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Weekly commentary on economic and financial market developments July 12, 2013

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Bernanke, Earnings, China GDP & The BoC To Drive Market Tone .......................................................... Derek Holt

Why Should The BoC Bother Dropping Its Rate Bias? .............................................................Derek Holt & Dov Zigler

The Divergence In U.S. Federal Deficit Forecasts ................................................................................ Mary Webb

How Consensus Lines Up Across The Fed Tapering Variables .................................................Derek Holt & Dov Zigler

Bernanke Overrides Stale FOMC Minutes, But Can He Guide The FOMC? .................................Derek Holt & Dov Zigler

Brazilian Interest Rate Hike Amidst Heightened Social Tensions ........................................................... Pablo Bréard

Sweden — Economic And Currency Outlook .................................................................................. Sarah Howcroft

New Zealand — Economic And Currency Outlook ......................................................... Tuuli McCully & Camilla Sutton

Global Gaming Industry Loses Momentum ........................................................................................... Erika Cain

Do Pemex Investors Care About Fundamentals? .......................................................... Araceli Espinosa & Joe Kogan

Hot Summer For French Budget! ................................................................................................. Frédéric Prêtet

Latin America Week Ahead: For The Week Of July 15 - 19 .............................................................. Eduardo Suárez

2-18 Economics

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

Key Indicators ......................................................................................................................................... A3-A4

Global Auctions Calendar ............................................................................................................................ A5

Events Calendar .......................................................................................................................................... A6

Global Central Bank Watch .......................................................................................................................... A7

Forecasts ..................................................................................................................................................... A8

Latest Economic Statistics .................................................................................................................... A9-A10

Latest Financial Statistics ........................................................................................................................... A11

A1-A11 Forecasts & Data

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19-20 Emerging Markets Strategy

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Global Views

Economics

2 July 12, 2013

THE WEEK AHEAD

Bernanke, Earnings, China GDP & The BoC To Drive Market Tone

Please see our full indicator, central bank, auction and event calendars on pp. A3-A7. It’s a big upcoming week for Canadian markets with the Bank of Canada leading the possible influences. That’s because Wednesday brings new Governor Stephen Poloz’s first rate statement, Monetary Policy Report, and press conference since having assumed the role at the start of the month. Our article in this week’s Global Views discusses the pros and cons of dropping the rate hike bias as this is the key issue. On net, we think the case for dropping the bias is weak and hence it is unlikely the BoC will adopt this tactic, but the wild card is a new Governor’s bias that we continue to evaluate. If the BoC drops the bias, then it will court rate cut expectations driven by potential leveraged fast money rapidly coming into the modestly sized market and undershooting rate guidance that may have the markets pushing the BoC back in the direction of the lower zero bound. The BoC put considerable effort into getting off that lower zero bound in late 2010 and is unlikely to wish to give that up at this juncture. Retaining the bias could be constructive to CAD post-statement, albeit temporarily so against grander forces, and less so for the yield curve that is already convinced rates are going nowhere for a long time. An offset could be altered growth forecasts including the profile of the output gap since we continue to feel that the BoC is overly optimistic in projecting spare capacity to disappear by the end of 2014. Canadian fundamentals will also book-end the BoC meeting. Monday’s housing resales print is less relevant to us as forecasters of economic growth and markets than an update on new home sales that will arrive probably later in the week when Realnet releases Toronto figures. New home sales involve much greater value added effects on GDP than resales that are mostly just a paper swap with a few ancillary services bolted on. As the resale correction has cooled at markedly lower volumes than the peak in the Spring of 2012, the sharp drop in new home sales has intensified in 2013 such that combined resales and new home sales continue to trend lower in the Toronto market. We think that Tuesday’s manufacturing sales print for May will be challenged to avoid another drop following April’s large 2.4% m/m decline because of continued trend weakness in new orders, and soft auto exports that month. Thursday’s wholesale sales will help us firm up the call for May GDP on July 31st and the only missing piece of the puzzle after next week will be the following week’s retail sales figures. We think the economy will slow from 2.5% growth in Q1 to 1.5% in Q2. That's partly as the sharp gains in mining, oil and gas extraction since last September cool off, and that were driven by the sector shaking off earlier technical disruptions. The week will end with June CPI figures on Friday. The risk is to the upside on this call as year-ago base effects alone are likely to spark a sharp upward swing in inflation from 0.7% in May to about 1.3% by our estimation of the combined effects of the prices we can observe, seasonal influences, and base effects. If so, then while inflation is likely to persistently track beneath the BoC’s 2% target, it will do so by a narrower margin which may also allow the BoC to claim that it is directionally on track toward returning to its 2% inflation target. That would reinforce our argument against dropping the BoC’s vague rate hike bias. Earnings, Fed speak, and some key data will dominate attention in US markets and play a heavy role in shaping the global market tone. Earnings reports will intensify their significance as key financials continue to release including Citigroup, Goldman Sachs, BoNY, BoA, Amex, and Morgan Stanley. In all, 63 companies on the S&P500 release earnings in a week that will start and end slowly but with Wednesday and Thursday crammed with 53 of these firms. Nasdaq firms also release earnings including Yahoo, Intel, eBay, Microsoft and Google. Federal Reserve Chairman Ben Bernanke delivers his semi-annual testimony before the House Financial Services Committee on Wednesday and the Senate Banking Committee on Thursday. This used to be referred to as the Humphrey-Hawkins testimony. Recall that Bernanke first hinted at tapering in his testimony before the Joint Economic Committee of Congress on May 22nd when he said the Fed could taper purchases over coming meetings. Needless to say it did not go well in terms of the market aftermath that now has Bernanke remarking that financial market conditions have tightened. Bernanke is unlikely to signal another change of course next week and will instead probably repeat the broad tone of his dovish comments delivered this past

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

Global Views

Economics

3 July 12, 2013

THE WEEK AHEAD

… continued from previous page

Wednesday that we think supported our view of later rather than sooner tapering of MBS and Treasury purchases. Do not look for material new policy directions before a politically charged audience a year ahead of Congressional mid-term elections and before approving a likely new Chairman and replacement for Governor Duke's vacancy. Rather, Bernanke is likely to repeat that financial conditions have tightened recently, that it is too early to evaluate the sequester’s influences, that significant risks bear ongoing monitoring and that the Fed remains off its full employment and price stability goals. Fed speak will also come in the form of Governor Daniel Tarullo’s comments on banking regulation and perhaps policy matters on Monday, Kansas City Federal Reserve President Esther George's (voting 2012, nonvoting 2013) comments on economic conditions on Tuesday, and Governor Sarah Bloom Raskin's remarks on Wednesday. Finally, key US data risk will be focused upon housing, manufacturing and inflation. We’re expecting a solid gain in June’s retail sales due to what we already know about the month’s big rise in auto sales. That will nevertheless have Q2 total consumption growth closing out the quarter at under 1.5% in annualized and inflation-adjusted terms as one part of why we think GDP growth softens in Q2. Also on Monday will be the release of the Empire manufacturing gauge that is expected to continue to signal expansion, and business inventories for May that are motivating some shops to revise Q2 GDP growth to sub-1%. It would be rather difficult for the Federal Reserve to embrace tapering by September in the wake of a soft Q2 GDP report that lands on July 31st (the same day as the next FOMC statement) following 1.8% growth in Q1 and only 0.4% growth in 2012Q4. We think housing starts probably crept back in the direction of one million units in June, industrial production should resume growth, and the Philly Fed manufacturing barometer is likely to continue to signal growth in manufacturing. Finally, Tuesday’s CPI inflation update is likely to pick up somewhat but remain below the Federal Reserve’s policy goal. The Fed’s preferred market gauge of inflation expectations is the 5-year forward breakeven rate and it continues to decline to the lowest reading since the Spring of 2012. It is against this backdrop of diminished perceived need for inflation protection that the US auctions 10 year TIPS on Thursday. China will set much of the global tone when Q2 GDP and a series of other important releases arrive next week. The fun starts right off the bat on Sunday evening (ET) when GDP, industrial production, retail sales and fixed asset investments are released. Second quarter growth is expect to cool to 7.5% y/y from 7.7% in Q1. That would make year-to-date tracking come in at about 7.7% compared to 7.8% in the same period last year. The bigger question for China may be a further deceleration in growth over 2013H2 that could drop the annual growth print to 7.5% or lower. That could happen as tightened macroprudential rules governing the housing sector become more binding in their influences, and the aftermath of the liquidity belt tightening motivates a significantly cooler credit cycle. Further, China has begun to own up to the manipulation of trade figures with reported trade growth sharply ebbing over the past couple of months. The bigger issue is that China’s trade competitiveness is being massively diminished in the context of weak growth in its top export markets. That’s because the proper way of looking at its currency is to adjust it for domestic versus foreign inflation and after trade-weighting the nominal exchange rate crosses versus China’s trading partners. This measure is called the real effective exchange rate and it has appreciated by a whopping 42% since 2005 and has been associated with the sharp drop in China’s current account balance (see chart). Economists at the Federal Reserve and Washington’s Peterson Institute have argued there is over a


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Global Views

Economics

4 July 12, 2013

THE WEEK AHEAD


two-year lagged relationship between movements in this measure of the exchange rate and movements in the current account. As the REER continues to appreciate sharply into this year, the adjustments are not over such that the elimination of China’s current account surplus is entirely feasible over the medium term. That could mean a continued topping out in the country’s foreign exchange reserves with downside risks, perhaps motivating China to further liberalize foreign direct investment into the country and seek advantageous trade agreements. The days of counting upon never-ending trade surpluses and hoarding global savings in quasi-mercantilist fashion may be coming to an end for China. The interconnected influences of changes in balance of payments accounts and debates governing currency convertibility and capital market deepening may have only just begun. China also releases industrial production and retail sales on Sunday and both are expected to remain in line with the prior month’s growth rate but on a long-run cooling trend. Indeed retail sales are growing at around the slowest pace since prior to the global crisis while industrial production growth has cooled to the weakest pace since the global economy first began emerging from the crisis in 2009. Wednesday’s property prices for the month of June will be carefully watched for whether house price gains are cooling in China; so far they have not despite the efforts of authorities to tighten macroprudential rules. As we go to press, we also await aggregate financing statistics including new yuan loans that may be released only into the weekend or early next week. Asia-Pacific markets will also be influenced by publication of the minutes to the Reserve Bank of Australia’s meeting on July 2nd, India’s export growth — or rather the lack of it following a 1.1% y/y drop in exports in May, and whether New Zealand CPI for Q2 will remain at the lowest depths since 1999. By comparison to developments in the US, Asia and Canada, Europe will be fairly quiet with one exception. It will be a big week for UK data with CPI, jobs numbers, and retail sales all due out. We’ll also get minutes from the most recent BoE meeting, which incidentally was Governor Carney’s first policy move at the helm — and in which he introduced a form of forward guidance to the UK. He did so by flagging rate pressures that have emerged recently, but a formal decision on providing rate guidance will have to wait until the August inflation report. How the composition of the vote against expanding stimulus positioned Carney relative to the rest of the Monetary Policy Committee will be a key takeaway in evaluating the new Governor's bias. Most of the other European data are fairly second tier, with Germany’s ZEW survey of financial analysts one of the data points likely to receive some attention (though we caution against paying too much heed to its often volatile results). Italian trade and industrial orders data and Eurozone-wide trade balance and CPI figures round out next week’s European releases. The week closes with the meeting of G20 finance ministers and central bankers in Moscow on Friday and Saturday. A focal point may well be international pressure upon the Federal Reserve and US administration for greater clarity in monetary and fiscal policy. Much has changed since the US was righteously wagging a finger at Europe for failing to achieve policy stability in the interests of world growth.


Global Views

Economics

5 July 12, 2013

CANADIAN MONETARY POLICY

There are good and bad reasons for doing so, but on net we question the merits of dropping rate hike guidance.

The biggest issue ahead of next Wednesday's Bank of Canada statement is whether or not the central bank will drop or water down its rate hike bias. The forward guidance in the BoC rate statement currently reads:

“With continued slack in the Canadian economy, the muted outlook for inflation, and the constructive evolution of imbalances in the household sector, the considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required, consistent with achieving the 2 per cent inflation target.”

1. The Logic of Removing the Rate Hike Bias a) Undershooting Inflation Why would the BoC remove its forward guidance? One argument for doing so would be that the new Governor may feel pressured to do something further to back up a main point that he has emphasized in his early communications. Thus far Governor Poloz has tended to argue that the BoC is just as concerned about undershooting its inflation target as overshooting and, with inflation cruising at 0.7% y/y and hence less than half of the BoC's 2% target, the central bank continues to fail to meet its prime policy goal (chart 1). A counter-argument to this is that the BoC can also achieve this aim by playing the pause and remaining accommodative within the existing language behind the rate guidance. b) Over-valued Currency Another argument for dropping the rate hike bias would be to weaken the currency. Currency markets have treated the bias more seriously than fixed income markets, but that argument gradually broke down as CAD sharply depreciated. Compared to last September's peak in USDCAD at 96.85, the currency has depreciated by over 8 full cents. It could well still be viewed as overvalued and we like the view that says it depreciates at least 10-15% more from here over the medium term. One reason is that while the US economy could well soften over the summer, the private sector should gradually gain further momentum into next year while fiscal drag gradually diminishes. Another reason is that three-quarters of the Canadian economy that lies in the household sector is operating at structural all-time highs across every volume, debt and price metric and is therefore likely to underperform the US household sector over time. This risks breaking the historical connection between US and Canadian GDP growth given that there is no parallel over history to today’s conditions marked by Canada’s household sector that is operating at all-time structural peaks versus the US household sector that remains mired in improving but still depressed conditions.

Why Should The BoC Bother Dropping Its Rate Bias?

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


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The BoC's Fed Constraint

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Chart 2

Global Views

Economics

6 July 12, 2013



As an added observation on Canadian GDP growth, we largely dismiss the Q1 gain of 2.5% since after excluding the mining, oil and gas extraction sector that has simply been rebounding from technical distortions that took growth down until last September, the rest of the economy only grew by about 1% at an annualized rate. If that single sector is done recovering from lost output throughout much of last year, then it is likely to become a more neutral driver of GDP growth over the balance of this year into next. All of this matters because it is relative GDP growth differentials and their pull effects on capital flows that drive currencies in the long run, and as an offshoot from that, drive relative central bank policies that should gradually turn more and more constructive to the USD relative to CAD. This would come as the US tapering debate signals greater potential upside to yields at the US front end than Canada’s and thus serve as a prime currency driver (chart 2). Regardless, CAD depreciation to date lessens the pressures upon the BoC to remove its rate hike bias. Furthermore, Governor Poloz has tended to downplay the competitiveness problem stemming from an elevated CAD by noting that it can have effects upon business margins but less so on volumes. Of course, that reasoning has its limits as CAD depreciation becomes more significant. Regardless, the central bank’s powers to sustainably influence CAD are weak — a lesson learned through failed interventions in the 1990s. c) Join Other Central Banks In Tamping Down Fed-Inspired Rate Increases A third argument for removing the hiking bias would be to join European central banks in attempting to tamp down upward global rate pressures that were sparked by speculation that the Federal Reserve will reduce the pace of its asset purchases. Forward guidance is much less powerful, however, when central banks are already operating at the lower zero bound and when markets are already largely convinced that short rates are not going anywhere for a long time. A central bank not engaged in QE measures — like the BoC — has limited influence further up the curve. The front-end gains to strengthened forward guidance often amount to a few basis points at best. This is also true in Canada where a flat term structure has, say, yields on five year Government of Canada bonds trading at only about a 75bps spread above the overnight rate and with little perceived risk of rate hikes for a long time. 2. Arguments Against Removing the Rate Hike Bias a) Enough Flexibility Already There are, however, at least as many decent reasons not to remove the rate hike bias. One reason for not removing the rate hike guidance is that the commitment as it currently stands is so open-ended in nature and thus so vague that it already allows for enough policy flexibility. Go back and read it again, and the last paragraph in the BoC’s statement just says that after “a period of time” some “modest” withdrawal of stimulus “will likely be required.” That language is wide open to interpretation: how long of a period is meant? How modest will future hikes be? What is the meaning of the subjective probabilistic word “likely”? b) Front-End Is Not Unreasonably Priced Another reason is related to the first one and postulates that, frankly, 2s are already pricing in future rate hike risk. Even with our view that the central bank is on hold until 2015, 2 year yields at 1.15% are reasonably pricing in small back-end loaded rate hikes and may if anything be a little light in this regard.



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Global Views

Economics

7 July 12, 2013



c) Encouraging Excess Household Indebtedness A third reason is that dropping the hike bias could provide the wrong signal to household borrowers to expect low(er) for longer and hence go out and feed the debt growth binge against which the BoC began to apply moral suasion relatively late in the cycle. A counter-argument to this is that household debt growth has sharply decelerated in response to strong evidence of structural peaks across most activity measures in the household sector and in response to what might well prove to be seen as a pro-cyclical over-tightening of macroprudential rules governing household financing markets (chart 3). Thus, low(er) for longer rate guidance would just be a move toward accommodating downside risks to the household sector. d) Are You Sure You Wish To Engineer Rate Cuts? A fourth reason against removing the bias would be that markets would probably take it as a cue to start pricing in rate cuts which may force the BoC's hand in this regard and thus risk revisiting the risks of operating closer to the lower zero bound. Should it eliminate the rate hike language, the BoC is unlikely to be able to hold off leveraged fast money swooping into the front end of the curve and undershooting pause guidance in favour of sub-1% 2s as has happened in the past. Conclusion So where do we come down on net? The BoC could strengthen the language surrounding “a period of time” and turn more dovish on next week’s statement details to reinforce that rates are not going anywhere for a long time. That would achieve the goal of anchoring the front end of the curve through what is likely going to continue to be a very volatile curve environment going forward, but we see little value in dropping the bias entirely given the handicap of having introduced it in the first place and the mixed signals that could be conveyed to markets and borrowers. The BoC could achieve such an outcome through more explicit reference to the length of the pause, such as — in one scenario — by perhaps reintroducing a conditional commitment, pushing out its inflation forecast, revising next year’s growth forecast lower, and thus pushing out in time the period at which the Canadian economy closes spare capacity. That may not be what the BoC does, but it would be in keeping with our view that the BoC is too aggressive in its growth forecasts into next year and thus too aggressive in its timeline regarding when spare capacity closes (chart 4). The trade-off that Poloz must make lies in the confidence injection of signaling a more prolonged pause, versus the negative signal associated with lowering the BoC’s growth forecast. For a central bank governor who leans more heavily upon the confidence building role of the BoC, this poses an awkward trade-off. Judging how he may manage this in concert with the Governing Council is difficult because Poloz has yet to establish a track record by which to more adequately evaluate his monetary policy bias and framework.



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Scotia'sOutput GapBoC's outputgap

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Global Views

Economics

8 July 12, 2013

FISCAL

Good news on fiscal 2013 deficit is not spurring mid-term policy compromises. As expected, the starting point for the Obama administration's Mid-Session Review (MSR), released this week, presented three months after its early April Budget, is a $214 billion downward revision in its projected deficit for fiscal 2013 (FY13) to $759 billion1 (left chart). Assuming no policy changes, the Congressional Budget Office (CBO) forecasts a $642 billion shortfall this year. Scotiabank's estimate of a $720 billion FY13 deficit assumes some modest Q4 slippage in the $394 billion y/y bottom line improvement indicated by monthly data for the first three quarters of FY13. The MSR adds $65 billion to FY13 revenues. 'Technical' revisions offer a $110 billion revenue boost, but lower output growth and GDP inflation estimates of 2.0% and 1.5%, respectively, for calendar 2013 trim revenues by $46 billion. The MSR lowers estimated FY13 expenditures by $149 billion, given the continuation of the sequester’s across-the-board spending cuts through FY13 and higher-than-expected dividend payments from Fannie Mae and Freddie Mac. From FY14 to FY23, however, the MSR's forecast of somewhat wider deficits than the April Budget estimates increases Washington's red ink by a cumulative $0.5 trillion. Deficits from FY20 to FY23, according to the MSR are now expected to average wider than $550 billion annually, more than 2% of GDP, allowing only a gradual reduction in publicly held debt-to-GDP from the projected peak of over 78% in FY15-FY16. Slightly slower economic growth is expected to shave $424 billion from revenues over the decade to FY23. Spending estimates from FY14 to FY18 are almost unchanged, but a re-estimation of a number of mandatory programs and net interest contributes to a $138 billion expenditure increase from FY19 to FY23. The MSR builds in cumulative deficit reduction of close to $1.8 trillion over the next ten years from the President's package of replacing the sequester with additional spending cuts, modest entitlement adjustments and revenue gains from closing tax loopholes, elevating the total deficit reduction effort to more than $4.3 trillion. But the wide differences between the various policy prescriptions remains, as the right chart illustrates, despite some breathing room offered by the U.S. private sector's ongoing recovery and the savings from unwinding overseas military operations and the extraordinary supports offered during the recession. The next fiscal decision points occur this Fall with the expiry of the current continuing resolution providing the government with spending authority until September 30 and the debt ceiling vote likely required in October when the U.S. Treasury's ongoing "extraordinary measures" are exhausted. Going forward the escalation in net interest should serve as one reminder of deficit discipline, with the MSR now projecting an increase from $215 billion in FY13 to $302 billion in FY16 to $545 billion by FY19.

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

The Divergence In U.S. Federal Deficit Forecasts

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1. U.S. federal fiscal year-end is September 30; fiscal estimates in US dollars; FY12 federal deficit: $1.087 trillion.

Global Views

Economics

9 July 12, 2013

US MONETARY POLICY

We show how consensus lines up across the key Fed policy variables affecting the debate over tapered asset purchases and explain where and why we differ.

When Will Tapering Happen? 17 of 21 primary dealers answered this question (81%). This is the highest response rate among the

questions posed by Reuters in their July post-nonfarm Survey. Unfortunately not all primary dealers responded to the survey or to each question.

A modest majority of consensus (11 out of 17 respondents and 21 dealers) now expect a tapering announcement at the September 18th FOMC meeting (chart 1). In July, five shops brought forward their expected date for tapering compared to the June survey. We don’t know what the other five shops believe.

Of the remainder who answered, three expect the Fed to taper at the October FOMC meeting, two expect tapering in December (including ourselves, BNS), and one expects this to occur in 2014Q1.

Note that none of the primary dealers expect tapering to be announced at the July 31st FOMC. Our view has always been that US growth would ebb into Q2/Q3 after consumers brought forward

consumption growth into Q1 and that the sequester would impose additional downsides while inflation continues to under-shoot the Fed’s policy goals. We do not discount the possibility that Q2 growth could come in at sub-1% in accordance with recent forecast revisions by some shops. If that happens, then growth of 0.4% in 2012Q4, 1.8% in Q1 after downward revisions, and potentially sub-1% in Q2 would make it awfully hard for the Federal Reserve to taper asset purchases come September especially as tightened financial market conditions impair growth into Q3 as well. Such factors are in addition to external risks to the US economy, the global impact of early tapering, and the continued uncertainty over the US debt ceiling debate. These views would support later tapering rather than sooner.

Two things have now changed. One is that the Fed can perhaps now tick the box on moderate sustained employment growth in the wake of upward revisions to US job growth. Note, however, that significant slack in job markets still persists and so does the debate over potentially lowering the unemployment rate threshold. This is why Fed Chairman Bernanke has repeated that the Fed still lies short of its employment targets.

While job growth has improved, reach-for-yield concerns have gone the other way and toward imposing a broad financial shock on the US economy. Witness the USD’s 3-6% appreciation against the yen, Euro, pound sterling, CAD and the A$. Also note that a sharp rate shock has, for instance, returned the 30 year fixed mortgage rate to the highest level since May 2011 and the Moody’s BAA corporate benchmark yield to October 2011 levels. Also note that oil prices are at their highest levels since early 2012 in the wake of instability in Egypt.

How Consensus Lines Up Across The Fed Tapering Variables



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Consensus Expects Tapering In September

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Chart 1

Global Views

Economics

10 July 12, 2013

US MONETARY POLICY


On net, less evidence of reach-for-yield pressures may lower the perceived urgency for the Federal Reserve to taper purchases, while growth downsides amid a significant shock across several financial variables counsel caution on timing the tapering decision. This is likely why no one expects tapering on July 31st. Although the tone of data and markets going forward will be instructive and we could well be proven wrong by better data and/or a possible policy misstep, at this juncture we feel that consensus is being overly hasty in bringing forward tapering expectations and we are sticking with our off-consensus December call.

How Big Will Tapering Initially Be? 15 primary dealers answered (71%). The median estimate expects monthly purchases of MBS and Treasuries to be initially reduced by $20

billion. The range of estimates is wide from $10 billion to $28 billion (chart 2). We expect tapering later (in December) but expect among the largest tapering decisions at $25 billion.

Only two other shops are toward the upper bound on the size of the first taper. Our view is that when the Fed decides tapering is necessary, it would be futile to come in low on the adjustment.

It is important to note that there appears to be no relationship between the timing of the first decision to taper and the amount of this taper. We are among the minority expecting later but bigger tapering.

When Will QE3 End? 16 primary dealers answered (76%). The median answer expects QE3 to end in mid-2014. All expect QE3 to end between March and

September (chart 3).



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Global Views

Economics

11 July 12, 2013

US MONETARY POLICY


How Big Will QE3 Ultimately Be? Only 13 primary dealers answered (62%). Few changed their assessment of the cumulative size of the QE3 program with the consensus sitting at a

median estimate of $1.3 trillion which is the same as our estimate and actually up but only marginally so from US$1.255 trillion in the prior survey.

The range of views is materially wide, from as low as US$1 trillion to as high as US$1.4 trillion for a $400 billion difference (chart 4). By reference, the Fed has purchased $670 billion in combined MBS and Treasuries under the QE3 program up to the end of June. QE2 equaled $600 billion.

The most dovish shop expects small tapering in December, is also at the upper bound within consensus on the size of QE3 and expects the program to end only by next September.

The most hawkish shop expects a large September taper and sees the program ending next March at US$1.02 trillion which lies toward the lower end of consensus.

At least in terms of forecasters within the primary dealer community, we also note that the Fed’s problem does not lie in terms of convincing markets that the Fed funds target will be on hold well into 2015. All but one shop expects the first rate hike to occur only by 2015 and the one remaining shop retains a 2016 call. Further, a key takeaway from our round-up of consensus expectations is that the Federal Reserve appears to have generally succeeded in ensuring stability in the primary dealer community’s expectations regarding the stock and duration of asset purchases. Interestingly, despite this success, the issue confronting the Fed is how to manage uncertainty governing the flow of purchases, and indeed this failure has resulted in the volatility in bond prices witnessed since May when the tapering debate intensified. That may call into question the Fed’s view that it is the stock of purchases that matters over the flow.



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RBS BNPParibas

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Source: Reuters.

$ billions

No Tapering of QE3’s Size

Chart 4

Global Views

Economics

12 July 12, 2013

US MONETARY POLICY

We review how Chairman Bernanke returned to a more dovish interpretation following the publication of hawkish-sounding FOMC minutes.

Two conflicting assessments of the Federal Reserve’s policy bias emerged on July 10th within hours of one another in the form of what we treated as Chairman Bernanke’s dismissal of the messages that fell out of stale minutes to the June 18th-19th meeting of the Federal Open Market Committee. This article explains what was said in both the Fed minutes and by Ben Bernanke. What The Minutes Said The big surprise in a full reading of the minutes to the June 18th-19th FOMC meeting was that half of FOMC participants (voting and nonvoting) wanted to end the QE3 program by the end of this year, and that suggested strong tensions within the Fed against the guidance from Bernanke and the majority of FOMC voting members that the program would last until mid-2014. This makes the picture very vulnerable to the shift in the composition of FOMC voters next year that is likely to see Bernanke’s departure given reports the White House is advancing the search for his successor, and the rotation of perennial hawks Fisher and Plosser into the vote (and doves like Evans and Bullard out). If half think QE3 should end within six months and more of that group will vote next year, then this raises the risks to destabilizing Fed policy in such a manner as to make us very nervous regarding the Treasury outlook, all else equal. What Bernanke Said Our view that the FOMC minutes were full of stale surprises which pre-dated the market shocks imposed by the FOMC’s statement and Bernanke’s press conference on June 19th was borne out in light of Chairman Bernanke’s comments on July 10th in Q&A following the publication of the minutes and after delivery of a relatively innocuous speech. So what did Bernanke say? We frankly read his comments noted below as an about-face from the tone of the June FOMC statement that declared fewer downside risks. In the wake of the abrupt market response to the June FOMC statement, Bernanke now sees some signs of

tightening financial conditions which confirms our suspicions that he did not anticipate the extent of the adverse market reaction to the FOMC statement. That, combined with the absence of any forward-looking comments on the potential effects of the statement on post June 19th financial conditions in the minutes themselves reinforces our bias that the Fed is surprised by the rates sell-off in a way that puts renewed downside risks to FOMC forecasts.

Bernanke now also repeats the earlier line from prior to the FOMC statement that it is too early to tell whether the US economy has weathered fiscal restraint. That’s a step back from downside risks having diminished and back to the prior playbook on how the Fed would want to wait until after the data can be evaluated in the wake of the sequester’s effects which we won’t have in its entirely until well into the Fall. We still do not understand why the Fed did a 180 turn in evaluating downside risks from waiting for the sequester’s full effects one minute, to sweeping aside such concerns on June 19th before we have the data to evaluate the economy’s performance and long in advance of the debt ceiling debate that still looms large into October.

Bernanke also flagged “significant risks” that bear ongoing monitoring, and noted that more stimulus is required in targeting the Fed’s dual mandate objectives.

He also repeated that the Fed remains off its employment targets and appeared to now put more weight upon undershooting the Fed’s inflation target than was evident on June 19th.

If Bernanke’s updated bias is representative of current thinking across the Fed, then it fully rejects any notion that the Fed is about to signal tapered asset purchases this month at the July 31st FOMC, or even September in our opinion.

Bernanke Overrides Stale FOMC Minutes, But Can He Guide The FOMC?



Global Views

Economics

13 July 12, 2013

US MONETARY POLICY


And Why The Minutes Were Stale Nevertheless, treat the minutes as stale for two reasons such that all else is not equal. First is actually a point that would reinforce the early tapering and ending QE3 view whereas there was a dovish offset with the declaration that “many members indicated that further improvement in the outlook for the labor market would be required before it would be appropriate to slow the pace of asset purchases”. The FOMC arguably got that wish when last Friday’s nonfarm payrolls report landed including revisions that brought the six month moving average to about 200,000 jobs created per month. That still leaves open debate for the amount of slack in US job markets and whether the unemployment rate target should be lowered. To date, only Chicago’s Evans has suggested a rule of thumb in keeping with the six-month moving average argument and the rest of the FOMC voters may not yet be convinced that enough progress has been made in job markets. The second reason to dismiss the minutes as stale goes in the opposite direction from the backward looking improvement in the jobs picture. It lies in the fact that financial markets have moved a great deal following the June 18-19 FOMC meeting and we don’t see signs that “many” or the majority on the FOMC were significantly worried about the potential market impact of the statement and press conference. The large upward spike in rates since then leaves open the possibility that the Fed would be more worried after observing the market’s response to the June 19th steps and would therefore perhaps be more cautious now than during the two-day meeting. Bernanke’s comments following the publication of the minutes confirmed this interpretation. At risk, however, is that the Chairman may not be speaking with the full authority of the FOMC backing him. The question is whether a likely outgoing Chairman holds sway over a more hawkish-than-expected set of FOMC officials. We need to hear a clear message from the majority of voting FOMC officials that they stand behind the Chairman’s updated assessments that were provided yesterday. We got that from Dudley’s post-FOMC speeches, but not so much from the Governors who have spoken since and that needs to be addressed in the Fed’s line-up of speakers. Otherwise, the half of all FOMC officials (voting and nonvoting) who advocated ending QE3 by year-end represent a hawkish counter-weight to the Chairman’s views particularly as more of the hawks (Fisher, Plosser) vote next year and rotate some of this year’s doves (Evans, Bullard) out of the picture. Our full listing of how the opinions of FOMC officials line up within the framework used by the meeting minutes that lists the frequency with which individual opinions, particularly on policy matters and forecasts, were expressed is available upon request.



Global Views

Economics

14 July 12, 2013

LATIN AMERICA

The Central Bank of Brazil increased its policy-setting SELIC rate by 50 basis points (bps) to 8.5% at the end of its two-day Monetary Policy Committee (COPOM) meeting on July 10th, 2013. Ongoing sell-off pressure in the emerging-market asset class fuelled by shifting views regarding US monetary policy direction, coupled with deteriorating local growth and inflation conditions, have intensified the drive for official intervention by the Brazilian authorities to restore exchange rate stability and contain rising inflationary expectations. Market participants anticipated the policy action. The Brazilian real (BRL), which has depreciated by 14% over the past four months reacted negatively to COPOM’s decision and is valued presently at 2.27 per US dollar (USD). Brazilian equity securities, which have been declining since the beginning of the year (down 29% in local-currency terms), maintain a bearish tone at present. Finally, sovereign debt markets have also been in risk re-pricing mode lately, with the credit-default spread (CDS) widening by 100 bps since early May to the current level of 200 bps. The Brazilian authorities are focused on the battle against inflation. Further monetary tightening is in store; the next COPOM meeting is scheduled for August 28th. The sharp currency devaluation and ensuing volatility has impaired the effectiveness of the government’s inflation containment strategy. Sell-off pressure on emerging-market asset classes driven by the “Fed forward-guidance shock” injected further instability. Consumer price inflation reached 6.7% y/y last month, slightly above the officially established 4.5-6.5% target range. Government officials and central bank leaders are united in an effort to control growth-damaging price pressures. At the same time, the Rousseff administration maintains its commitment to reach fiscal targets through planned spending cuts to attain a primary surplus equivalent to 2.3% of GDP. Economic activity remains weak. Real GDP expanded by just 1.9% y/y in the first quarter of the year, yet there seems to be a slight acceleration in prospect for the second half of the year. At the core of such fragile economic performance is the absence of a well-executed public sector investment program together with the adverse effect of a strong-currency policy and lower commodity markets. Domestic interest rates in Brazil remain excessively high, preventing further leveraged domestic consumption. The International Monetary Fund recently lowered its economic growth projections to 2.5% and 3.2% for 2013 and 2014, respectively with a clear bias towards further downside risks. The political landscape has deteriorated sharply as portrayed by recent and persistent nationwide waves of violence and public protest in most cities in the country. President Rousseff has also acknowledged the need to address corruption to improve the deteriorating social climate; a plebiscite aimed at constitutional reform to overhaul the political system may also be in store. The need to improve basic infrastructure has also aggravated the eroding socio-economic situation, prompting the government to announce a multi-billion plan to upgrade the transport sector. Society is demanding corruption control and more aggressive government spending on health care and education. Meanwhile, there are growing concerns regarding the country’s infrastructure adequacy to host the 2014 World Football Cup and the 2016 Olympic Games.

Pablo Bréard (416) 862-3876 [email protected]

Brazilian Interest Rate Hike Amidst Heightened Social Tensions

Global Views

Economics

15 July 12, 2013

EUROPE

Solid fundamentals and fiscal management support economic outperformance, stable triple-A credit rating and gradual currency appreciation.

Sweden continues to benefit from a strong sovereign credit profile, illustrated by an uninterrupted history of triple-A credit ratings since 2004. The “stable” outlook by all three major rating agencies is underpinned by the nation’s record of prudent fiscal management, favourable external position, low public debt and robust institutional framework (including monetary policy flexibility). Sweden has relatively limited exposure to the euro area periphery in terms of both trade and financial linkages. Risks to the ratings outlook relate to the dependence on short-term wholesale funding and the high external debt load of the large banking sector (with assets over 400% of GDP), and rising household indebtedness (around 170% of disposable income). Sweden’s public finances are strong, underpinned by a set of fiscal rules designed to ensure long-term sustainability and a low interest burden. Fiscal discipline by successive governments has allowed the gross public debt to be reduced by nearly one half - from its peak of 73% of GDP in the wake of the country’s financial crisis in the early 1990s to 38% as of 2012. The government budget recovered quickly following the last recession (with only one year of deficit in 2009); however, it returned to a shortfall position in 2012 (0.5% of GDP) and the gap is expected to persist through 2014 (averaging around 1%). The 2013 fiscal bill outlined SEK23 billion worth of stimulus (equivalent to roughly 0.6% of GDP), including a reduction in the corporate tax rate from 26.3% to 22%, infrastructure investment plans and measures to strengthen the labour market. Sweden’s current account surplus averaged 7.4% of GDP over the last decade. The nation will continue to register surpluses in each of the trade, services and income accounts, with the overall surplus to remain steady around the 7% mark in 2013-14. Growth dynamics weakened markedly in Sweden in 2012 on account of the adverse effects of the downturn in Europe on exports (50% of GDP) and investment. Although external uncertainties remain prevalent and unemployment is still high (with the jobless rate averaging 8.1% over the last 12 months), economic conditions have begun to stabilize on the back of solid domestic demand. Real GDP is expected to advance by 1.3% this year (up slightly from 1.1% in 2012), before accelerating to around 2.4% in 2014. The continued expected outperformance relative to advanced European and Nordic peers - with the exception of resource-rich Norway - is attributable to the external competitiveness of the economy (low unit labour costs and favourable investment environment) as well as monetary and fiscal policy accommodation. Deflationary pressures persist, although the pace of price declines has moderated in recent months alongside krona depreciation. The headline CPI fell by 0.1% y/y in June while the underlying measure (excluding mortgage rate effects) picked up 0.9%. The Riksbank (the central bank) expects inflation to rise gradually toward the 2% y/y target by 2015. While there remain two dissenters on the Riksbank’s executive board who continue to press for rate cuts, no further policy easing is anticipated given that an economic recovery is in sight and the currency outlook is somewhat weaker. The benchmark repo rate will likely stay at its current level of 1.0% until the second half of 2014. The Swedish krona (SEK) - among the ten most actively traded currencies in the world - weakened sharply in June, primarily as a result of global financial market repositioning in light of shifting US Federal Reserve policy expectations. Continued pressure from a broadly stronger US dollar will limit near-term gains; however, we anticipate a partial correction through the remainder of the year and into 2014 driven by relative monetary policy expectations, as the Riksbank will ultimately lead other major central banks in hiking interest rates. Sweden’s solid fiscal profile, large current account surplus and sound financial system will maintain support for the currency’s safe-haven status over the longer term. Our year-end EURSEK targets for 2013 and 2014 are 8.50 and 8.20, respectively.

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

Sweden — Economic And Currency Outlook

Global Views

Economics

16 July 12, 2013

Economics / Foreign Exchange Strategy

ASIA/PACIFIC

Gradual economic improvement & near-term currency weakness. Economic Outlook New Zealand’s economic prospects remain sound. We expect real GDP to grow by 2.7% in 2013, equivalent to last year’s gain, before picking up to 2.9% next year, reflecting an improvement in global momentum. New Zealand’s output increased by 0.3% q/q (2.9% y/y) in the first quarter of the year following a strong 1.3% (3.6% y/y) gain in the final quarter of 2012. The performance of the small commodity-producing economy (particularly dairy, meat, and wood products) will greatly depend on the global growth cycle and world trade. For the time being, subdued external conditions will continue to weigh on the overall economic outlook as the country’s exporters battle with still-weak global demand and a strong currency. A pick-up in export sector activity will likely become more evident in 2014 along with the rebound in global conditions. Domestic demand continues to be the main economic motor, driven by earthquake-related reconstruction investment, though government spending will be constrained by fiscal consolidation efforts. Household spending is supported by developments in the labour and housing markets with improving momentum carrying into the second quarter, as evidenced by recent consumer confidence gains. In fact, New Zealand’s monetary authorities remain vigilant regarding developments in household debt levels and the housing market, assessing that house prices are currently overvalued. House price gains accelerated to 7.6% y/y in May compared with an average gain of 6.3% in the first quarter, though residential sales gains came to a halt in June following robust growth in prior months, confirming our view that the economic recovery continues to be uneven. Inflationary pressures are set to remain manageable in the coming quarters; the consumer price index (CPI) increased by 0.9% y/y in the first quarter of 2013, staying below the lower end of the Reserve Bank of New Zealand’s (RBNZ) 1-3% target range. The CPI for the second quarter of the year will be released on July 15th; we estimate that consumer prices increased by 0.8% y/y (0.3% q/q). Reflecting continued economic growth and increases in petrol and tobacco excise taxes, headline inflation will likely begin to creep higher in the latter part of the year reaching the 2% mark in early 2014, and remaining near that level throughout the year. Following the RBNZ’s policy meeting in mid-June, the monetary authorities maintained the benchmark Cash Rate at 2.50%, where it has been kept since early 2011. Policymakers noted that the rate will likely remain at the current level through the end of the year. The next monetary policy meeting is scheduled for July 24th; in line with the consensus of forecasters, we expect the benchmark interest rate to be left on hold at 2.50%. We assess that a gradual monetary normalization phase is set to commence in early 2014. Currency Outlook We expect further near-term New Zealand dollar (NZD) weakness based on a broadly stronger US dollar (USD) as markets react to shifting Fed policy and the rising risks associated with Asia’s growth outlook. However in 2014, the NZD is expected to retrace some of these losses as the RBNZ looks towards an interest

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

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

New Zealand — Economic And Currency Outlook

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Global Views

Economics

17 July 12, 2013

Economics / Foreign Exchange Strategy

ASIA/PACIFIC


rate hiking cycle and global growth fears begin to subside. We hold a 2013 NZDUSD year-end target of 0.75 and a 2014 year-end forecast of 0.82. On a year-to-date basis, the NZD has depreciated by 6% vis-à-vis the USD but is trading 10% above its 10-year average level of 0.7079; most long-term valuation tools, such as purchasing power parity, suggest that the NZD remains overvalued, however currencies can remain over or undervalued for years at a time. Shorter-term market correlations suggest that the NZD is shifting in line with traditional patterns (please see chart below), highly correlated with the AUD, CAD, interest rates, commodities and risk. Accordingly, the outlook for the NZD is dependent on relative interest rates, the broad global growth outlook and domestic drivers. The RBNZ struggles with the risks to financial stability poised by high household leverage and a strong housing market but an economic backdrop that is still vulnerable; monetary authorities likely also recognize that loosening policy in Australia and Japan with neutral policy in New Zealand has an important appreciating FX consequence. The RBNZ has periodically intervened in FX markets but we do not view this as a material risk for the NZD. In the near-term the USD is expected to appreciate broadly on the back of shifting Fed policy and this will likely continue to impact the NZD; however, by mid-2014 we expect the market to be looking ahead to tighter policy in New Zealand, which should help to support the currency. The New Zealand economic outlook is subdued but positive, as detailed in the fundamental section. Juxtaposed against the US, New Zealand should outperform, however to a relatively small degree and likely not enough to drive near-term NZD strength. With regards to the global growth outlook, a new wave of pessimism seems to be unfolding with regards to China; this could weigh on the NZD in the near-term. Finally, sentiment towards the NZD is balanced, with the CFTC reporting as of July 2nd, a flat position. Summing up, we expect near-term NZD weakness to continue as the USD strengthens; however, by mid-2014 the New Zealand dollar should be recovering.

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


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New Zealand Dollar Performance

Global Views

Economics

18 July 12, 2013

GAMING INDUSTRY

Despite this year’s deceleration, government deregulation and expansion of new casino and online gaming will continue to support industry growth over the next few years.

Global casino and online gaming revenue is expected to moderate this year to roughly 3%, down from 5½% in 2012. The slowdown reflects ongoing economic and fiscal challenges in the euro zone, the U.K., the U.S. and Canada, which are weighing on consumer confidence, discretionary spending and travel demand. In addition, economic growth and industry activity have also softened in emerging markets. Looking ahead to 2014 and 2015, revenue growth in the global gaming industry is expected to accelerate, driven by ongoing deregulation and the expansion of new casinos and online gaming markets, as well as stronger global economic growth and improving business and consumer sentiment. Industry expansion will continue to shift from low-revenue growth markets in the U.S., Western Europe and Australia, to high-growth emerging markets, particularly in the Philippines, South Korea, Japan, China, Eastern & Central Europe, the U.K. and Russia. During the first four months of 2013, U.S. gaming activity was dampened by heightened uncertainty surrounding fiscal restraint. Notwithstanding a soft start, U.S. gaming is expected to post modest gains this year, but with varied results across regions. In Las Vegas, changing spending habits of gaming patrons and rising competition will continue to dampen revenue growth. Nevertheless, its superior entertainment and revamped convention center will continue to attract major tourist volumes and corporate events. In contrast, gaming activity in Atlantic City will continue to contract, dragged down by increasing competition from neighbouring states, as well as fewer visitors due to the destruction caused by Hurricane Sandy. Regional casinos will continue to outperform and register high-single-digit growth in 2013. In Canada, household deleveraging and weaker consumer spending are dampening gaming prospects in 2013. However, some offset could come from a weaker Canadian dollar boosting U.S. visitors, the legalization of single event sports betting and developments in online gambling. The proposed casino in the city of Toronto has been rejected, however, with other locations in the GTA trying to secure this franchise and the OLG Corporation aiming to expand private sector delivery of lottery, casino and online gaming offerings, in 2013 the biggest development in the Canadian gaming industry could occur in Ontario. European gaming activity is projected to register low-single-digit growth in 2013, largely due to rising investment activity. However, growth will continue to be tempered by significant economic setbacks in the region. Elevated unemployment rates, weak consumer discretionary spending and fiscal consolidation in Spain, Portugal, Italy and Greece continue to dampen the outlook for 2013. Nevertheless, some offset will come from the U.K., where the deregulated casino licensing market has supported the resurgence in gaming revenue and investment. In addition, ongoing deregulation and the expansion of new casinos and online gaming markets in Central & Eastern Europe and other areas in Western Europe should provide some relief. Asia-Pacific will continue to be the fastest-growing market, however, following years of rapid expansion and robust revenue growth, gains in China and Singapore will moderate this year, at a pace more aligned with real GDP growth. The weaker outlook reflects the region’s already sizable revenue base and heavy reliance on international visitors. Gaming revenue growth in Macao is forecast to slow to high-single-digits in 2013, with support from improved infrastructure and rising demand from China. Following an unexpected decline last year, gaming revenue in Singapore is expected to rise by less than 5%, with activity continuing to be constrained by the current capacity at integrated casino hotel resorts and further government measures to limit the access of local citizens in an attempt to contain gambling-related social ills, which is also an impediment in China.

Erika Cain (416) 866-4205 [email protected]

Global Gaming Industry Loses Momentum

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Source: Las Vegas Convention and Visitor Authority and the Statistics and Census Service Macao SAR Government (DSEC).

Emerging Markets Strategy Global Views

19 July 12, 2013

Yesterday’s issuance demonstrated that while the investor base for Pemex is willing to add exposure, with $3bn issued, investors are still not willing to pay up for the bonds. Despite all of the good news in press reports recently about the upcoming energy reforms, Pemex issued bonds at a concession of 20 to 30bp above the existing curve. Moreover, most of the issuance was short-to-medium term even as the reforms promise to boost oil production and decrease financing needs in the long-run. Similarly, the evolution of the spread over sovereign for Pemex over the past few years has shown little response to any developments in fundamentals.

Consider the evidence so far in Figure 1. Perhaps the most significant reform was the Energy Reform of 2008 which permitted some foreign participation in oil exploration through production sharing contracts. Nevertheless, following the approval of the reform and the recovery from the financial crisis, Pemex was trading around 90bp above the sovereign whereas that differential was 30-50bp before the reform. The largest move in spreads over sovereign occurred in the second half of 2011, with an increase from 80bp to 110bp, but that happened not as a response to fundamental news but rather as part of a much more generalized sell-off in emerging markets resulting from concerns over Europe. Other developments in Pemex, such as the successful awarding of incentive contracts to foreign service providers, President Calderon’s talk of privatizing Pemex, and the stabilization of oil production also had no noticeable effect. Why should the market ignore such news? One reason is that the reforms may not go far enough to have a significant impact on such a large firm’s long-run profitability. Similarly, Mexican politicians have been promising major reforms to Pemex for a decade, but usually under-deliver. Thus, investors may only respond when significant legislation is actually adopted and implemented.

Do Pemex Investors Care About Fundamentals?

Yesterday’s issuance seems more an opportunity to capture low US rates than capitalize on optimism about upcoming energy reforms. Historically, Pemex’s spread over sovereign has been insensitive to changes in fundamentals. We assess which of the energy reform proposals under consideration could actually have an impact on bond prices.

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

Araceli Espinosa (5255) 9179-5237 [email protected]

Figure 1. Pemex spread over sovereign in the long end

Source: Bloomberg, Scotiabank GBM

Emerging Markets Strategy Global Views

20 July 12, 2013

We also don’t know which proposals will be included in the current reform measure. Some concern the opening to private sector participation of downstream activities like refining and petroleum distribution. Refining is a low margin activity globally, and while some companies are able to make money in distribution, that activity is not where the value lies. Instead, with marginal costs of production under $20/bbl and Mexican crude oil prices at $100/bbl, it is the upstream activities that matter most. There are at least three proposals that we think should matter because they could help to increase oil production in the long-run. The first lowers the tax burden on Pemex so that it could invest more in exploration. Such a reform would also have a significant effect on Pemex’s financial statements, where regular losses resulting from an unusually high tax burden and sometimes even negative equity in the balance sheet perpetuate a negative image. The second proposal allows private companies to participate in the exploration process, whether as partners to Pemex or as competitors. Finally, changes in corporate governance could make the company more efficient in its exploration activities. Another uncertainty is whether the goal is to aid Pemex or to improve the energy sector as a whole even if it comes at the expense of Pemex. For example, there are proposals to open downstream activities to private sector participation, but we don’t know if the law will allow that participation in the form of partnerships with Pemex or as competition to Pemex. More importantly, in exploration, foreign firms may be allowed to form joint ventures with Pemex or they may be able to bid against Pemex for exploration rights, paying royalties directly to the state. While greater competition would probably enhance efficiency for the country with corresponding benefits to sovereign bonds, the impact on Pemex bonds is less certain. In the case of Petrobras, the opening of the sector to competition forced Petrobras to become more efficient with clear benefits for its investors. Nevertheless, loss in market share is also possible under some of these reforms, with potentially negative impacts for the company’s bonds. Pemex unions would certainty resist any such reforms, especially if private firms that compete against Pemex do not have unionized workers. The stability of Pemex’s spread over sovereign has surprised us over the past year, as we had expected the bonds to price the prospect of reform considering how much it was discussed by Peña Nieto. When we look at the spread over sovereign not in absolute levels but as a percentage of the sovereign spread, we find that this ratio has actually been increasing slightly over the past few years. Perhaps the market was incorporating the positive effects of the energy reform in the sovereign bonds rather than in the quasi-sovereigns. Overall, the history suggests that a reform would have to be very far-reaching to move Pemex bond prices.


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

Araceli Espinosa (5255) 9179-5237 [email protected]

Fixed Income Strategy Global Views

21 July 12, 2013

Over the last 10 days, the downgrading of Italy’s sovereign credit rating from BBB+ to BBB and in the outlook for Portugal from “stable” to “negative” by S&P remind us that most EMU governments remain under negative watch by rating agencies. While these agencies have remained silent since the beginning of the year, it seems that this situation could be once again changing. The impact on the market of the S&P decisions seems nonetheless to have remained muted as peripheral debt yields are still seen as benefitting from the ECB umbrella. Actually, the recent swings in both Italian and Portugal yields have been highly correlated with sentiment on the Fed’s monetary policy. In the case of Italy, the 10Y yield spread vs. Germany has remained fairly stable at around 260/290 bps, a sign of resilience given the rise in market volatility. For Portugal, the recent political crisis has favoured a rewidening but to levels well below those seen last year. However, there is still the risk that the reality of the macroeconomic environment could catch up with sovereign funding costs.

In this regard, among the big EMU countries, investors’ attention could once again turn to France and, as such, the preparation of the 2014 financial law this summer could come under strong scrutiny. France was downgraded one notch from its AAA status last year by both Moody’s and S&P, while it has kept its high rating with Fitch. However, all agencies have maintained a “negative” outlook.

At this time, the main rationales behind these moves and these negative outlooks have been the elevated

uncertainty with respect to France’s fiscal outlook, disappointment regarding the implementation of structural reforms to enhance competitiveness, and the exposure of France to the peripheral countries.

Although the on-going weak economic environment and political developments in peripheral countries

still point to a fragile situation, the worst of the crisis seems to have passed thanks to the ECB. So the risk of spill-over to France has somewhat diminished for the time being. Also, the introduction of the labour reform at the beginning of the year as well as the discussion of a new reform on pensions to be finalised in the months ahead illustrate the government’s commitment to moving forward with structural reforms. However, news on the budget outlook worsened during the Spring and this could be a source of fragility.

Up to early February, the French government repeated its commitment to reduce the budget deficit to

3.0% of GDP this year from 4.8% in 2012. Four months later, the Stability Program sent to the EU Commission admitted that lower-than-expected growth dynamic this year would make it difficult to reach this target. As a result, the government now expects a budget deficit closer to 3.7% of GDP. Could it be worse than this? Looking to the EU Commission forecast, it seems possible, with an expectation of 3.9%. It is also the risk mentioned by the French Accounting Court (Cour des Comptes) in June, which estimated a figure between 3.8% and 4.1%.

Hot Summer For French Budget!

Frédéric Prêtet (00 33) 17037-7705 [email protected]

Chart 1: Portuguese & Italian yields still immune to rating changes?


22 July 12, 2013


While it is always risky to draw clear cut conclusions from monthly data on the budget as the seasonality could change from one year to the next, the figures from the first five months of this year tend to add fuel to the risk of a near-4.0% of GDP outcome. In May, the budget deficit reached €72.6 billion (bn) vs. €69.6 bn at the same time one year earlier.

It seems that both the spending

and the revenues sides are running away from previous expectations.

On the spending side, they are up more than 6% yoy in the first five months of the year. This

compares with the 1.2% yoy rise expected in the initial 2013 Financial Law. It is true that temporary and extra spending linked to the funding of the EIB (€1.6 bn) and the ESM (€3.3 bn) created an upward bias. Under Eurostat’s rules, these outlays will not be counted in the budget deficit. While removing these two factors of course reduces the magnitude of the increase, spending is nonetheless still up around 2.8% yoy, that is twice quicker than assumed.

On the income side, revenue is up 5.8% yoy, which is much lower than the 10% expected in the

initial Financial Law and even the 7.5% assumption announced in the revised Stability Program. While revenues from the corporate tax seemed to have surprised on the upside, this is less so the case for other categories like income taxes and indirect taxes like the VAT and the tax on energy (TIPP).

All in all, assuming that these respective yoy trends are replicated for the whole year (which we

agree is a bit simplistic) points to a budget deficit of around €80 bn rather than the €62 bn announced in the initial Financial Law, and so closer to the 4% of GDP mark.


Chart 2: French State budget deficit, monthly trend

Table 1: French State budget deficit, first five months of 2013

Sources: Bloomberg, Scotiabank


23 July 12, 2013


Looking ahead, this unfavourable dynamic puts strong pressure on the profile for the reduction of the French deficit for next year and up to 2017. In the Stability Program sent to the EU Commission in April, this trend was already revised up compared to the initial Financial Law to a target for 2017 of -0.7%, from -0.3% previously. However, at that time, the government indicated that the 2014 budget deficit would be below the 3.0% line, at 2.9%. It seems now that this target won’t be reached either. Recent indications from the Socialist Budget Commission at the French parliament suggest a figure rather around 3.5%. For the EU Commission, the risk could be even higher with a forecast for a rewidening in the French budget deficit to 4.2% next year after the 3.9% seen for this year. As a result for the Commission, the French debt to GDP ratio could continue to rise at a decent speed, reaching more than 96%, which is close to 10 points wider than assumed in last year’s Financial Law.

Last arbitrage for next year’s Financial Law will be taking place this summer, and the capacity and the credibility of the government to stick closer to initial plans could be closely watched.

Credibility could be judged first on the growth assumption for next year. Currently, the government

expects a 1.2% yoy rise. While the figure better matches with the estimated trend of French potential growth (around 1.4%), it could still be seen as too optimistic in view of the June Consensus Forecast which points to a figure at 0.6%. As a result, like this year, there could be questions regarding the capacity for meeting revenue expectations in the case that the French government sticks with this estimate.

Also, with disappointing growth dynamics and therefore downside risk on the revenue side, it is on the

spending side that the pressure is increasing. The government is well aware of this and has already indicated that the prospect of a 1% reduction in the structural deficit for 2014 will be linked primarily to tighter spending. Indeed, it should represent €13 to €14 bn (approximately 70%) of the adjustment, roughly in line with the recommendation of the French accounting court, while revenue gains should account for around €6 bn. However, the French accounting court noticed that, in 2012, while slowing down to around 1.0% from an average of 1.4% in 2008-2011, spending growth was still running higher than the 0.4% announced in the 2012-2017 program. So, it seems that there is also a tendency to be too optimistic on this front too and figures for the first five months of this year raise the risk that this could be also the case for 2013.

Therefore, the summer may prove tense for the government in the final preparation of next year’s

Financial Law with the growth assumption and the credibility of the announced measures to control spending likely to be closely watched.


Table 2: French Stability Program

Foreign Exchange Strategy Global Views

24 July 12, 2013

This coming week is relatively light in terms of tier-1 global data compared to the past two eventful weeks, but still features important indicators of US economic activity, such as the Fed’s Beige book and industrial production. US activity indicators will likely be relevant for the broader region due to their impact on “tapering expectations” and also more directly to the Mexican economy due to the strong links between the two countries’ manufacturing sectors. The two major external LATAM currency drivers in our view remain China’s growth outlook and Fed tapering views, so Fed-speak and US indicators will be monitored.

Week-ahead views: Brazil: The BCB (central bank) delivered the anticipated 50bps SELIC policy rate hike the market expected on Thursday, but as it usually does, provided little guidance about future policy direction in its brief statement, meaning this week’s minutes release will be scrutinized for signs of what to expect from monetary policy down the line. DI rates appear to be looking for one more 50bps hike, followed by a slowdown to a 25bps pace (following the 50bps hike, for the next meeting swaps appear to be looking for one 25bps hike, followed by a roughly 75% probability of another 25bps tightening). BRL (real) drivers remain a relatively weak economic outlook, global risk appetite trends and BCB intervention — which is currently focused on supporting the real. Now that most capital controls have been unwound, intervention to support the real is likely to be increasingly limited to spot / swaps intervention.

Chile: Last night, the BCCh (the central bank) showed a relatively sharp change in its description of the external environment, which appeared to turn more bearish on the growth outlook for emerging markets, highlighting tighter emerging market monetary conditions on the back of the shifting Fed QE bias, as well as downwards revisions to China’s growth outlook (which should impact much of the rest of the “emerging economy block”, particularly the commodity economies and those with strongest direct trade links – both of which include Chile). It also noted deteriorating “terms of trade for Chile” as metal prices dropped, while energy prices rose (a relatively good proxy for Chile’s commodity terms of trade is the oil / copper price ratio). On the domestic front, views on economic conditions remained fairly consistent with recent statements, noting a continuing deceleration (particularly in investment), accompanied by a still-tight labour market. The central bank stated that a continuation of these trends / conditions could make an adjustment to policy settings necessary, making easing a possibility. Next week is thin in terms of Chilean data, making Chinese property prices and US data the likely key CLP (peso) drivers in our view.

Colombia: Following BanRep (central bank) Governor Maiguashca’s suggestion that she sees positive signs that the economy is accelerating, markets will likely closely watch next week’s retail sales, industrial production and lending data for confirmation of that trend. In addition, the trade balance and industrial production figures remain key for “Dutch disease concerns”, which impact Colombian assets in two ways in our view: 1. appetite for COP (peso) strength from the government, and; 2. it could affect the timing of the publication of changes to AFP (local pension fund) benchmark rules.

Mexico: Next week is fairly light in terms of Mexican data, but heavy in US industrial data, which should provide guidance for local markets. We will still be looking for political parties’ positioning on the Pact for Mexico, as well as how strong support for current party leaders is as indications of reform’s outlook. Local media have reported that the PAN (a major opposition party) is starting to debate the course of the party’s leadership “post elections”. In addition, we have seen some trickling information regarding potential items to expect in both the energy and fiscal reforms, and we expect the debate to proceed throughout the summer as the anticipated submission of both reforms in September approaches. With IMM positioning having virtually flattened, the other item we will be looking for is how foreign holdings of domestic government securities evolve, for signs of how much overall positioning has lightened, which in our view is important for how much MXN (peso) can appreciate (our sense is that investors remain “bullish”, but positioning could weigh as potential Fed policy shifts slowly approach).

Peru: The BCRP (central bank) left the reference rate unchanged at 4.25%, as very widely anticipated, with the decision attributed to anchored inflation expectations and vigilance over external financial uncertainty. On the growth front, the BCRP highlighted “near-potential” domestic activity, but a relatively weak external environment. The central bank noted it has been loosening reserves to promote long-term funding in soles, which likely seeks two things: further financial system de-dollarization (particularly as the trend of USD/PEN has been less supportive on this front by reversing its appreciation trend), and keeping risks related to eventual capital flow reversals contained.

Eduardo Suárez (416) 945-4538 [email protected]

Latin America Week Ahead: For The Week Of July 15 - 19

Global Views

Economics

25 July 12, 2013

KEY DATA PREVIEW

Key Data Preview

CANADA We’re looking for CPI (July 19) to increase moderately in month-on-month terms (+0.2% m/m) but to surge in year-on-year terms, rising to 1.3% y/y on headline (vs. 0.7% y/y in May) and 1.4% y/y in terms of core CPI (vs. 1.1% y/y in May). These substantial increases won’t be a result of strong monthly price pressures: gasoline prices were moderate (+2.4% m/m) and expected seasonal price increases in the recreation category, while high, should only have marginal overall effects. Rather, we’re looking for CPI to rise on sharp base effects after CPI cooled unusually last June — which should go some ways towards restoring CPI to the BoC’s target band (see chart). Canadian manufacturing sales (July 16) could underperform for a second consecutive month in May (they fell by 2.4% m/m in April). Leading indicators look fairly bleak: a) new orders fell sharply in April (-0.9% m/m) and March (-2.2% m/m), and, b) exports of cars were soft in May (-3.8% m/m). Stronger output of refined crude products and machinery may cushion the manufacturing sector as exports of both were up on the month. UNITED STATES Retail sales in the U.S. (July 15) are poised to perform strongly in June largely on the basis of a surge in automotive sales, which increased to 15.9m SAAR from 15.2m SAAR the month before. That leaves our forecast at +0.5% m/m — despite flat gasoline prices and a 1.8% drop in the ICSC chain store sales index. While Canadian CPI is picking up, we’re expecting U.S. CPI to remain moderate when the June data are released on July 16th. We’re expecting a seasonally adjusted 0.2% m/m print, but we expect that the not-seasonally-adjusted year-on-year number will rise by less, coming in at 1.5% y/y as a mix of flat gasoline and food prices (see chart) prevent the index from budging too far. We expect that U.S. housing starts will work their way back towards the 1 million annualized rate level when the June numbers are released on July 17th. Our call is based on a pick-up in building permits over the preceding two months (1 million in April, 984k in May) which, among other factors, move our model to anticipate a 960k SAAR print. Note that while 1m SAAR housing starts represents progress for the U.S. housing sector, it also leaves plenty of room left to run in terms of a recovery (see chart). The other major number due out is industrial production for June. We’re expecting a strong print after: a) regional manufacturing surveys generally turned positive, and b) reports from the auto sector implied a strong increase in production schedules, a fact borne out by strong sales and shipments of autos on the month. It bears mentioning that utilities are a wild card in the air-conditioning-intensive summer months.

A1



250

750

1250

1750

2250

2750

1960 1970 1980 1990 2000 2010Housing StartsLong Run AverageAverage Recession Trough

Thousands, SAAR

Source: Census Bureau, Scotiabank Economics

U.S.: Housing StartsPlenty of Room to Run

85

90

95

100

105

110

115

120

Jan-2013 Apr-2013 Jul-2013

Cattle Corn

Wheat Hogs

Index,1/1/2013=100

Source: Bloomberg, Scotiabank Economics

Foodstuff Commodity PricesFlat in June, Rising in July

-2

-1

0

1

2

3

4

5

00 02 04 06 08 10 12

CPI y/y Core CPI y/y

Source: Statistics Canada, Scotiabank Economics.

%

Canadian Inflation:Below Target

BoC Target

Global Views

Economics

26 July 12, 2013

KEY DATA PREVIEW


EUROPE We expect both the CPI and RPI measures of inflation in the UK to reaccelerate in June, up by 0.3 percentage points to 3.0% y/y and 3.4% y/y, respectively. However, in both cases inflation risk is on the upside. Indeed, it will be a close call as to whether the CPI inflation rate rises to 3.1% y/y, which would trigger a letter from Bank of England (BoE) Governor Mark Carney to the Chancellor. Under the rules of the new mandate, this will no longer come one hour after the CPI is released, but alongside the minutes of the BoE meeting following the publication of the data. Hence if there is a 3.1% y/y (or higher) print next week then the letter will be published on August 14th. In terms of the underlying details of the CPI and RPI, the acceleration is likely to reflect a combination of energy price and core base effects. Petrol prices fell by around 3% m/m last June, versus a 0.8% rise this June. Core inflation fell by a chunky 0.35% m/m last June, much of which likely reflected surprisingly aggressive clothes price discounts (down by over 4% m/m compared with a seasonal norm of around 2%). We doubt that the extent of last year’s discounts will be repeated. June is likely to represent the peak in both CPI and RPI inflation this year and we expect a moderate deceleration through year-end. LATIN AMERICA Amid concerns regarding the Colombian economic recovery, retail sales and industrial production (IP) data will be released next week (July 19th). The figures for March and April were affected by calendar effects due to the timing of Easter (this year the holiday was in March while last year it was in April) resulting in higher volatility for both indicators, particularly in the IP. IP expanded by 8.4% y/y in April, after contracting 11.7% y/y in March. As a result, the contraction in year-to-date average terms declined from -6.1% to -2.4%. Similarly, retail sales also surpassed market expectations, advancing 5.7% y/y in April, following a very poor performance in previous months. Although both indicators exceeded our expectations, the May results will be important in distinguishing between a possible rebound for the second quarter of the year and just calendar distortions in the data. ASIA Chinese real GDP data for the second quarter of the year will be released on July 14th. We estimate that real GDP expanded by 7.6% y/y in Q2 following a 7.7% gain in the January-March period. China is facing weaker growth momentum as the country’s officials seem determined to promote the economy’s structural adjustment and clamp down on excessive credit growth at the expense of stronger output expansion. The third quarter will likely see slightly stronger output growth in annual terms on the back of the base effect reflecting the economy’s cyclical trough in the third quarter in 2012. The Chinese economy is in the midst of a structural change where the economic contribution of household spending — reflecting rising incomes and robust job creation — is increasing while that of investment and exports is diminishing, as was evident in the first quarter of the year when growth in services accelerated while the pace of gains in goods-producing sectors slowed. We expect the Chinese economy to expand on average by 7¾% in 2013-14.

A2


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

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

0

2

4

6

8

10

12

Mar-10 Mar-11 Mar-12 Mar-13

Real GDP Growth - China

y/y % change


forecast

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

Jan-11 Jul-11 Jan-12 Jul-12 Jan-13

Colombian Retail Sales & IP

Source: Bloomberg.

y/y % change

Retail Sales

Industrial Production

Economics

1

Global Views

July 12, 2013

KEY INDICATORS

Key Indicators for the week of July 15 - 19

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

A3

North America

Europe

Country Date Time Indicator Period BNS Consensus LatestUS 07/15 08:30 Empire State Manufacturing Index Jul 5.0 5.0 7.8US 07/15 08:30 Retail Sales (m/m) Jun 0.5 0.8 0.6US 07/15 08:30 Retail Sales ex. Autos (m/m) Jun 0.3 0.5 0.3CA 07/15 09:00 Existing Home Sales (m/m) Jun -- -- 3.6US 07/15 10:00 Business Inventories (m/m) May -- 0.1 0.3

CA 07/16 08:30 Manufacturing Shipments (m/m) May -0.5 1.0 -2.4US 07/16 08:30 CPI (m/m) Jun 0.2 0.3 0.1US 07/16 08:30 CPI (y/y) Jun 1.5 1.7 1.4US 07/16 08:30 CPI ex. Food & Energy (m/m) Jun 0.2 0.2 0.2US 07/16 08:30 CPI ex. Food & Energy (y/y) Jun 1.5 1.6 1.7US 07/16 09:00 Total Net TIC Flows (US$ bn) May -- -- 12.7US 07/16 09:15 Industrial Production (m/m) Jun 0.4 0.3 0.0US 07/16 10:00 NAHB Housing Market Index Jul 51.0 52.0 52.0

US 07/17 07:00 MBA Mortgage Applications (w/w) JUL 12 -- -- -4.0CA 07/17 08:30 International Securities Transactions (C$ bn) May -- -- 14.9US 07/17 08:30 Building Permits (000s a.r.) Jun -- 1000.0 985.0US 07/17 08:30 Housing Starts (000s a.r.) Jun 960.0 960.0 914.0US 07/17 08:30 Housing Starts (m/m) Jun 5.0 5.0 6.8CA 07/17 10:00 BoC Interest Rate Announcement (%) Jul 17 1.00 1.00 1.00

CA 07/18 08:30 Wholesale Trade (m/m) May 0.3 0.3 0.2US 07/18 08:30 Initial Jobless Claims (000s) JUL 13 350 340 360US 07/18 08:30 Continuing Claims (000s) JUL 6 3000 2957 2977MX 07/18 09:00 Unemployment Rate (%) Jun -- 5.0 4.9US 07/18 10:00 Leading Indicators (m/m) Jun -- 0.3 0.1US 07/18 10:00 Philadelphia Fed Index Jul 8.0 7.5 12.5

CA 07/19 08:30 CPI, All items (m/m) Jun 0.2 0.1 0.2CA 07/19 08:30 CPI, All items (y/y) Jun 1.3 1.2 0.7CA 07/19 08:30 Core X8 CPI (m/m) Jun -0.1 -0.2 0.2CA 07/19 08:30 Core X8 CPI (y/y) Jun 1.4 1.3 1.1CA 07/19 08:30 CPI SA, All items (m/m) Jun -- -- 0.1CA 07/19 08:30 Core CPI SA, All items (m/m) Jun -- -- 0.0

Country Date Time Indicator Period BNS Consensus LatestUK 07/16 04:30 CPI (m/m) Jun -0.1 -0.1 0.2UK 07/16 04:30 CPI (y/y) Jun 3.0 3.0 2.7UK 07/16 04:30 RPI (y/y) Jun 3.4 3.4 3.1EC 07/16 05:00 CPI (m/m) Jun 0.1 0.1 0.1EC 07/16 05:00 CPI (y/y) Jun F 1.6 1.6 1.6EC 07/16 05:00 Trade Balance (€ bn) May -- 12.0 14.9EC 07/16 05:00 ZEW Survey (Economic Sentiment) Jul -- -- 30.6GE 07/16 05:00 ZEW Survey (Current Situation) Jul -- 9.0 8.6GE 07/16 05:00 ZEW Survey (Economic Sentiment) Jul -- 40.0 38.5

UK 07/17 04:30 Average Weekly Earnings (3-month, y/y) May 1.2 1.4 1.3UK 07/17 04:30 Employment Change (3M/3M, 000s) May 93.0 81.0 24.0UK 07/17 04:30 Jobless Claims Change (000s) Jun -- -8.0 -8.6UK 07/17 04:30 ILO Unemployment Rate (%) May 7.8 7.8 7.8IT 07/17 05:00 Current Account (€ mn) May -- -- 854.0

EC 07/18 04:00 Current Account (€ bn) May -- -- 19.5UK 07/18 04:30 Retail Sales ex. Auto Fuel (m/m) Jun -- 0.2 2.1

GE 07/19 02:00 Producer Prices (m/m) Jun -- -0.1 -0.3UK 07/19 04:30 PSNB ex. Interventions (£ bn) Jun -- 8.0 8.8

Economics

2

Global Views

July 12, 2013

KEY INDICATORS

Key Indicators for the week of July 15 - 19


A4

Asia Pacific

Country Date Time Indicator Period BNS Consensus LatestCH 07/13 06:59 Business Climate Index 2Q -- -- 125.6

CH 07/14 06:59 Actual FDI (y/y) Jun -- 0.7 0.3AU 07/14 21:30 New Motor Vehicle Sales (m/m) Jun -- -- 0.0CH 07/14 22:00 Fixed Asset Investment YTD (y/y) Jun -- 20.2 20.4CH 07/14 22:00 Industrial Production (y/y) Jun 9.1 9.1 9.2CH 07/14 22:00 Real GDP (y/y) 2Q 7.6 7.5 7.7CH 07/14 22:00 Retail Sales (y/y) Jun -- 12.9 12.9

SI 07/15 01:00 Retail Sales (y/y) May -- 0.6 -0.5IN 07/15 02:30 Monthly Wholesale Prices (y/y) Jun 5.0 4.9 4.7JN 07/15 07:59 Nationwide Department Store Sales (y/y) Jun -- -- 2.6NZ 07/15 18:45 Consumer Prices (y/y) 2Q 0.8 0.80 0.90

IN 07/16 07:59 Exports (y/y) Jun -- -- -4.60IN 07/16 07:59 Imports (y/y) Jun -- -- -0.37SK 07/16 17:00 PPI (y/y) Jun -- -- -2.6SI 07/16 20:30 Exports (y/y) Jun -- -5.4 -4.6

MA 07/17 05:00 CPI (y/y) Jun 1.9 2.0 1.8SK 07/17 06:59 Department Store Sales (y/y) Jun -- -- 1.0AU 07/17 20:00 Conference Board Leading Index (%) May -- -- 0.3NZ 07/17 21:00 ANZ Consumer Confidence Index Jul -- -- 123.9

HK 07/18 04:30 Unemployment Rate (%) Jun 3.4 3.4 3.4

JN 07/19 00:30 All Industry Activity Index (m/m) May -- 1.2 0.4JN 07/19 01:00 Coincident Index CI May F 105.9 -- 105.9JN 07/19 01:00 Leading Index CI May F 110.5 -- 110.5HK 07/19 06:59 Composite Interest Rate (%) Jun -- -- 0.3PH 07/19 06:59 Balance of Payments (US$ mn) Jun -- -- 75.0

Country Date Time Indicator Period BNS Consensus LatestPE 07/15 06:59 Economic Activity Index NSA (y/y) May -- -- 7.7PE 07/15 06:59 Unemployment Rate (%) Jun -- -- 5.7

CO 07/17 17:00 Trade Balance (US$ mn) May -- -- 36.8

CO 07/19 17:00 Industrial Production (y/y) May -- -1.5 8.4CO 07/19 17:00 Retail Sales (y/y) May -- 3.0 5.7

Latin America

Economics

3

Global Views

July 12, 2013

AUCTIONS

Global Auctions for the week of July 15 - 19


A5

North America

Europe

Latin America

Asia Pacific

Country Date Time EventUS 07/15 11:00 U.S. Fed to Purchase USD0.75-1.00 Bln NotesUS 07/15 11:30 U.S. to Sell USD30 Bln 3-Month BillsUS 07/15 11:30 U.S. to Sell USD25 Bln 6-Month Bills

CA 07/16 10:30 Canada to Sell CAD9.5 Bln 98-Day BillsCA 07/16 10:30 Canada to Sell CAD3.5 Bln 169-Day BillsCA 07/16 10:30 Canada to Sell CAD3.5 Bln 350-Day BillsUS 07/16 11:00 U.S. Fed to Purchase USD1.25-1.75 Bln NotesUS 07/16 11:30 U.S. to Sell 4-Week BillsMX 07/16 12:30 10Y I/L YieldMX 07/16 12:30 1M T-Bill YieldMX 07/16 12:30 1M T-Bill Bid/Cover RatioMX 07/16 12:30 3M T-Bill YieldMX 07/16 12:30 3M T-Bill Bid/Cover RatioMX 07/16 12:30 6M T-Bill YieldMX 07/16 12:30 6M T-Bill Bid/Cover Ratio

US 07/18 13:00 U.S. to Sell USD15 Bln 10-Year TIPS

US 07/19 11:00 U.S. Fed to Purchase USD2.75-3.50 Bln Notes

Country Date Time EventNE 07/15 04:00 Netherlands to Sell Up to EUR3 Bln 106-Day BillsNE 07/15 04:00 Netherlands to Sell Up to EUR2 Bln 198-Day BillsFR 07/15 08:50 France to Sell Bills

SP 07/16 04:30 Spain to Sell 6-Month and 12-Month BillsBE 07/16 05:30 Belgium to Sell BillsSZ 07/16 05:30 Switzerland to Sell 91-Day Bills

GE 07/17 05:30 Germany to Sell EUR4 Bln 1.5% 2023 Bonds

SP 07/18 04:30 Spain to Sell BondsFR 07/18 04:50 France to Sell I/L Bonds / Notes

IC 07/19 06:00 Iceland to Sell BondsUK 07/19 06:10 UK to Sell Bills

Country Date Time EventAU 07/15 21:00 Australia to Sell Inflation Bonds due 2022

CH 07/16 23:00 China to Sell CNY30 Bln 10-Year BondsJN 07/16 23:35 Japan to Sell 1-Year BillJN 07/16 23:45 Japan to Sell 5-Year Bonds

AU 07/17 20:30 Australia Plans to Sell T-BillsNZ 07/17 22:05 New Zealand Plans to Sell NZ$300m BondsJN 07/17 23:35 Japan to Sell 3-Month Bill

JN 07/19 04:00 Japan Auction for Enhanced-Liquidity

Country Date Time EventBZ 07/16 13:30 Brazil to Sell I/L Bonds due 8/15/2018 - NTN-BBZ 07/16 13:30 Brazil to Sell I/L Bonds due 8/15/2022 - NTN-BBZ 07/16 13:30 Brazil to Sell I/L Bonds due 8/15/2030 - NTN-BBZ 07/16 13:30 Brazil to Sell I/L Bonds due 8/15/2040 - NTN-BBZ 07/16 13:30 Brazil to Sell I/L Bonds due 8/15/2050 - NTN-B

BZ 07/18 11:00 Brazil to Sell Bills due 10/01/2014 - LTNBZ 07/18 11:00 Brazil to Sell Bills due 07/01/2015 - LTNBZ 07/18 11:00 Brazil to Sell Bills due 1/1/2017 - LTNBZ 07/18 11:00 Brazil to Sell Floating-rate Notes due 3/1/2019 - LFTCL 07/18 12:00 5Y Fixed Yield (Cen Bank)CL 07/18 12:00 10Y Fixed Yield (Cen Bank)CL 07/18 12:00 5Y I/L Yield (Cen Bank)CL 07/18 13:00 1M Bill YieldCL 07/18 13:00 3M Bill YieldCL 07/18 13:00 6M Bill Yield

Economics

4

Global Views

July 12, 2013

EVENTS


Events for the week of July 15 - 19

A6

North America

Europe

Country Date Time EventUS 07/15 08:00 Fed's Tarullo Speaks on Banking Regulation in WashingtonUS JUL 15-24 Trans-Pacific Partnership Negotiations

US 07/16 14:15 Fed's George Speaks on Economic Conditions and Agriculture

CA 07/17 10:00 Bank of Canada RateUS 07/17 10:00 Fed's Bernanke Delivers Semi-Annual Policy Report to HouseCA 07/17 11:15 Bank of Canada Governor Gives Press ConferenceUS 07/17 12:30 Fed's Raskin Speaks at Exchequer Club in WashingtonUS 07/17 14:00 U.S. Federal Reserve Releases Beige Book

US 07/18 10:00 Fed's Bernanke Delivers Semi-Annual Policy Report to Senate

Country Date Time EventGE 07/14 12:30 Merkel Gives Election-Year Interview to ARD Television

SP 07/15 04:00 Budget Data Central Govt, Regions, Social Security Through MayPO 07/15 06:00 Portugal Releases Tourist Activity ReportSP 07/15 06:30 BOS exec speaks in MadridEC 07/15 07:15 OECD's Gurria in MadridSP 07/15 08:45 Spain PM Mariano Rajoy Meets Polish PM Donald TuskEC 07/15 11:00 ECB's Asmussen speaks in Schwerin, GermanyEC 07/15 ESMA Supervisory Frameworks and EMIR Equivalence Advice Due

SW 07/16 03:30 Riksbank Minutes from Rate Meeting ReleasedEC 07/16 04:00 BOS Chief Economist Malo de Molina Speaks in MadridIT 07/16 04:30 Bank of Italy Releases May Public Finance SupplementUK 07/16 06:30 BOE's Fisher, DMO's Stheeman Speak in LondonSP 07/16 07:20 Spain economy minister speaks in BarcelonaPO 07/16 08:00 Bank of Portugal Releases Summer Economic Bulletin

UK 07/17 04:30 Bank of England Releases Monetary Policy Committee MinutesIT 07/17 05:00 Bank of Italy Releases the Quarterly Economic BulletinUK 07/17 07:30 U.K. Debt Management Office Chief Executive Stheeman SpeaksRU JUL 17-18 VEB Hosts Conference on Long-Term Investment

EC 07/18 03:00 ECB's Asmussen speaks in Vilnius, LithuaniaGE 07/18 10:00 Merkel Campaigns for CSU Sister Party in BavariaUK 07/18 Last Day of Commons Session Before Summer RecessGR 07/18 German Finance Minister Wolfgang Schaeuble in AthensRU JUL 18-19 G20 Finance Ministers' and Central Bank's Deputies MeetingRU JUL 18-19 G20 Labour Ministers Meeting

EC 07/19 06:00 ECB Announces 3-Year LTRO RepaymentSP 07/19 06:00 Opposition Leader Rubalcaba Speaks on Constitutional ReformPO 07/19 08:00 Bank of Portugal Releases Monthly Economic Indicators ReportGE 07/19 08:00 Merkel Holds Election Rally on North Sea Island of BorkumSP JUL 19-20 EU Foreign Ministers Meet in Palma de Mallorca, SpainRU JUL 19-20 G20 Finance Ministers and Central Bank Governors Meeting

Asia Pacific

Country Date Time EventIN 07/15 00:00 Finance Minister Chidambaram at Inauguration of PE EventAU 07/15 21:30 RBA Policy Meeting - July MinutesAU JUL 15-17 Euromoney Latin America Australia Investors ForumUS JUL 15-24 Trans-Pacific Partnership Negotiations

IN 07/16 09:00 India Chief economic Adviser Rajan to Speak at NCAER EventJN 07/16 19:50 Bank of Japan June 10-11 meeting minutesAU JUL 16-17 The Economist Bellwether Conference on Australia

AU 07/17 21:30 RBA Foreign Exchange TransactnHK JUL 17-18 Composite Interest Rate

HK 07/18 08:00 Euromoney Asia Awards for Excellence

Economics

5

Global Views

July 12, 2013

Rate Current Rate Next Meeting Scotia's Forecasts Consensus ForecastsBank of Canada – Overnight Target Rate 1.00 July 17, 2013 1.00 1.00

Federal Reserve – Federal Funds Target Rate 0.25 July 31, 2013 0.25 --

Banco de México – Overnight Rate 4.00 September 6, 2013 4.00 --

EUROPERate Current Rate Next Meeting Scotia's Forecasts Consensus ForecastsEuropean Central Bank – Refinancing Rate 0.50 August 1, 2013 0.50 --

Bank of England – Bank Rate 0.50 August 1, 2013 0.50 0.50

Swiss National Bank – Libor Target Rate 0.00 September 19, 2013 0.00 --

Central Bank of Russia – Refinancing Rate 8.25 August 9, 2013 8.25 --

Hungarian National Bank – Base Rate 4.25 July 23, 2013 4.25 4.00

Central Bank of the Republic of Turkey – 1 Wk Repo Rate 4.50 July 23, 2013 4.50 --

Sweden Riksbank – Repo Rate 1.00 September 5, 2013 1.00 --

Norges Bank – Deposit Rate 1.50 September 19, 2013 1.50 --

ASIA PACIFICRate Current Rate Next Meeting Scotia's Forecasts Consensus ForecastsBank of Japan – Target Rate 0.10 August 8, 2013 0.10 --

Reserve Bank of Australia – Cash Target Rate 2.75 August 6, 2013 2.75 2.63

Reserve Bank of New Zealand – Cash Rate 2.50 July 24, 2013 2.50 --

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

Reserve Bank of India – Repo Rate 7.25 July 30, 2013 7.00 --

Bank of Korea – Bank Rate 2.50 August 7, 2013 2.50 --

Bank of Thailand – Repo Rate 2.50 August 21, 2013 2.50 --

Bank Indonesia – Reference Interest Rate 6.50 August 15, 2013 6.50 --

LATIN AMERICARate Current Rate Next Meeting Scotia's Forecasts Consensus ForecastsBanco Central do Brasil – Selic Rate 8.50 August 28, 2013 8.50 --

Banco Central de Chile – Overnight Rate 5.00 August 13, 2013 5.00 --

Banco de la República de Colombia – Lending Rate 3.25 July 26, 2013 3.25 --

Banco Central de Reserva del Perú – Reference Rate 4.25 August 8, 2013 4.25 4.25

AFRICARate Current Rate Next Meeting Scotia's Forecasts Consensus ForecastsSouth African Reserve Bank – Repo Rate 5.00 July 18, 2013 5.00 5.00

BoC: With the BoC due to release a rate statement and issue an MPR on July 17 for the first time under Gov. Poloz, we expect… more of the same. An emphasis on a still gaping output gap and sluggish inflation will keep the tone dovish; that said, we’re not sure that the BoC wants to remove its forward guidance (which currently implies rate hikes in the very distant future) thereby feeding bets on future rate cuts. Fed: Will Chairman Bernanke’s testimony to the House Financial Services Committee (also on July 17) reprise his dovish comments following a speech on July 10 (he said that the Fed could “push back” if rates are too high)? Markets will be watching carefully both for hints regarding how the Fed sees the recent run-up in rates as well as the prospects for reductions in asset purchases.

We expect the South African policy rate to remain unchanged at 5.0% after next week’s central bank meeting. Although some of the rand weakening pressure appears to have dissipated in recent weeks, currency volatility will likely persist, while the risk for increased social unrest, political instability, electricity outages and labour disruptions will remain elevated. As a result, inflationary pressures will persist, with the headline rate (which eased slightly from 5.9% y/y to 5.6% in May) expected to stay near the upper end of the central bank’s 3-6% target range. This will keep the central bank from easing monetary conditions in support of the flagging economy.

Global Central Bank Watch

CENTRAL BANKS

A7


North America

Europe

Asia Pacific

Latin America

Africa

Economics

6

Global Views

July 12, 2013

FORECASTS

A8

Forecasts as at June 27, 2013* 2000-11 2012 2013f 2014f 2000-11 2012 2013f 2014f

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

World13.7 3.1 3.0 3.6

Canada 2.2 1.7 1.6 2.2 2.1 1.5 1.1 1.8 United States 1.8 2.2 1.8 2.6 2.5 2.1 1.5 2.0 Mexico 2.2 3.9 3.0 4.2 4.8 3.6 4.1 4.0

United Kingdom 1.9 0.3 0.8 1.1 2.3 2.7 2.5 2.4 Euro zone 1.4 -0.5 -0.7 0.5 2.1 2.2 1.4 1.6

Japan 0.8 1.9 1.4 1.5 -0.3 -0.1 0.7 1.2 Australia 3.0 3.6 2.5 3.0 3.1 2.2 2.5 3.0 China 9.4 7.8 7.8 7.8 2.4 2.5 3.3 3.9 India 7.4 5.1 5.5 6.0 6.6 7.3 5.6 6.5 Korea 4.5 2.0 2.4 3.3 3.2 1.4 2.1 2.9 Thailand 4.0 6.5 4.5 4.2 2.6 3.6 2.5 3.2

Brazil 3.6 0.9 3.0 3.5 6.6 5.8 5.8 6.0 Chile 4.4 5.6 4.9 5.0 3.4 1.5 2.6 3.3 Peru 5.6 6.3 5.9 6.1 2.6 2.6 2.9 3.0

Central Bank Rates (%, end of period) 12Q4 13Q1 13Q2e 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 2.75 2.50 2.50 2.50 2.75 2.75

Exchange Rates (end of period)

Canadian Dollar (USDCAD) 0.99 1.02 1.05 1.07 1.06 1.05 1.04 1.02Canadian Dollar (CADUSD) 1.01 0.98 0.95 0.93 0.94 0.95 0.96 0.98Euro (EURUSD) 1.32 1.28 1.30 1.26 1.25 1.25 1.24 1.24Sterling (GBPUSD) 1.63 1.52 1.52 1.47 1.45 1.45 1.45 1.44Yen (USDJPY) 87 94 98 104 105 106 107 109Australian Dollar (AUDUSD) 1.04 1.04 0.93 0.92 0.90 0.90 0.91 0.92Chinese Yuan (USDCNY) 6.2 6.2 6.1 6.1 6.1 6.1 6.1 6.1Mexican Peso (USDMXN) 12.9 12.3 13.1 12.6 12.6 12.7 12.5 12.6Brazilian Real (USDBRL) 2.05 2.02 2.19 2.15 2.10 2.10 2.10 2.15

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

WTI Oil (US$/bbl) 57 94 95 98Brent Oil (US$/bbl) 58 112 106 108Nymex Natural Gas (US$/mmbtu) 5.67 2.83 4.00 4.50

Copper (US$/lb) 2.10 3.61 3.27 3.15Zinc (US$/lb) 0.77 0.88 0.88 1.10Nickel (US$/lb) 7.62 7.95 7.00 8.15Gold, London PM Fix (US$/oz) 668 1,670 1,400 1,200

Pulp (US$/tonne) 718 872 925 870Newsprint (US$/tonne) 581 640 615 645Lumber (US$/mfbm) 272 299 340 390

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

7

Global Views

July 12, 2013

ECONOMIC STATISTICS

Source: Bloomberg, Global Insight, Scotiabank Economics.

A9

North America

Canada 2012 12Q4 13Q1 Latest United States 2012 12Q4 13Q1 Latest Real GDP (annual rates) 1.7 0.9 2.5 Real GDP (annual rates) 2.2 0.4 1.8 Current Acc. Bal. (C$B, ar) -62.2 -58.5 -56.3 Current Acc. Bal. (US$B, ar) -440 -409 -425 Merch. Trade Bal. (C$B, ar) -12.0 -8.6 -6.9 -3.6 (May) Merch. Trade Bal. (US$B, ar) -741 -730 -717 -761 (May) Industrial Production 0.9 -0.6 0.8 0.6 (Apr) Industrial Production 3.6 2.8 2.4 1.5 (May) Housing Starts (000s) 215 202 174 200 (Jun) Housing Starts (millions) 0.78 0.90 0.96 0.91 (May) Employment 1.2 1.6 1.7 1.3 (Jun) Employment 1.7 1.6 1.6 1.7 (Jun) Unemployment Rate (%) 7.3 7.2 7.1 7.1 (Jun) Unemployment Rate (%) 8.1 7.8 7.7 7.6 (Jun) Retail Sales 2.5 1.0 0.9 1.5 (Apr) Retail Sales 5.1 4.5 3.9 4.3 (May) Auto Sales (000s) 1673 1665 1680 1731 (Apr) Auto Sales (millions) 14.4 15.0 15.3 15.9 (Jun) CPI 1.5 0.9 0.9 0.7 (May) CPI 2.1 1.9 1.7 1.4 (May) IPPI 0.6 -0.1 0.7 0.0 (May) PPI 1.9 1.7 1.5 2.5 (Jun) Pre-tax Corp. Profits -4.9 -12.9 -10.6 Pre-tax Corp. Profits 16.6 14.7 2.9

Mexico Real GDP 3.9 3.2 0.8 Current Acc. Bal. (US$B, ar) -11.4 -28.1 -22.1 Merch. Trade Bal. (US$B, ar) 0.0 -7.7 -4.1 -5.6 (May) Industrial Production 3.6 1.8 -1.4 0.5 (May) CPI 4.1 4.1 3.7 4.1 (Jun)

Euro Zone 2012 12Q4 13Q1 Latest Germany 2012 12Q4 13Q1 Latest Real GDP -0.6 -0.9 -1.2 Real GDP 0.9 0.3 -0.3 Current Acc. Bal. (US$B, ar) 149 309 163 240 (Apr) Current Acc. Bal. (US$B, ar) 238.6 279.1 237.7 174.9 (May) Merch. Trade Bal. (US$B, ar) 129.3 196.6 179.1 264.3 (Apr) Merch. Trade Bal. (US$B, ar) 243.2 244.3 266.5 218.9 (May) Industrial Production -2.3 -3.1 -2.4 -2.5 (May) Industrial Production -0.4 -2.4 -2.4 0.3 (May) Unemployment Rate (%) 11.3 11.8 12.0 12.1 (May) Unemployment Rate (%) 6.8 6.9 6.9 6.8 (Jun) CPI 2.5 2.3 1.9 3.9 (May) CPI 2.0 2.0 1.5 1.8 (Jun)

France United Kingdom Real GDP 0.0 -0.3 -0.4 Real GDP 0.2 0.0 0.3 Current Acc. Bal. (US$B, ar) -60.2 -47.6 -65.6 -148.2 (May) Current Acc. Bal. (US$B, ar) -93.8 -81.4 -97.5 Merch. Trade Bal. (US$B, ar) -51.9 -48.0 -48.0 -55.6 (May) Merch. Trade Bal. (US$B, ar) -171.1 -179.7 -164.3 -155.9 (May) Industrial Production -2.4 -3.0 -2.8 -1.9 (May) Industrial Production -2.4 -3.3 -2.6 -4.1 (May) Unemployment Rate (%) 10.3 10.6 10.8 10.9 (May) Unemployment Rate (%) 8.0 7.8 7.8 7.8 (Mar) CPI 2.0 1.5 1.1 0.9 (Jun) CPI 2.8 2.7 2.8 5.6 (May)

Italy Russia Real GDP -2.4 -2.8 -2.4 Real GDP 3.4 2.1 Current Acc. Bal. (US$B, ar) -11.3 25.2 -20.2 13.3 (Apr) Current Acc. Bal. (US$B, ar) 74.8 12.8 Merch. Trade Bal. (US$B, ar) 13.8 35.7 14.1 29.8 (Apr) Merch. Trade Bal. (US$B, ar) 16.0 15.2 16.2 15.0 (May) Industrial Production -6.3 -6.6 -4.4 -9.9 (May) Industrial Production -5.3 1.7 -0.1 -1.4 (May) CPI 3.1 2.5 1.9 1.2 (Jun) CPI 5.1 6.5 7.1 6.9 (Jun)

Europe

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

Economics

8

Global Views

July 12, 2013

ECONOMIC STATISTICS

Source: Bloomberg, Global Insight, Scotiabank Economics.

A10

Asia Pacific

Australia 2012 12Q4 13Q1 Latest Japan 2012 12Q4 13Q1 Latest Real GDP 3.6 3.2 2.5 Real GDP 1.9 0.4 0.2 Current Acc. Bal. (US$B, ar) -56.9 -67.7 -38.9 Current Acc. Bal. (US$B, ar) 60.4 1.4 66.4 64.2 (May) Merch. Trade Bal. (US$B, ar) 5.9 -7.3 14.3 31.5 (May) Merch. Trade Bal. (US$B, ar) -85.8 -106.9 -116.2 -97.5 (May) Industrial Production 3.8 3.7 3.6 Industrial Production 0.2 -6.3 -6.5 0.2 (May) Unemployment Rate (%) 5.2 5.4 5.5 5.7 (Jun) Unemployment Rate (%) 4.4 4.2 4.2 4.1 (May) CPI 1.8 2.2 2.5 CPI 0.0 -0.2 -0.6 0.1 (May)

South Korea China Real GDP 2.0 1.5 1.5 Real GDP 10.4 7.9 Current Acc. Bal. (US$B, ar) 43.1 59.3 39.9 103.7 (May) Current Acc. Bal. (US$B, ar) 290.0 Merch. Trade Bal. (US$B, ar) 28.3 39.8 22.9 66.2 (Jun) Merch. Trade Bal. (US$B, ar) 230.7 332.0 169.2 325.5 (Jun) Industrial Production 1.2 1.9 -0.8 -2.9 (May) Industrial Production 8.9 8.9 9.3 9.2 (Apr) CPI 2.2 1.7 1.4 1.0 (Jun) CPI 2.5 2.5 2.1 2.1 (May)

Thailand India Real GDP 6.5 19.1 Real GDP 5.1 4.7 Current Acc. Bal. (US$B, ar) 2.7 0.9 1.3 Current Acc. Bal. (US$B, ar) -91.5 -31.9 Merch. Trade Bal. (US$B, ar) 0.7 0.3 -0.1 0.5 (May) Merch. Trade Bal. (US$B, ar) -16.3 -19.1 -14.8 -12.2 (Jun) Industrial Production 2.3 42.6 3.9 -8.3 (May) Industrial Production 0.7 2.1 2.2 -1.6 (May) CPI 3.0 3.2 3.1 2.3 (Jun) WPI 7.5 7.3 6.7 4.7 (May)

Indonesia Real GDP 6.2 6.1 Current Acc. Bal. (US$B, ar) -24.1 -7.6 Merch. Trade Bal. (US$B, ar) -0.1 -0.9 -0.1 -0.6 (May) Industrial Production 4.1 11.0 8.9 10.4 (Mar) CPI 4.3 4.4 5.3 5.9 (Jun)

Brazil 2012 12Q4 13Q1 Latest Chile 2012 12Q4 13Q1 Latest Real GDP 0.8 1.1 1.8 Real GDP 5.6 5.7 4.1 Current Acc. Bal. (US$B, ar) -54.2 -80.4 -99.4 Current Acc. Bal. (US$B, ar) 0.1 -11.5 -6.8 Merch. Trade Bal. (US$B, ar) 19.5 14.9 -20.6 28.7 (Jun) Merch. Trade Bal. (US$B, ar) 12.4 3.8 3.2 7.3 (Jun) Industrial Production -2.7 -0.5 1.2 -2.6 (May) Industrial Production 2.9 1.4 3.3 0.3 (May) CPI 5.4 5.6 6.4 6.7 (Jun) CPI 3.0 2.2 1.5 1.9 (Jun)

Peru Colombia Real GDP 9.2 5.9 Real GDP 6.9 3.1 Current Acc. Bal. (US$B, ar) -7.1 -1.9 Current Acc. Bal. (US$B, ar) -11.9 -3.3 Merch. Trade Bal. (US$B, ar) 0.5 0.5 0.1 -0.4 (May) Merch. Trade Bal. (US$B, ar) 0.4 0.4 0.2 0.0 (Apr) Unemployment Rate (%) 7.0 5.9 6.3 5.7 (May) Industrial Production 0.0 -1.9 -6.3 8.4 (Apr) CPI 3.7 2.8 2.6 2.8 (Jun) CPI 3.2 2.8 1.9 2.2 (Jun)

Latin America

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

Economics

9

Global Views

July 12, 2013

FINANCIAL STATISTICS

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

A11

Interest Rates (%, end of period)

Canada 13Q1 13Q2 Jul/05 Jul/12* United States 13Q1 13Q2 Jul/05 Jul/12*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 0.98 1.02 1.03 1.02 3-mo. T-bill 0.07 0.03 0.04 0.03 10-yr Gov’t Bond 1.87 2.44 2.55 2.43 10-yr Gov’t Bond 1.85 2.49 2.74 2.54 30-yr Gov’t Bond 2.50 2.90 2.97 2.92 30-yr Gov’t Bond 3.10 3.50 3.71 3.61 Prime 3.00 3.00 3.00 3.00 Prime 3.25 3.25 3.25 3.25 FX Reserves (US$B) 70.0 70.6 (May) FX Reserves (US$B) 135.2 133.0 (May)

Germany France 3-mo. Interbank 0.11 0.14 0.14 0.17 3-mo. T-bill 0.01 0.03 0.02 0.02 10-yr Gov’t Bond 1.29 1.73 1.72 1.55 10-yr Gov’t Bond 2.03 2.35 2.30 2.18 FX Reserves (US$B) 66.6 66.2 (May) FX Reserves (US$B) 52.6 51.7 (May)

Euro Zone United Kingdom Refinancing Rate 0.75 0.50 0.50 0.50 Repo Rate 0.50 0.50 0.50 0.50 Overnight Rate 0.11 0.21 0.09 0.09 3-mo. T-bill 0.39 0.39 0.39 0.38 FX Reserves (US$B) 326.7 324.6 (May) 10-yr Gov’t Bond 1.77 2.44 2.49 2.30

FX Reserves (US$B) 88.4 89.0 (May)

Japan Australia Discount Rate 0.30 0.30 0.30 0.30 Cash Rate 3.00 2.75 2.75 2.75 3-mo. Libor 0.10 0.09 0.09 0.09 10-yr Gov’t Bond 3.41 3.76 3.82 3.74 10-yr Gov’t Bond 0.55 0.85 0.86 0.82 FX Reserves (US$B) 46.7 46.3 (May) FX Reserves (US$B) 1215.0 1215.9 (May)

Exchange Rates (end of period)

USDCAD 1.02 1.05 1.06 1.04 ¥/US$ 94.22 99.14 101.20 99.31CADUSD 0.98 0.95 0.95 0.96 US¢/Australian$ 1.04 0.91 0.91 0.91GBPUSD 1.520 1.521 1.489 1.512 Chinese Yuan/US$ 6.21 6.14 6.13 6.14EURUSD 1.282 1.301 1.283 1.306 South Korean Won/US$ 1111 1142 1143 1124JPYEUR 0.83 0.78 0.77 0.77 Mexican Peso/US$ 12.331 12.931 13.076 12.809USDCHF 0.95 0.95 0.96 0.95 Brazilian Real/US$ 2.022 2.232 2.252 2.264

Equity Markets (index, end of period)

United States (DJIA) 14579 14910 15136 15479 U.K. (FT100) 6412 6215 6376 6548 United States (S&P500) 1569 1606 1632 1676 Germany (Dax) 7795 7959 7806 8207 Canada (S&P/TSX) 12750 12129 12135 12511 France (CAC40) 3731 3739 3754 3860 Mexico (IPC) 44077 40623 40623 40342 Japan (Nikkei) 12398 13677 14310 14506 Brazil (Bovespa) 56352 47457 45210 46343 Hong Kong (Hang Seng) 22300 20803 20855 21277 Italy (BCI) 851 849 871 873 South Korea (Composite) 2005 1863 1833 1870

Commodity Prices (end of period)

Pulp (US$/tonne) 900 930 930 930 Copper (US$/lb) 3.44 3.06 3.09 3.14 Newsprint (US$/tonne) 610 605 605 605 Zinc (US$/lb) 0.85 0.83 0.82 0.84 Lumber (US$/mfbm) 408 292 295 311 Gold (US$/oz) 1598.25 1192.00 1212.75 1279.75 WTI Oil (US$/bbl) 97.23 96.56 103.22 104.87 Silver (US$/oz) 28.64 18.86 19.32 19.66 Natural Gas (US$/mmbtu) 4.02 3.57 3.62 3.67 CRB (index) 296.39 275.62 280.72 286.24

DISCLAIMER Global Views

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TM Trademark of The Bank of Nova Scotia. Used under license, where applicable. Scotiabank, together with “Global Banking and Markets”, is a marketing name for the global corporate and investment banking and capital markets businesses of The Bank of Nova Scotia and certain of its affiliates in the countries where they operate, including Scotia Capital (USA) Inc. The fixed income strategy reports contained herein have been prepared for Institutional Investors by Fixed Income Strategists of Scotia Capital (USA) Inc. (“SCUSA”) and may include contributions by strategists who are employees of affiliates of SCUSA. Fixed Income Strategists are employees of SCUSA’s Fixed Income Credit Sales & Trading Desk and support the trading desk through the preparation of market commentary, including specific trading ideas, and other materials, both written and verbal, which may or may not be made publicly available, and which may or may not be made publicly available at the same time it is made available to the Fixed Income Credit Sales & Trading Desk. Fixed Income Strategists are not research analysts, and this report was not reviewed by the Research Departments of SCUSA. Fixed Income Strategist publications are not research reports and the views expressed by Fixed Income Strategists in this and other reports may differ from the views expressed by other departments, including the Research Department, of SCUSA. The securities laws and regulations and the policies of SCUSA that are applicable to Research Analysts may not be applicable to Fixed Income Strategists. These reports are provided to you for informational purposes only. Prices shown in this publication are indicative and SCUSA is not offering to buy or sell, or soliciting offers to buy or sell any financial instrument. SCUSA may engage in transactions in a manner inconsistent with the views discussed herein. SCUSA may have positions, or be in the process of acquiring or disposing of positions, referred to in this publication. Other than the disclosures related to SCUSA, the information contained in this publication has been obtained from sources that SCUSA knows to be reliable, however we do not represent or warrant that such information is accurate and complete. The views expressed herein are the views of the Fixed Income Strategists of SCUSA and are subject to change, and SCUSA has no obligation to update its opinions or information in this publication. SCUSA and any of its officers, directors and employees, including any persons involved in the preparation or issuance of this document, may from time to time act as managers, co-managers or underwriters of a public offering or act as principals or agents, deal in, own or act as market makers or advisors, brokers or commercial and/or investment bankers in relation to the securities or related derivatives which are the subject of this publication. Neither SCUSA nor any of its officers, directors, partners, employees or affiliates accepts any liability for any direct or consequential loss arising from this publication or its contents. The securities discussed in this publication may not be suitable for all investors. SCUSA recommends that investors independently evaluate each issuer and security discussed in this publication, and consult with any advisors they deem necessary prior to making any investment.

July 12, 2013


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July 12, 2013


July 12, 2013

Foreign Exchange Strategy This report is prepared by The Bank of Nova Scotia (Scotiabank) as a resource for clients of Scotiabank. Opinions, estimates and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness and neither the information nor the forecast shall be taken as a representation for which The Bank or its affiliates or any of their employees incur any responsibility. Neither Scotiabank or its affiliates accept any liability whatsoever for any loss arising from any use of this report or its contents. This report is not, and is not constructed as, an offer to sell or solicitation of any offer to buy any of the currencies referred to in this report. Scotiabank, its affiliates and/or their respective officers, directors or employees may from time to time take positions in the currencies mentioned herein as principal or agent. Directors, officers or employees of Scotiabank and its affiliates may serve as directors of corporations referred to herein. Scotiabank and/or its affiliates may have acted as financial advisor and/or underwriter for certain of the corporations mentioned herein and may have received and may receive remuneration for same. This report may include forward-looking statements about the objectives and strategies of members of Scotiabank. Such forward-looking statements are inherently subject to uncertainties beyond the control of the members of Scotiabank including but not limited to economic and financial conditions globally, regulatory development in Canada and elsewhere, technological developments and competition. The reader is cautioned that the member's actual performance could differ materially from such forward-looking statements. You should note that the manner in which you implement any of strategies set out in this report may expose you to significant risk and you should carefully consider your ability to bear such risks through consultation with your legal, accounting and other advisors. Information in this report regarding services and products of Scotiabank is applicable only in jurisdictions where such services and products may lawfully be offered for sale and is void where prohibited by law. If you access this report from outside of Canada, you are responsible for compliance with local, national and international laws. Not all products and services are available across Canada or in all countries. All Scotiabank products and services are subject to the terms of applicable agreements. This research and all information, opinions and conclusions contained in it are protected by copyright. This report may not be reproduced in whole or in part, or referred to in any manner whatsoever nor may the information, opinions and conclusions contained in it be referred to without in each case the prior express consent of Scotiabank. Scotiabank is a Canadian chartered bank. TM Trademark of The Bank of Nova Scotia. Used under license, where applicable. Scotiabank, together with “Global Banking and Markets”, is a marketing name for the global corporate and investment banking and capital markets businesses of The Bank of Nova Scotia and certain of its affiliates in the countries where they operate, including, Scotia Capital Inc. and Scotia Capital (USA) Inc. - all members of Scotiabank. Dodd-Frank Act Disclaimer: This material has been prepared and distributed by The Bank of Nova Scotia for informational and marketing purposes only and should not be construed as an opinion as to whether you should enter into any swap or trading strategy involving a swap. The general transaction, financial, educational and market information contained herein is not intended to be, and does not constitute, a recommendation of a swap or trading strategy involving a swap. This material is not intended to be individually tailored to your needs or characteristics and should not be viewed as a “call to action” or suggestion that you enter into a swap or trading strategy involving a swap. You need to exercise independent judgment in evaluating this material, and you should consult with your own independent financial, legal, accounting, tax and other professional advisors as to whether any swap or trading strategy involving a swap is suitable or advisable for you.

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Scotiabank Economics

This report has been prepared by Scotiabank Economics as a resource for the clients of Scotiabank. Opinions, estimates and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither Scotiabank nor its affiliates accepts any liability whatsoever for any loss arising from any use of this report or its contents. TM Trademark of The Bank of Nova Scotia. Used under license, where applicable.

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