact, we are unsure why the government was interested in this business at all. The best news from all of this could be the strong negative reaction in Peru, which has put the government on the defensive. They might even be backtracking. President Humala’s wife, Nadine Heredía, speaking last Thursday, emphasized the importance of the private sector to economic growth and promised a careful, technical approach to the Repsol purchase. This Tuesday, she backtracked further, saying the government would only proceed with the purchase if the numbers made sense. Since all of the local information on the refinery so far suggests that the numbers do not make sense, perhaps she is preparing an easy way out from the issue. Jorge Merino, the minister of energy and mines, in recent interviews, also spoke of the need to evaluate the investment and said that any purchase should be approved by Congress. He raised the possibility that PetroPeru would invest in conjunction with private parties, and denied any shift in government policy away from the private sector. Thus, one possible outcome, potentially quite positive for the local market, is that the government backs away from the purchase all together.


Joe Kogan (212) 225-6541 [email protected]

Foreign Exchange Strategy Global Views

13 May 3, 2013

Five years since the onset of the financial crisis, global growth remains fragile, inflation fears have not materialized and new policy tools continue to be tested. The sense of cautious optimism that developed in early 2013 is now giving way to a growing sense of unease. Economic data have deteriorated in the US, China and Europe, and the economic outlook is complicated by strict fiscal policy and challenged political systems in many of the advanced economies. In response, monetary conditions remain loose but are unable to offset the full fiscal burden. Increasingly, the foreign exchange debate has shifted from the impact of G4 monetary policy (the Bank of Japan, the Bank of England, the Federal Reserve and the European Central Bank) on other economies and currencies to the importance of stimulating growth in the major advanced economies through policy initiatives. Even the BoJ’s aggressive monetary policy measures seemed to have won support from major institutions and policymakers (G20, IMF, etc.) with very little political push-back. The mid-April collapse in gold prices suggests that valuations are incorporating central bank policy that is successfully supporting moderate growth but lacks enough momentum to risk a spike in inflation or central bank independence. From an FX perspective, April was marked by depreciation in both the US dollar (USD) and Japanese yen (JPY) with most other currencies in trading ranges or appreciating. The main catalysts were a deterioration in US data — which pushed out the expected timing of a tapering in the Fed’s bond buying program — and the historic and aggressive monetary action by the BoJ on April 4th. These FX trends are likely to remain in place in the near-term. However, there is likely to be a shift before year-end, ultimately driving a strengthening in the USD against the other majors (EUR, GBP and JPY) on the one hand, while it holds its own or weakens further against a host of other currencies on the other hand. In North America, the US growth outlook has come under pressure; however, the economy is expected to achieve real GDP growth of 2.0% in 2013 and 2.7% in 2014, thereby outperforming most other advanced economies. In addition, the Fed is expected to maintain the current pace of bond buying in the near-term, but as we move into 2014 these should slow, which is likely to give the USD an advantage. For the CAD, for every appreciating force there is an offsetting depreciatory pressure, leaving the CAD unable to move substantially or sustainably away from parity, a pattern we expect to continue into year-end. The Mexican peso faces similar pressures, but is expected to break below 12 this quarter before retracing back towards 12.30. The Peruvian sol is anticipated to be the outperformer in the Latin America region, with the Brazilian real trapped in a relatively narrow trading band close to 2.0. The euro zone backdrop is complicated by ongoing fragmentation in credit markets, which hinders the transmission of monetary policy, thereby limiting the stimulative impact of low interest rates. In addition, strict austerity measures continue to hamper the outlook for growth while political uncertainty in several European countries is also putting strains on the euro zone. In the near-term, the EUR remains supported by relative monetary policy between the euro zone and the US (namely that the ECB has not engaged in QE); however, as the Fed shifts to a less accommodative stance the EUR is likely to weaken under the weight of the European backdrop. The outlook for the UK is not any better. The most recent rating agency downgrade (Fitch to AA+/stable) highlights the vulnerability of sovereigns with high and rising debt burdens; however, sterling failed to react

Camilla Sutton (416) 866-5470 [email protected]

Central Bank Policy Proves Important Driver Of FX

Source: Bloomberg & Scotiabank FX Strategy

EURUSD EXPECTED TO CLOSE 2013 at 1.25

Foreign Exchange Strategy Global Views

14 May 3, 2013

negatively as Q1 GDP growth came in at +0.3%q/q and 0.6%y/y, vaguely stronger than expected and easing fears of a triple dip recession. Relative monetary policy temporarily favours the GBP, but as Mark Carney prepares to lead the BoE, we expect a more aggressive BoE to emerge, ultimately weighing on the GBP into year-end. EURCHF has moved a leg higher, reflecting an easing in risk aversion; we expect the Swiss National Bank to continue to administer a credible 1.20 floor. The outlook for the SEK is relatively stable against the USD, but we expect outperformance from the NOK. The Asia/Pacific region faces significant currency pressure. The recent BoJ policy announcement, which includes the expected doubling of the monetary base to ¥270trn by the end of 2014 and annual JGB purchases of ¥50trn, is likely to drive significant JPY weakness. We have revised our USDJPY forecast and now look for it to close the year at 105. At the same time, the Chinese Renminbi (CNY) has strengthened to a new record, while Q1 real GDP growth disappointed at just 7.7% y/y. The combination of a strong CNY and weak JPY puts significant pressure on the Asian region and in particular China. We expect most Asian currencies to hold their own against the USD, with some modest strength in the PHP, MYR and KRW. The outlook for the AUD has temporarily softened, but our base case is that the Reserve Bank of Australia fails to cut interest rates, and that its policies prove currency supportive. Accordingly, we hold a year-end 1.04 AUD target. The authorities’ tolerance towards currency strength is likely to prove the most important driver of foreign exchange patterns in the Asia/Pacific region.


Camilla Sutton (416) 866-5470 [email protected]

USDJPY EXPECTED TO CLOSE 2013 at 105

Source: Bloomberg & Scotiabank FX Strategy

Portfolio Strategy Global Views

15 May 3, 2013

S&P 500 Hits Record High Amid Noisy and Confusing April Global macro data has been disappointing since the start of the second quarter and commodity weakness was

the main takeaway in April. Natural resources prices did recover in the latter half of the month, but still posted losses in April (CRB Index -2.8%). Despite hitting a fresh record on April 30, the S&P 500 (+1.8%) trailed the MSCI AC World index (+2.6%) last month. Strength mostly resided in other Developed Markets (MSCI DM +2.9%), especially in Japan (Topix +8.8%), Australia (ASX 200 +4.1%), Germany (DAX +2.8%), and the U.K. (FTSE +2.6%). All returns in USD, price only using MSCI indices unless specified. See exhibit 1.

Emerging Markets (MSCI EM +0.4%) struggled to keep up on disappointing Chinese growth data, lower commodities prices, and a weakening yen. Still, India (+4.9%) and China (+1.1%) managed to beat their EM peers. The performance divergence between EM continues as Chinese tailwinds fail to lift commodity-sensitive benchmarks and the lower yen hurts Southeast Asian sentiment. In Latin America (-1.1%), Mexico (-2.3%) underperformed Brazil (+0.8%). Weaker-than-expected Q1 earnings in Mexico could challenge premium valuations on the Bolsa. In Canada, the TSX (-2.3% in CAD, -1.4% in USD) underperformed badly as gold and base metals returns tumbled.

YTD, the MSCI AC World index is up 8.7%, with narrow leadership coming from Japan (+20%), S&P 500 (+12%), and Australia (+12%). Europe (U.K. +4.3%, Germany +1.7%), LatAm (Mexico +3.5%, Chile +0.5%, Brazil -0.5%), China (-3.5%), and Canada (TSX -1.1%/+0.2% in CAD) are lagging. Emerging Markets (-1.5%) are underperforming as a group, and both Colombia (-12%), and Peru (-15%) have suffered due to their large commodity exposure.

The S&P 500 is outperforming LT bonds (+0.7% YTD) by 1130 bp so far in 2013, while the TSX is now trailing LT bonds (+0.2%) by 4 bp. The S&P 500 is outpacing the TSX by 1308 bp and Mexico by 856 bp since the start of the year.

Asset Mix And Model Portfolios — May Update

Vincent Delisle (514) 287-3628 [email protected]

Exhibit 1 - Global Equity Returns (USD) - April & YTD Performance (price only; April 30, 2013)

Source: Scotiabank GBM, Bloomberg.


16 May 3, 2013

Asset Mix: Defensive Bias in Q2 Overweight (OW); Market Weight (MW); Underweight (UW) Reiterate cautious stance for Q2. We shifted

to a more defensive tactical stance in our March/April updates and are reiterating this lower beta strategy. We are NEUTRAL on equities (S&P500 > TSX; DM > EM) and OW cash. Seasonality, inventory de-stocking (ISM rolling-over), and extended risk-on levels have been supporting this view since March. Our recommended asset mix is unchanged at 60% equities; 34% bonds; 6% cash, but we are widening our U.S./EAFE spread with EM-LatAm/Asia. See exhibit 2. Still, we stand ready to “buy the dip” as long as improvements in U.S. employment (lower jobless claims) and housing continue.

Weaker ISM to challenge S&P500. The April manufacturing ISM came in at 50.7 and momentum has been moderating since February. The employment component declined to 50.2 (53.6 average in Q1), which is bad for near-term payroll visibility. New orders improved to 52.3 (from 51.4 in March) and the New Orders-to-Inventory spreads (N/I) increased to +5.8 (from +1.9 in March). ISM visibility should weigh on investor sentiment through early Q3 before the typical seasonal recovery in latter part of the year. In our opinion, recent S&P500 resiliency is not sustainable with weaker ISM (see Exhibit 3).

Tactical Quant Screens. Both the DM over EM signal and the S&P500 over bond signal remain intact. The big shift in our quant screens pertains to Canadian asset mix (we are now getting a bond > TSX signal) and U.S. equity strategy (defensive over cyclical bias). (See Exhibits 4.) We update these quant screens monthly and use them as guides to our strategy decision process.

TSX Strategy & model portfolio. Our low beta/Mining underweight stance added value in April and the Strategic Edge Portfolio (SEP) outperformed the TSX by +166 bp (total return. YTD, the SEP is edging the TSX by 323 bp. In addition to our underweight stance in Mining, the focus S&P500-sensitive areas (Discretionary-Media/Autos, Telecom, Staples, and Technology) also helped. Within Materials, we are sticking with a focus on Chemicals/Fertilizers and Lumber. The TSX



Exhibit 2 - Scotiabank GBM Asset Mix - May 2013 Update

Source: Scotiabank GBM estimates.

Exhibit 3 - ISM Manufacturing vs. S&P 500 QOQ (2000-2012)

Source: Scotiabank GBM, Bloomberg.

Exhibit 4 - Developed vs. Emerging Markets Barometer

Source: Scotiabank GBM estimates, Bloomberg.


17 May 3, 2013

has been plagued by global risks (lower commodities) and domestic fears (housing weighing on Bank valuations), but we believe global risks will remain the focus until later in Q3 when the extent of the housing correction can be assessed. For our May update, we are lowering cash to 5% (from 7%); adding POT, OTC, and NBD. Weighting in AGU (out), MEG, CNQ, BTE, JPM (out) declines. Marginal moves down in MG, TRI; CM, RY, WN, GIBa weightings move modestly higher. Please refer to our Daily Edge Strategy report for model portfolio details.

U.S. equity strategy. We shifted to an outright defensive over cyclical stance in March (2 months before the quant signal) and we stand by this call. Our U.S. sector portfolio outperformed the S&P 500 by 14 bp in April (+82 bp YoY). S&P 500 earnings leadership (change in forward estimates) also supports a cautious view on global cyclicals such as Industrials, Materials, and Energy. U.S. Technology earnings revisions have fared the worst since Q3/12 and continue to lag the S&P 500.



Global Views

Economics

18 May 3, 2013

KEY DATA PREVIEW

Key Data Preview

CANADA Canadian jobs numbers were very weak in March at -55k; in terms of additions of payroll employees (as opposed to the ranks of the self-employed, which grew by 39k) the figures were an absolute disaster at -93k. To what extent can we expect a bounce-back from the deluge of firing in March? The manufacturing sector shed the most jobs at -24k, and those seem unlikely to be added back (manufacturing jobs have fallen by 48.6k in the past 12 months — it does not seem like a sector that is adding jobs in Canada at the moment). Construction also shed 9k jobs, and in light of the secular headwinds in that space for reasons described below — and after considering the fact that construction has added 23k jobs in the past 12 months — continued weakness in that field seems feasible. The 24k drop in public administration workers also doesn’t seem ripe for a rapid correction. The one hope is that the 25k drop in accommodation and food services employees speaks to the unseasonably cold March in central and eastern Canada, so perhaps there might be some give-back there. In short, the job losses were in areas that we think speak to fundamental soft spots, and so we’re expecting only a muted 10k increase with all of the usual caveats that ought to apply to any Canadian jobs forecast (e.g. there is a paucity of leading indicators, no initial jobless claims figures, etc.). Housing starts pose substantial risk in our view and we’re forecasting a very soft 165k annualized print for the key April building month. Why does April matter so much? In not seasonally adjusted terms, housing starts typically bounce very significantly in April as the weather warms up allowing for more projects to break ground. For that reason, a soft seasonally adjusted housing print means a lot more in April than it does in January (January is normally the housing construction nadir in NSA terms — see chart). We think that housing starts will come in very soft this April for a number of reasons. The most important factor in our view is a marked slowing of new home sales in Toronto during March (see chart). The consulting group Realnet estimated that Toronto new home sales came in at their second weakest level in more than a decade during Q1 2013, adding to soft volumes of existing home sales that have been in the middle teens since late 2012. The implication of the soft home sales market as we see it is that homebuilders in all likelihood will accordingly pare back their construction sharply this summer. The building permit figures for February (the most recent ones available) reflected this type of weakness (issuance fell 12% to authorization of 168k buildings).

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Jan.-March GTA New Home Sales - Total, 000's

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Toronto New Home Sales

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Canada Housing Starts: Seasonal PatternApril's an Important Month...

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Net Change inEmployment

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Source: Statistics Canada, Scotiabank Economics

Canada Net Change in EmploymentMore Weakness to Come?

Global Views

Economics

19 May 3, 2013

KEY DATA PREVIEW


EUROPE Next week’s Bank of England (BoE) meeting comes in tandem with the preparation of the quarterly Inflation Report. As such, if there is going to be a change in the Monetary Policy Committee’s (MPC) bias, this is one of the more likely times for it to happen. While economic conditions in the UK economy are not strong, nor are they as weak as they could have been. Real GDP posted a reasonable 0.3% q/q expansion during Q1 — far better than feared. Inflation, although elevated (at 2.8% y/y in March), has ended its run of upward surprises. In fact, there have been some signs of cooling off and the recent drop in the price of oil points to a lower peak in the months ahead. The more moderate inflation profile suggests that the obstruction to more quantitative easing (QE) has receded. Having said that, lower inflation, particularly energy inflation, means that the squeeze on disposable income is less intense, which is helpful for growth. Although it is not a substitute, the recently announced extension of the Funding for Lending Scheme (FLS) fractionally reduces the urgency to expand QE. The FLS is a more targeted measure, intended to address a specific issue (i.e. SME lending and business investment). The bottom line is that the urgency for the MPC to deliver further policy easing has decreased, and for now we expect the message to be that the MPC is sitting on its hands. If policy is going to be eased further, which it still could be, we doubt that it will come in the immediate month or two ahead (i.e. before the new Governor is in office). LATIN AMERICA Price dynamics remain uneven in the major economies of Latin America, causing a monetary policy divergence across the region. April’s inflation data for Mexico, Chile, Colombia and Brazil will be released next week. While in Mexico and Brazil headline inflation has surpassed the respective central bank’s tolerance range (2.5-6.5% in Brazil and 2-4% in Mexico), in Colombia and Chile, consumer prices stabilized at the lower-end of the official range (2-4% for both countries). The Brazilian authorities recently hiked the reference rate by 25 basis points (bps) to 7.5%, signaling that monetary policy adjustments will be undertaken with caution. In Mexico, the central bank cut the reference rate by 50 bps in early March, responding to lower inflation risks and an easier adjustment to the expected high liquidity in international markets. Additionally, they stated that higher inflation in the coming months is expected to be temporary, returning to the 3%-mark through the year. The central bank of Colombia reduced the reference rate by 200 bps over nine months, responding to slow economic activity and decelerated consumer prices. Nonetheless, inflation has stabilized closer to the 2%-mark. The monetary policy stance in Chile remains neutral with inflation slightly below the official range, while the country enjoys a solid economic performance. ASIA Indonesian Q1 2013 real GDP data will be released on May 6th. We estimate that the economy maintained its fourth-quarter momentum, and expanded by 6.1% y/y. Output gains will likely accelerate in the coming quarters, as a gradual pickup in regional and global demand conditions will be reflected in Indonesia’s export sector performance. Low real interest rates, rising real wages, and improving consumer confidence will likely remain supportive of household consumption in Indonesia, with solid private investment also underpinning domestic demand strength. We expect the nation’s real GDP growth to reach 6⅓% overall this year.

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Tuuli McCully (416) 863-2859 [email protected]

Alan Clarke (44 207) 826-5986 [email protected]

Daniela Blancas (416) 862-3908 [email protected]

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Economics

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Global Views

May 3, 2013

KEY INDICATORS

Key Indicators for the week of May 6 - 10

Forecasts at time of publication. Source: Bloomberg, Scotiabank Economics.

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North America

Europe

Country Date Time Indicator Period BNS Consensus LatestCA 05/06 08:30 Building Permits (m/m) Mar -- 1.0 1.7

US 05/07 15:00 Consumer Credit (US$ bn m/m) Mar -- 16.0 18.1

US 05/08 07:00 MBA Mortgage Applications (w/w) MAY 3 -- -- 1.8CA 05/08 08:15 Housing Starts (000s a.r.) Apr 165.0 175.0 180.9

CA 05/09 08:30 New Housing Price Index (m/m) Mar -- 0.1 0.2US 05/09 08:30 Initial Jobless Claims (000s) MAY 4 330 334 324US 05/09 08:30 Continuing Claims (000s) APR 27 3000 3020 3019MX 05/09 09:00 Consumer Prices (m/m) Apr 0.05 0.1 0.7MX 05/09 09:00 Consumer Prices (y/y) Apr 4.6 4.7 4.3MX 05/09 09:00 Consumer Prices Core (m/m) Apr 0.25 0.1 0.3MX 05/09 09:00 Trade Balance (US$ mn) Mar F -- 391.0 1714.3US 05/09 10:00 Wholesale Inventories (m/m) Mar -- 0.4 -0.3

CA 05/10 08:30 Employment (000s m/m) Apr 10.0 11.0 -54.5CA 05/10 08:30 Unemployment Rate (%) Apr 7.2 7.2 7.2MX 05/10 09:00 Industrial Production (m/m) Mar -- -- 0.5MX 05/10 09:00 Industrial Production (y/y) Mar 2.8 -- -1.2US 05/10 14:00 Treasury Budget (US$ bn) Apr -- 106.5 -106.5

Country Date Time Indicator Period BNS Consensus LatestIT 05/06 03:45 Services PMI Apr -- -- 45.5FR 05/06 03:50 Services PMI Apr F -- 44.1 44.1GE 05/06 03:55 Services PMI Apr F -- 49.2 49.2EC 05/06 04:00 Composite PMI Apr F -- 46.6 46.5EC 05/06 04:00 Services PMI Apr F -- 46.6 46.6EC 05/06 05:00 Retail Trade (m/m) Mar -- -0.1 -0.3RU 05/06 07:59 Russia Refinancing Rate (%) May 6 8.25 8.25 8.25UK 05/06 07:59 Halifax House Price (3 month, y/y) Apr 1.2 1.6 1.1

FR 05/07 02:45 Central Government Balance (€ bn) Mar -- -- -27.1FR 05/07 02:45 Industrial Production (m/m) Mar -0.3 -0.3 0.7FR 05/07 02:45 Industrial Production (y/y) Mar -- -1.4 -2.5FR 05/07 02:45 Manufacturing Production (m/m) Mar -- -0.5 0.8FR 05/07 02:45 Trade Balance (€ mn) Mar -- -5500.0 -6011.0GE 05/07 06:00 Factory Orders (m/m) Mar -0.7 -0.5 2.3

GE 05/08 06:00 Industrial Production (m/m) Mar -0.3 -0.1 0.5NO 05/08 08:00 Norwegian Deposit Rates (%) May 8 1.50 1.50 1.50

SP 05/09 03:00 Industrial Output NSA (y/y) Mar -- -- -8.5UK 05/09 04:30 Industrial Production (m/m) Mar 0.1 0.2 1.0UK 05/09 04:30 Manufacturing Production (m/m) Mar 0.8 0.3 0.8UK 05/09 07:00 BoE Asset Purchase Target (£ bn) May 375 375 375UK 05/09 07:00 BoE Policy Announcement (%) May 9 0.50 0.50 0.50

GE 05/10 02:00 Current Account (€ bn) Mar -- 19.5 16.0GE 05/10 02:00 Trade Balance (€ bn) Mar -- 17.5 16.8IT 05/10 04:00 Industrial Production (y/y) Mar -- -3.8 -3.8UK 05/10 04:30 Visible Trade Balance (£ mn) Mar -9000 -9000 -9416

Economics

2

Global Views

May 3, 2013

KEY INDICATORS



A4

Asia Pacific

Country Date Time Indicator Period BNS Consensus LatestTA 05/05 20:30 CPI (y/y) Apr -- 1.3 1.4AU 05/05 21:30 Retail Sales (m/m) Mar -- 0.1 1.3AU 05/05 21:30 ANZ Job Advertisements (m/m) Apr -- -- -1.5CH 05/05 21:45 HSBC Services PMI Apr -- -- 54.3

ID 05/06 07:59 Real GDP (q/q) 1Q -- 1.5 -1.5ID 05/06 07:59 Real GDP (y/y) 1Q 6.1 6.1 6.1PH 05/06 21:00 CPI (y/y) Apr 2.8 2.8 3.2PH 05/06 21:00 Core CPI (y/y) Apr -- 3.3 3.8PH 05/06 21:00 GDP (m/m) Apr -- 0.4 0.1AU 05/06 21:30 House Price Index (q/q) 1Q -- 1.8 1.6AU 05/06 21:30 House Price Index (y/y) 1Q -- 4.0 2.1AU 05/06 21:30 Trade Balance (AUD mn) Mar -- 0.0 -178.0

AU 05/07 00:30 RBA Cash Target Rate (%) May 7 3.00 3.00 3.00AU 05/07 02:30 Foreign Reserves (AUD bn) Apr -- -- 48.7TA 05/07 04:00 Exports (y/y) Apr -- 3.3 3.3TA 05/07 04:00 Imports (y/y) Apr -- 0.8 0.2TA 05/07 04:00 Trade Balance (US$ bn) Apr -- 1.5 3.2SI 05/07 05:00 Foreign Reserves (US$ bn) Apr -- -- 258.2

MA 05/08 00:01 Exports (y/y) Mar -- -1.4 -7.8MA 05/08 00:01 Imports (y/y) Mar -- 3.0 -4.4MA 05/08 00:01 Trade Balance (MYR bn) Mar -- 8.3 8.2MA 05/08 05:00 Foreign Reserves (US$ bn) Apr 30 -- -- 139.9CH 05/08 06:59 Exports (y/y) Apr -- 10.0 10.0CH 05/08 06:59 Imports (y/y) Apr -- 13.0 14.1CH 05/08 06:59 Trade Balance (USD bn) Apr -- 15.5 -0.9NZ 05/08 18:45 Unemployment Rate (%) 1Q -- 6.8 6.9NZ 05/08 18:45 Employment Change (y/y) 1Q -- -0.7 -1.4NZ 05/08 20:00 QV House Prices (y/y) Apr -- -- 6.5SK 05/08 21:00 BoK Base Rate (%) May 9 2.75 2.75 2.75AU 05/08 21:30 Employment (000s) Apr -- 11.0 -36.1AU 05/08 21:30 Unemployment Rate (%) Apr -- 5.6 5.6CH 05/08 21:30 CPI (y/y) Apr 2.2 2.3 2.1CH 05/08 21:30 PPI (y/y) Apr -- -2.3 -1.9

MA 05/09 00:01 Industrial Production (y/y) Mar -- 1.0 -4.5JN 05/09 01:00 Coincident Index CI Mar P -- 93.2 92.4JN 05/09 01:00 Leading Index CI Mar P -- 97.7 97.6JN 05/09 01:00 New Composite Leading Economic Index Mar P -- 97.7 97.6MA 05/09 06:00 Overnight Rate (%) May 9 3.00 3.00 3.00JN 05/09 19:50 Bank Lending (y/y) Apr -- -- 1.6JN 05/09 19:50 Current Account (¥ bn) Mar -- 1216.3 637.4JN 05/09 19:50 Trade Balance - BOP Basis (¥ bn) Mar -- -274.0 -677.0PH 05/09 21:00 Exports (y/y) Mar -- -3.7 -15.6

JN 05/10 01:00 Eco Watchers Survey (current) Apr -- -- 57.3JN 05/10 01:00 Eco Watchers Survey (outlook) Apr -- -- 57.5IN 05/10 01:30 Industrial Production (y/y) Mar -- -- 0.6CH 05/10 06:59 Aggregate Financing (CNY bn) Apr -- 1480.0 2544.3CH 05/10 06:59 New Yuan Loans (bn) Apr -- 767.5 1060.0HK 05/10 06:59 Real GDP (q/q) 1Q -- 0.7 1.2HK 05/10 06:59 Real GDP (y/y) 1Q -- 2.7 2.5ID 05/10 06:59 Current Account Balance (US$ mn) 1Q -- -5300.0 -7763.0IN 05/10 06:59 Exports (y/y) Apr -- -- 7.0IN 05/10 06:59 Imports (y/y) Apr -- -- -2.9SI 05/10 06:59 Real GDP (y/y) 1Q F -- -- -0.6SI 05/10 06:59 GDP Annualized (y/y) 1Q F -- -- -1.4SI 05/10 06:59 GDP (q/q) 1Q F -- -- -0.6

Economics

3

Global Views

May 3, 2013

Latin America

KEY INDICATORS



A5

Country Date Time Indicator Period BNS Consensus LatestCO 05/04 13:00 Consumer Price Index (m/m) Apr -- 0.2 0.2CO 05/04 13:00 Consumer Price Index (y/y) Apr 1.9 1.9 1.9

CL 05/06 08:30 Economic Activity Index SA (m/m) Mar -- -- -0.1CL 05/06 08:30 Economic Activity Index NSA (y/y) Mar -- 4.8 3.8

BZ 05/08 07:59 Economic Activity Index SA (m/m) Mar -- -- -0.5BZ 05/08 07:59 Economic Activity Index NSA (y/y) Mar -- -- 0.4BZ 05/08 08:00 IBGE Inflation IPCA (m/m) Apr -- 0.5 0.5BZ 05/08 08:00 IBGE Inflation IPCA (y/y) Apr 6.6 6.4 6.6CL 05/08 08:00 CPI (m/m) Apr -- -0.2 0.4CL 05/08 08:00 CPI (y/y) Apr 1.5 1.4 1.5

PE 05/09 19:00 Reference Rate (%) May 4.25 4.25 4.25

PE 05/10 06:59 Trade Balance (PEN mn) Mar -- -- -88.0

Economics

4

Global Views

May 3, 2013

AUCTIONS

Global Auctions for the week of May 6 - 10


A6

North America

Europe

Asia Pacific

Latin America

Country Date Time EventUS 05/06 11:30 U.S. to Sell USD29 Bln 3-Month BillsUS 05/06 11:30 U.S. to Sell USD24 Bln 6-Month Bills

CA 05/07 10:30 Canada to Sell CAD2.850 Bln 182-Day BillsCA 05/07 10:30 Canada to Sell CAD7.8 Bln 98-Day BillsCA 05/07 10:30 Canada to Sell CAD2.850 Bln 364-Day BillsUS 05/07 11:30 U.S. to Sell 4-Week BillsUS 05/07 13:00 U.S. to Sell USD32 Bln 3-Year NotesMX 05/07 13:30 3Y I/L YieldMX 05/07 13:30 3Y Fixed Yield

CA 05/08 12:00 Canada to Sell 5 Year NotesUS 05/08 13:00 U.S. to Sell USD24 Bln 10-Year Notes

US 05/09 13:00 U.S. to Sell USD16 Bln 30-Year Bonds

Country Date Time EventNE 05/06 04:00 Netherlands to Sell Up to EUR2 Bln 84-Day BillsNE 05/06 04:00 Netherlands to Sell Up to EUR2 Bln 205-Day BillsFR 05/06 08:50 France to Sell Bills (BTF)

MB 05/07 05:00 Malta to Sell BillsAS 05/07 05:00 Austria to Sell 1.95% 2019 BondsAS 05/07 05:00 Austria to Sell 1.75% 2023 BondsSW 05/07 05:03 Sweden to Sell BillsSZ 05/07 05:30 Switzerland to Sell 90-Day Bills

SZ 05/08 05:30 Switzerland to Sell BondsUK 05/08 05:30 U.K. to Sell GBP1.1 Bln 0.125% I/L 2044 BondsGE 05/08 05:30 Germany to Sell EUR5 Bln 2018 BondsNO 05/08 06:00 Norway to Sell BillsNO 05/08 06:00 Norway to Sell Bonds

SP 05/09 04:30 Spain to Sell Bonds

IT 05/10 05:00 Italy to Sell 3-Month and 12-Month BillsNO 05/10 06:00 Norway to Sell BondsUK 05/10 06:10 U.K. to Sell Bills

Country Date Time EventCH 05/07 23:00 China to Sell 3-Year BondsJN 05/07 23:35 Japan to Sell 6-Month Bill

JN 05/08 04:00 Japan Auction for Enhanced-LiquidityJN 05/08 23:35 Japan to Sell 3-Month Bill

CH 05/09 23:00 China to Sell 3-Year BondsCH 05/09 23:00 China to Sell 5-Year Bonds

Country Date Time EventBZ 05/09 10:30 Brazil to Sell Bills due 1/1/2017 - LTNBZ 05/09 10:30 Brazil to Sell Bills due 10/1/2013 - LTNBZ 05/09 10:30 Brazil to Sell Bills due 07/1/2015 - LTNBZ 05/09 10:30 Brazil to Sell Fixed-rate bonds due 1/1/2019 - NTN-FBZ 05/09 10:30 Brazil to Sell Fixed-rate bonds due 1/1/2023 - NTN-F

Economics

5

Global Views

May 3, 2013

EVENTS


Events for the week of May 6 - 10

A7

North America

Europe

Country Date Time EventUS 05/05 09:30 Fed's Pianalto Gives Commencement Speech in Toledo, Ohio

US 05/07 19:15 Former Vice President Gore Speaks in TorontoUS 05/07 South Carolina Holds Special Election for House SeatUS 05/07 Peter G. Peterson Foundation Fiscal SummitUS 07-09 MAY Salt Skybridge Alternatives Conference

US 05/08 08:30 Fed's Stein Speaks at Chicago Fed Conference

US 05/09 08:00 Fed's Lacker Speaks on Financial Stability in New YorkUS 05/09 13:15 Fed's Plosser Speaks on Monetary Policy in New York

US 05/10 08:25 Fed's Evans Speaks at Chicago Fed ConferenceUS 05/10 09:30 Fed's Bernanke Speaks at Chicago Fed ConferenceUS 05/10 14:00 Fed's George Speaks on the Economy in Jackson, Wyoming

Country Date Time EventFR 05/05 04:00 Finance Minister Moscovici to be Interviewed on Europe 1 RadioFR 05/05 14:00 Prime Minister Ayrault to be Interviewed on TF1 News

GE 05/06 03:30 Merkel Speaks at Berlin Meeting Ahead of U.N. Climate TalksIT 05/06 04:00 Italian Court Expected to Rule to Transfer Berlusconi's Trial

NO 05/06 04:00 Norges Bank published its Regional Network ReportGE 05/06 05:00 Schaeuble Speaks on Europe at Hamburg Business ClubGE 05/06 05:00 Merkel Discusses EU's Future With Berlin High-School StudentsSP 05/06 05:00 Bank of Spain Deputy Governor Fernando Restoy Speaks at EventSP 05/06 08:00 Spain Deputy Economy Minister Fernando Latorre Speaks at EventIT 05/06 09:00 Draghi Speaks at University Ceremony in RomeLX 05/06 ECB's Mersch Speaks At Luxembourg EventRU 05/06 Russia Refinancing RateRU 05/06 Overnight Deposit RateRU 05/06 Overnight Auction-Based Repo

GE 05/07 03:30 Schaeuble and Moscovici Speak, Debate at Berlin UniversityNO 05/07 04:00 Norway Releases Revised National BudgetGE 05/07 07:30 Schaeuble, Moscovici Debate with Students, Brief PressFI 05/07 10:00 EU President Van Rompuy, Finland's Katainen Speak in HelsinkiEC 05/07 13:00 ECB's Asmussen Speaks on Banking UnionPO 05/07 Bank of Portugal Releases Data on BanksEC 05/07 EU's Rehn, Dijsselbloem, ECB's Mersch Speak in Brussels

EC 05/08 03:30 European Parliament Exchange of Views With Troika on CyprusIT 05/08 05:00 Bank of Italy to Release Balance-Sheet for AprilPO 05/08 06:00 Portugal Releases Industrial Sales, Employment ReportNO 05/08 08:00 Norwegian Deposit RatesEC 05/08 11:00 Asmussen Speaks on Inflation as Threat to Prosperity: BerlinGE 05/08 11:15 Merkel Speaks at Families Conference in Northern GermanyUK 05/08 State Opening of ParliamentEC 05/08 ECB's Asmussen, EU's Rehn Testify in EU Parliament in Brussels

PO 05/09 04:00 ECB's Costa, Portugal's Gaspar, Bank CEOs Speak at ConferencePO 05/09 06:00 Portugal Reports New Industrial Orders, UnemploymentUK 05/09 07:00 Bank of England Monetary Policy Committee DecisionUK 05/09 07:00 BOE ANNOUNCES RATESUK 05/09 07:00 BOE Asset Purchase Target

PO 05/10 05:00 Portuguese Prime Minister Attends Debate in ParliamentEC 05/10 06:00 ECB Announces 3-Year LTRO RepaymentUK 10-11 MAY G-7 Finance Ministers, Central Bank Chiefs, Meet in U.K.

Economics

6

Global Views

May 3, 2013

EVENTS


Events for the week of May 6 - 10

A8

Asia Pacific

Latin America

Country Date Time EventIN 01-05 MAY Asian Development Bank Annual Board MeetingHK 03-04 MAY Transport Department Auction Personalized Vehicle MarksMA 04-05 MAY Malaysia Holds General ElectionsCH 04-07 MAY Palestinian Authority President Abbas Visits ChinaNZ 05/05 18:00 Government Financial StatementsNZ 05/05 22:00 Treasury Publishes Monthly Economic IndicatorsIS 06-10 MAY Israel Prime Minister Netanyahu Visits ChinaAU 05/07 00:30 RBA CASH TARGETCA 05/07 12:00 China Reform Foundation Chairman Speaks at CCBCNZ 05/07 17:00 RBNZ Financial Stability ReportNZ 05/07 17:05 RBNZ Governor News ConferenceUS 05/07 U.S. President Obama Hosts South Korea President ParkCA 05/08 12:00 CCBC Executive Director Speaks on China's Power TransitionSK 05/08 21:00 South Korea 7-Day Repo RateMA 05/09 06:00 Overnight RateAU 05/09 21:30 RBA's Statement on Monetary PolicyUK 10-11 MAY G-7 Finance Ministers, Central Bank Chiefs, Meet in U.K.

Country Date Time EventPE 05/09 19:00 Reference Rate

Economics

7

Global Views

May 3, 2013

Global Central Bank Watch

CENTRAL BANKS

A9


NORTH AMERICARate Current Rate Next Meeting Scotia's Forecasts Consensus ForecastsBank of Canada – Overnight Target Rate 1.00 May 29, 2013 1.00 --

Federal Reserve – Federal Funds Target Rate 0.25 June 19, 2013 0.25 --

Banco de México – Overnight Rate 4.00 June 7, 2013 4.00 --

EUROPERate Current Rate Next Meeting Scotia's Forecasts Consensus ForecastsEuropean Central Bank – Refinancing Rate 0.50 June 6, 2013 0.50 --

Bank of England – Bank Rate 0.50 May 9, 2013 0.50 0.50

Swiss National Bank – Libor Target Rate 0.00 June 20, 2013 0.00 --

Central Bank of Russia – Refinancing Rate 8.25 May 6, 2013 8.25 8.25

Hungarian National Bank – Base Rate 4.75 May 28, 2013 4.50 4.50

Central Bank of the Republic of Turkey – 1 Wk Repo Rate 5.00 May 16, 2013 5.00 --

Sweden Riksbank – Repo Rate 1.00 July 3, 2013 1.00 --

Norges Bank – Deposit Rate 1.50 May 8, 2013 1.50 1.50

ASIA PACIFICRate Current Rate Next Meeting Scotia's Forecasts Consensus ForecastsBank of Japan – Target Rate 0.10 May 22, 2013 0.10 --

Reserve Bank of Australia – Cash Target Rate 3.00 May 7, 2013 3.00 3.00

Reserve Bank of New Zealand – Cash Rate 2.50 June 12, 2013 2.50 2.50

People's Bank of China – Lending Rate 6.00 TBA -- --

Reserve Bank of India – Repo Rate 7.25 TBA 7.25 --

Bank of Korea – Bank Rate 2.75 May 8, 2013 2.75 2.75

Bank of Thailand – Repo Rate 2.75 May 29, 2013 2.75 --

Bank Indonesia – Reference Interest Rate 5.75 May 14, 2013 5.75 5.75

LATIN AMERICARate Current Rate Next Meeting Scotia's Forecasts Consensus ForecastsBanco Central do Brasil – Selic Rate 7.50 May 29, 2013 7.75 --

Banco Central de Chile – Overnight Rate 5.00 May 16, 2013 5.00 5.00

Banco de la República de Colombia – Lending Rate 3.25 May 31, 2013 3.25 --

Banco Central de Reserva del Perú – Reference Rate 4.25 May 9, 2013 4.25 4.25

AFRICA

Rate Current Rate Next Meeting Scotia's Forecasts Consensus ForecastsSouth African Reserve Bank – Repo Rate 5.00 May 23, 2013 5.00 --

BoC: Markets are hotly anticipating initial policy remarks from new BoC Governor-designate Stephen Poloz. Until those arrive, our sense is that markets will need to be patient and avoid the temptation of moving to price in imputations of policy bias that are at best highly conjectural. Fed: We do not think that better-than-expected jobs figures in April (and positive revisions to March) meaningfully change the FOMC’s outlook. We still think that the Fed will wait until it has economic data for the sequester period before making its mind up one way or the other regarding so-called asset purchase tapering – and as we expect the economy to cool mid-year (as recent data have implied) we do not expect that tapering to occur in the near term.

With the economy showing a mixed performance and inflation still well below target (at 1.4% y/y in March, with core inflation at 0.9%), the Norges Bank will maintain the status quo on monetary policy next week. The central bank last cut rates in March 2012 while, at the most recent meeting, the authorities indicated that an easy policy stance would be maintained for longer than previously envisioned (given a more protracted recovery with a longer period before inflation returns to the 2.5% target).The krone has weakened since February, but remains at a relatively strong level and continues to dampen exports. The Russia central bank is also expected to leave rates unchanged for the time being. Economic growth has decelerated materially – with an estimated GDP gain of just 1.1% y/y in the first quarter. Meanwhile, inflation remains above target (at 7.0% y/y in March), although it appears that price pressures have peaked. The recent decision of the government to direct oil reserve funds toward infrastructure investment will likely be complemented by modest monetary easing in the coming months, once the new governor takes office in June.

We maintain our view that the central bank of Peru will likely keep its reference rate unchanged at 4.25%, where it has been since May 2011. Nevertheless, we anticipate that the authorities will continue to raise the reserve requirement rate in foreign currency to provide direction to monetary conditions. After peaking at 2.9% y/y in January, headline inflation decelerated to 2.3% y/y in April, approaching the mid-point of the central bank’s tolerance range (1-3%). Additionally, economic output continues to expand at a solid pace, close to its potential rate.

Australian monetary authorities have highlighted that previous interest rate reductions will continue to work their way through the economy. Therefore, we maintain our view that the monetary easing cycle has reached its bottom, with the bank rate kept at the current level of 3.0% following the Reserve Bank of Australia’s policy meeting on May 7th. The Bank of Korea will meet on May 8th. In the context of a decent economic revival and new fiscal stimulus measures, we expect the central bank to maintain the benchmark interest rate at the current level of 2.75%. Nevertheless, we highlight that the possibility of a further small interest rate cut in the near term has increased recently.

North America

Europe

Asia Pacific

Latin America

Africa

Economics

8

Global Views

May 3, 2013

FORECASTS

A10

Forecasts as at April 30, 2013* 2000-11 2012e 2013f 2014f 2000-11 2012e 2013f 2014f

Output and Inflation (annual % change) Real GDP Consumer Prices2

World13.7 3.1 3.1 3.8

Canada 2.2 1.8 1.5 2.3 2.1 1.5 1.2 1.8 United States 1.8 2.2 2.1 2.7 2.5 2.1 1.8 2.1 Mexico 2.2 3.9 3.4 3.9 4.8 3.6 4.1 4.0

United Kingdom 1.9 0.3 0.6 1.4 2.3 2.7 2.5 2.4 Euro zone 1.4 -0.6 -0.5 0.9 2.1 2.2 1.3 1.5

Japan 0.8 2.0 1.0 1.5 -0.3 -0.1 0.7 1.2 Australia 3.0 3.6 2.6 3.1 3.1 2.2 2.7 3.0 China 9.4 7.8 8.0 8.3 2.4 2.5 3.3 3.9 India 7.4 5.0 6.0 6.5 6.6 7.3 6.5 6.5 Korea 4.5 2.0 2.6 3.5 3.2 1.4 2.5 2.9 Thailand 4.0 6.5 4.5 4.2 2.6 3.6 3.0 3.3

Brazil 3.6 0.9 3.0 3.5 6.6 5.8 5.8 6.0 Chile 4.7 5.6 5.0 5.2 3.4 1.5 2.9 3.3 Peru 5.6 6.3 6.2 6.4 2.6 2.6 2.9 3.0

Central Bank Rates (%, end of period) 12Q4 13Q1f 13Q2f 13Q3f 13Q4f 14Q1f 14Q2f 14Q3f

Bank of Canada 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00Federal Reserve 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25European Central Bank 0.75 0.75 0.50 0.50 0.50 0.50 0.50 0.50Bank of England 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50Swiss National Bank 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Bank of Japan 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10Reserve Bank of Australia 3.00 3.00 3.00 3.00 3.25 3.25 3.50 3.50

Exchange Rates (end of period)

Canadian Dollar (USDCAD) 0.99 1.02 1.04 1.02 1.02 1.01 1.00 1.00Canadian Dollar (CADUSD) 1.01 0.98 0.96 0.98 0.98 0.99 1.00 1.00Euro (EURUSD) 1.32 1.28 1.27 1.26 1.25 1.25 1.24 1.24Sterling (GBPUSD) 1.63 1.52 1.49 1.47 1.45 1.45 1.45 1.44Yen (USDJPY) 87 94 102 104 105 106 107 109Australian Dollar (AUDUSD) 1.04 1.04 1.02 1.04 1.04 1.06 1.06 1.08Chinese Yuan (USDCNY) 6.2 6.2 6.2 6.1 6.1 6.1 6.1 6.1Mexican Peso (USDMXN) 12.9 12.3 11.9 12.1 12.2 12.3 12.2 12.2Brazilian Real (USDBRL) 2.05 2.02 2.01 2.01 2.00 2.01 2.02 2.04

Commodities (annual average) 2000-11 2012 2013f 2014f

WTI Oil (US$/bbl) 57 94 94 96Brent Oil (US$/bbl) 58 112 108 110Nymex Natural Gas (US$/mmbtu) 5.67 2.83 4.00 4.50

Copper (US$/lb) 2.10 3.61 3.40 3.20Zinc (US$/lb) 0.77 0.88 0.92 1.10Nickel (US$/lb) 7.62 7.95 7.85 8.85Gold, London PM Fix (US$/oz) 668 1,670 1,480 1,350

Pulp (US$/tonne) 718 872 907 870Newsprint (US$/tonne) 581 640 620 660Lumber (US$/mfbm) 272 299 375 400

1 World GDP for 2000-11 are IMF PPP estimates; 2012-14f are Scotiabank Economics' estimates based on a 2011 PPP-weighted sample of 38 countries. 2 CPI for Canada and the United States are annual averages. For other countries, CPI are year-end rates.

* See Scotiabank Economics 'Global Forecast Update' (http://www.gbm.scotiabank.com/English/bns_econ/forecast.pdf) for additional forecasts & commentary.

Brazil

India South Korea Thailand

Chile Peru

Japan

Canada

United States

Mexico

United Kingdom

Australia China

Euro Zone

Economics

9

Global Views

May 3, 2013

ECONOMIC STATISTICS

Source: Bloomberg, Global Insight, Scotiabank Economics.

A11

North America

Canada 2012 12Q3 12Q4 Latest United States 2012 12Q3 12Q4 Latest Real GDP (annual rates) 1.8 0.7 0.6 Real GDP (annual rates) 2.2 3.1 0.4 2.5 (Q1-A) Current Acc. Bal. (C$B, ar) -66.9 -72.2 -69.0 Current Acc. Bal. (US$B, ar) -475 -450 -442 Merch. Trade Bal. (C$B, ar) -12.0 -21.5 -11.1 0.3 (Mar) Merch. Trade Bal. (US$B, ar) -735 -697 -722 -674 (Mar) Industrial Production 1.1 0.1 -0.4 2.4 (Feb) Industrial Production 3.6 3.4 2.7 3.2 (Mar) Housing Starts (000s) 215 222 202 181 (Mar) Housing Starts (millions) 0.78 0.77 0.90 1.04 (Mar) Employment 1.2 1.0 1.6 1.2 (Mar) Employment 1.7 1.7 1.6 1.6 (Apr) Unemployment Rate (%) 7.3 7.3 7.2 7.2 (Mar) Unemployment Rate (%) 8.1 8.0 7.8 7.5 (Apr) Retail Sales 2.5 2.5 1.0 1.5 (Feb) Retail Sales 4.8 4.6 4.0 2.6 (Mar) Auto Sales (000s) 1673 1658 1665 1651 (Feb) Auto Sales (millions) 14.4 14.5 15.0 14.9 (Apr) CPI 1.5 1.2 0.9 1.0 (Mar) CPI 2.1 1.7 1.9 1.5 (Mar) IPPI 0.6 0.0 -0.1 -0.9 (Mar) PPI 1.9 1.5 1.7 1.1 (Mar) Pre-tax Corp. Profits -2.7 -3.6 -9.1 Pre-tax Corp. Profits 16.6 19.3 14.7

Mexico Real GDP 3.9 3.2 3.2 Current Acc. Bal. (US$B, ar) -9.2 -3.8 -26.0 Merch. Trade Bal. (US$B, ar) 0.2 -4.7 -7.8 20.6 (Mar) Industrial Production 3.6 3.6 1.8 -1.2 (Feb) CPI 4.1 4.6 4.1 4.3 (Mar)

Euro Zone 2012 12Q3 12Q4 Latest Germany 2012 12Q3 12Q4 Latest Real GDP -0.6 -0.7 -0.9 Real GDP 0.9 0.9 0.4 Current Acc. Bal. (US$B, ar) 149 204 309 194 (Feb) Current Acc. Bal. (US$B, ar) 238.6 225.0 278.0 256.4 (Feb) Merch. Trade Bal. (US$B, ar) 129.3 151.6 196.6 191.8 (Feb) Merch. Trade Bal. (US$B, ar) 243.1 254.5 244.5 274.9 (Feb) Industrial Production -2.3 -2.4 -3.0 -2.7 (Feb) Industrial Production -0.4 -0.7 -2.4 -1.7 (Feb) Unemployment Rate (%) 11.3 11.5 11.8 12.0 (Mar) Unemployment Rate (%) 6.8 6.8 6.9 6.9 (Apr) CPI 2.5 2.5 2.3 1.7 (Mar) CPI 2.0 2.0 2.0 1.2 (Apr)

France United Kingdom Real GDP 0.0 0.1 -0.3 Real GDP 0.3 0.4 0.2 Current Acc. Bal. (US$B, ar) -60.2 -41.4 -58.0 -94.7 (Feb) Current Acc. Bal. (US$B, ar) -91.4 -111.9 -76.0 Merch. Trade Bal. (US$B, ar) -52.3 -50.5 -47.3 -54.0 (Feb) Merch. Trade Bal. (US$B, ar) -168.6 -164.5 -174.3 -174.9 (Feb) Industrial Production -2.7 -2.1 -3.3 -2.5 (Feb) Industrial Production -2.4 -1.7 -2.6 -2.2 (Feb) Unemployment Rate (%) 10.3 10.3 10.5 11.0 (Mar) Unemployment Rate (%) 8.0 7.8 7.8 7.9 (Jan) CPI 2.0 2.0 1.5 1.0 (Mar) CPI 2.8 2.4 2.7 2.8 (Mar)

Italy Russia Real GDP -2.4 -2.6 -2.8 Real GDP 3.4 3.0 2.1 Current Acc. Bal. (US$B, ar) -15.3 -0.7 19.7 -25.5 (Feb) Current Acc. Bal. (US$B, ar) 74.8 6.3 12.8 Merch. Trade Bal. (US$B, ar) 13.8 23.0 35.7 17.4 (Feb) Merch. Trade Bal. (US$B, ar) 16.1 12.8 15.5 15.9 (Feb) Industrial Production -6.3 -6.0 -6.5 -3.9 (Feb) Industrial Production -5.3 2.5 1.7 2.6 (Mar) CPI 3.1 3.2 2.5 1.6 (Mar) CPI 5.1 6.0 6.5 7.0 (Mar)

Europe

All data expressed as year-over-year % change unless otherwise noted.

Economics

10

Global Views

May 3, 2013

ECONOMIC STATISTICS

Source: Bloomberg, Global Insight, Scotiabank Economics.

A12

Asia Pacific

Australia 2012 12Q3 12Q4 Latest Japan 2012 12Q3 12Q4 Latest Real GDP 3.6 3.1 3.1 Real GDP 2.0 0.4 0.4 Current Acc. Bal. (US$B, ar) -56.4 -68.1 -64.7 Current Acc. Bal. (US$B, ar) 60.4 82.4 1.4 82.1 (Feb) Merch. Trade Bal. (US$B, ar) 6.1 1.6 -6.2 15.9 (Feb) Merch. Trade Bal. (US$B, ar) -85.8 -97.6 -106.9 -116.8 (Mar) Industrial Production 4.0 4.3 4.8 Industrial Production -1.0 -4.6 -6.7 -6.1 (Mar) Unemployment Rate (%) 5.2 5.3 5.4 5.6 (Mar) Unemployment Rate (%) 4.4 4.3 4.2 4.1 (Mar) CPI 1.8 2.0 2.2 CPI 0.0 -0.4 -0.2 -0.9 (Mar)

South Korea China Real GDP 2.0 1.6 1.5 Real GDP 10.4 7.4 7.9 Current Acc. Bal. (US$B, ar) 43.1 58.2 59.3 59.7 (Mar) Current Acc. Bal. (US$B, ar) 290.0 Merch. Trade Bal. (US$B, ar) 28.3 29.9 39.8 31.0 (Apr) Merch. Trade Bal. (US$B, ar) 230.7 316.5 332.0 -9.9 (Mar) Industrial Production 1.2 -1.6 1.9 -1.5 (Mar) Industrial Production 10.3 9.2 10.3 8.9 (Mar) CPI 2.2 1.6 1.7 1.2 (Apr) CPI 2.5 1.9 2.5 2.1 (Mar)

Thailand India Real GDP 6.4 3.1 18.9 Real GDP 5.0 5.3 4.5 Current Acc. Bal. (US$B, ar) 2.7 2.7 0.9 Current Acc. Bal. (US$B, ar) -93.3 -22.6 -32.6 Merch. Trade Bal. (US$B, ar) 0.7 1.7 0.3 2.0 (Mar) Merch. Trade Bal. (US$B, ar) -16.3 -16.7 -19.4 -10.3 (Mar) Industrial Production 2.3 -10.0 42.7 1.8 (Mar) Industrial Production 0.7 0.4 2.1 0.6 (Feb) CPI 3.0 2.9 3.2 2.4 (Apr) WPI 7.5 7.9 7.3 6.0 (Mar)

Indonesia Real GDP 6.2 6.2 6.1 Current Acc. Bal. (US$B, ar) -24.2 -5.3 -7.8 Merch. Trade Bal. (US$B, ar) -0.1 0.2 -0.9 0.3 (Mar) Industrial Production 4.1 -0.4 11.0 11.0 (Dec) CPI 4.3 4.5 4.4 5.6 (Apr)

Brazil 2012 12Q3 12Q4 Latest Chile 2012 12Q3 12Q4 Latest Real GDP 0.8 0.8 1.1 Real GDP 5.6 5.8 5.7 Current Acc. Bal. (US$B, ar) -54.2 -35.6 -80.4 Current Acc. Bal. (US$B, ar) 0.5 -19.6 -11.5 Merch. Trade Bal. (US$B, ar) 19.4 34.6 14.9 -11.9 (Apr) Merch. Trade Bal. (US$B, ar) 12.4 -7.3 3.8 13.6 (Mar) Industrial Production -2.7 -2.1 -0.6 1.0 (Mar) Industrial Production 2.9 3.5 1.4 2.2 (Mar) CPI 5.4 5.2 5.6 6.6 (Mar) CPI 3.0 2.6 2.2 1.5 (Mar)

Peru Colombia Real GDP 9.1 6.8 5.9 Real GDP 4.0 2.7 3.1 Current Acc. Bal. (US$B, ar) -7.1 -2.6 -1.9 Current Acc. Bal. (US$B, ar) -11.4 -3.5 -3.6 Merch. Trade Bal. (US$B, ar) 0.4 0.3 0.4 -0.1 (Feb) Merch. Trade Bal. (US$B, ar) 0.4 0.1 0.4 0.4 (Feb) Unemployment Rate (%) 7.0 6.5 5.9 6.4 (Mar) Industrial Production 0.0 -0.3 -1.9 -4.5 (Feb) CPI 3.7 3.5 2.8 2.6 (Mar) CPI 3.2 3.1 2.8 1.9 (Mar)

Latin America

All data expressed as year-over-year % change unless otherwise noted.

Economics

11

Global Views

May 3, 2013

FINANCIAL STATISTICS

* Latest observation taken at time of writing. Source: Bloomberg, Scotiabank Economics.

A13

Interest Rates (%, end of period)

Canada 12Q4 13Q1 Apr/26 May/03* United States 12Q4 13Q1 Apr/26 May/03*BoC Overnight Rate 1.00 1.00 1.00 1.00 Fed Funds Target Rate 0.25 0.25 0.25 0.25 3-mo. T-bill 0.93 0.98 0.98 0.99 3-mo. T-bill 0.04 0.07 0.05 0.05 10-yr Gov’t Bond 1.80 1.87 1.71 1.75 10-yr Gov’t Bond 1.76 1.85 1.66 1.72 30-yr Gov’t Bond 2.37 2.50 2.38 2.42 30-yr Gov’t Bond 2.95 3.10 2.86 2.94 Prime 3.00 3.00 3.00 3.00 Prime 3.25 3.25 3.25 3.25 FX Reserves (US$B) 68.4 70.0 70.0 (Mar) FX Reserves (US$B) 139.1 135.2 135.2 (Mar)

Germany France 3-mo. Interbank 0.10 0.11 0.11 0.13 3-mo. T-bill -0.01 0.01 0.00 0.00 10-yr Gov’t Bond 1.32 1.29 1.21 1.25 10-yr Gov’t Bond 2.00 2.03 1.74 1.83 FX Reserves (US$B) 67.4 66.6 66.6 (Mar) FX Reserves (US$B) 54.2 52.6 52.6 (Mar)

Euro Zone United Kingdom Refinancing Rate 0.75 0.75 0.75 0.50 Repo Rate 0.50 0.50 0.50 0.50 Overnight Rate 0.13 0.11 0.08 0.08 3-mo. T-bill 0.36 0.39 0.39 0.38 FX Reserves (US$B) 332.5 326.6 326.6 (Mar) 10-yr Gov’t Bond 1.83 1.77 1.68 1.73

FX Reserves (US$B) 88.6 88.4 88.4 (Mar)

Japan Australia Discount Rate 0.30 0.30 0.30 0.30 Cash Rate 3.00 3.00 3.00 3.00 3-mo. Libor 0.11 0.10 0.09 0.09 10-yr Gov’t Bond 3.27 3.41 3.16 3.04 10-yr Gov’t Bond 0.79 0.55 0.59 0.57 FX Reserves (US$B) 44.9 40.9 (Feb) FX Reserves (US$B) 1227.2 1215.0 1215.0 (Mar)

Exchange Rates (end of period)

USDCAD 0.99 1.02 1.02 1.01 ¥/US$ 86.75 94.22 98.05 99.06CADUSD 1.01 0.98 0.98 0.99 US¢/Australian$ 1.04 1.04 1.03 1.03GBPUSD 1.626 1.520 1.547 1.559 Chinese Yuan/US$ 6.23 6.21 6.17 6.16EURUSD 1.319 1.282 1.303 1.314 South Korean Won/US$ 1064 1111 1112 1097JPYEUR 0.87 0.83 0.78 0.77 Mexican Peso/US$ 12.853 12.331 12.144 12.084USDCHF 0.92 0.95 0.94 0.93 Brazilian Real/US$ 2.052 2.022 1.999 2.011

Equity Markets (index, end of period)

United States (DJIA) 13104 14579 14713 14997 U.K. (FT100) 5898 6412 6426 6523 United States (S&P500) 1426 1569 1582 1615 Germany (Dax) 7612 7795 7815 8094 Canada (S&P/TSX) 12434 12750 12220 12484 France (CAC40) 3641 3731 3810 3903 Mexico (IPC) 43706 44077 41897 42480 Japan (Nikkei) 10395 12398 13884 13694 Brazil (Bovespa) 60952 56352 54252 56223 Hong Kong (Hang Seng) 22657 22300 22548 22690 Italy (BCI) 873 851 903 911 South Korea (Composite) 1997 2005 1945 1966

Commodity Prices (end of period)

Pulp (US$/tonne) 870 900 900 900 Copper (US$/lb) 3.59 3.44 3.20 3.23 Newsprint (US$/tonne) 640 610 610 610 Zinc (US$/lb) 0.92 0.85 0.86 0.83 Lumber (US$/mfbm) 388 408 355 345 Gold (US$/oz) 1657.50 1598.25 1471.50 1469.25 WTI Oil (US$/bbl) 91.82 97.23 93.00 95.31 Silver (US$/oz) 29.95 28.64 24.02 24.25 Natural Gas (US$/mmbtu) 3.35 4.02 4.15 4.02 CRB (index) 295.01 296.39 285.40 289.00

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May 3, 2013


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