Global Views 07-19-13 - Scotiabank Global Banking … · Vincent Delisle & Hugo Ste-Marie 2-9 ... we’ll see how effectively the Japanese Diet can implement the trickier ... Global

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Global Views

Weekly commentary on economic and financial market developments July 19, 2013

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Imagine A Week Devoid Of Central Banks ........................................................................................... Derek Holt

Normalizing Policy In Abnormal Economic Times ...............................................................................Aron Gampel

Quebec — Gradual External Sector Momentum ................................................................................. John Bulmer

Chile Country Outlook ................................................................................................................... Pablo Bréard

Colombia’s Economic Recovery Underway ................................................................................... Daniela Blancas

UK: Wait A Minute Month! ............................................................................................................... Alan Clarke

Euro Area Q2 GDP To Surprise On Upside? .................................................................................. Frédéric Prêtet

GBP Outlook — Driven By Central Bank Policy & Growth Dynamic ...................................................... Camilla Sutton

Beat The Street — Q2 Earnings Season Preview ....................................................... Vincent Delisle & Hugo Ste-Marie

2-9 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

2-4

5-6

7

8

9

16-17 Portfolio Strategy

10-14 Fixed Income Strategy

15 Foreign Exchange Strategy

Global Views

Economics

2 July 19, 2013

THE WEEK AHEAD

Imagine A Week Devoid Of Central Banks

Please see our full indicator, central bank, auction and event calendars on pp. A3-A7. Imagining a week without major global central banks jumping into the fray is difficult to do these days. It will nevertheless be reality next week as the Federal Reserve goes into communications black-out while other major central banks shift to the sidelines until early August (or September in the case of the Bank of Canada). The focus will nonetheless be upon speculating ahead of the next week’s FOMC statement, Japan’s weekend elections and key updates on Abenomics, China’s manufacturing sector, UK GDP, and myriad other global fundamentals alongside a more diversified and very active global earnings season. Japan heads into elections for its legislature’s upper house this weekend with Shinzo Abe’s ruling Liberal Democratic Party expected to cruise to victory. The positive implication is the view that with a larger legislative majority, the LDP will be better able to implement the structural reforms that PM Abe has trumpeted as the ‘third arrow’ in his economic revival quiver. The hiccup was a recent comment from one of Abe’s advisors to the effect that there might be cause to postpone the current plan to hike Japan’s sales tax in 2014. While this ought to be positive for markets (indeed, we see the sales tax hike as a misguided policy that could stunt Japan’s recovery as a similar move did in 1997), the announcement is seen as an initial sign of lack of resolve by Abe — and points to signs of dissent within the LDP, known to be a party composed of many rival factions. With the ‘easy’ policy changes now having been implemented (namely, monetary policy easing and a large fiscal stimulus package), we’ll see how effectively the Japanese Diet can implement the trickier business of structural reform. After all, it’s easier to spend money, which both the Diet and BoJ have now amply done, than it will be to take on Japan’s enmeshed systems of anti-competitive labour laws and industrial regulations. We remain bearish toward Abenomics and believe it will fail to deliver a sustainable acceleration in growth while simultaneously failing to achieve the BoJ’s doubled inflation target of 2%. This was explained in our April paper on Abenomics, and major areas of policy uncertainty such as the sales tax debate lead us to be very cautious toward the market into next year particularly relative to what is still priced in to the Nikkei and yen. To date, it is exceptionally difficult to pin Japan’s better recent Q1 growth on Abenomics. The Abe government’s policy changes were only implemented in Q2, and market expectations of policy changes that began in Q4 would carry longer and uncertain lagged effects than to impact Q1 growth in our opinion. Further colour on Abenomics will arise next Thursday (Eastern Time) in the form of inflation data for June (national) and July (Tokyo). Be careful how you read the figures. The headlines may scream the end to deflation, but the key will be to look at how this is happening. If it were to come through a generalized improvement in price pressures across many categories then we would be a little more encouraged by BoJ efforts to lift inflation. The problem is that Japan is instead experiencing a relative price shock (not generalized inflation) that is driven by a sharp rise in energy prices relative to other prices. In June, for example, utilities prices in Tokyo were up 8.6% y/y as a reflection of the costs to taking nuclear reactors off line and because of the impact that yen depreciation has had upon imported natural gas and oil prices (see chart). That’s why Tokyo headline CPI came in flat on year-ago levels after a prolonged period of declines. Meanwhile, prices for food, housing, household goods, medical care, and entertainment are all still falling. Transportation and communication prices have gotten a lift, likely due in part to higher imported energy prices that have been partly driven by yen depreciation for a big energy importer. The economic

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

-5 0 5 10

Household

Entertainment

Food

Housing

Medical

Education

Clothing

Transport

Utilities

Japan's Relative Price ShockTokyo CPI, y/y % change, June

Source: MIAC, Scotiabank Economics

Global Views

Economics

3 July 19, 2013

THE WEEK AHEAD

… continued from previous page

implications to a relative price shock versus a generalized inflation pick-up are very different. If Japan is experiencing a relative price shock that we argued would occur in our April paper on Abenomics, then Japanese consumers will pay more for what they have to (energy) and this will crowd out purchasing power for other items in the consumer basket in a more broadly deflationary sense. Thus, a relative price shock on the first round consequences can well give way to renewed disappointment on headline inflation pressures later on once inflation-adjusted wages suffer and substitution effects within the CPI basket begin to occur. Another key Asian risk facing global markets next week will come through Chinese manufacturing data. July’s ‘flash’ preliminary version of the private sector purchasing managers’ index is expected to remain in contraction. We view it as more reliable than the state’s cooked version that recently dropped the key trade subcomponents. China is grappling with unreliable trade figures that were over-reporting export growth through an extended period, and its tendency to mask some of the implications by not releasing key data that also included skipping the steel sector’s PMI gauge is disturbing. Also watch for China’s industrial profits on Friday. Asia’s export momentum will also be updated via trade figures due out of Japan, Hong Kong, New Zealand, Philippines, Taiwan and Thailand. Policy holds by the RBNZ and Philippines, Australian CPI, and South Korean GDP round out the hits. Also pay heed to the earnings season as 336 companies across Asia-Pacific markets release earnings reports of which 70% are in the final two days of the week. Asia’s earnings calendar does not tend to get as much attention as in, say, the US in part because of a lower focus upon short-term reporting and because less detail is typically provided than by US companies. US markets will face silence from the Fed next week as it goes into communications black-out on Tuesday ahead of the July 31st FOMC statement. That is unless the Federal Reserve plants a hint or two in the financial press, though the frequency and value of this approach has been sharply reduced in the era of greater Fed transparency. The US earnings calendar will again be very active with 951 companies releasing across all exchanges, of which 157 S&P500 firms will release. This will include firms like Netflix, defense plays like Lockheed Martin and General Dynamics that may carry sequester info, EI du Pont, AT&T, Apple, PepsiCo, Ford Motor Co, Boeing, Visa, 3M, Coca-Cola, Colgate-Palmolive, Dow Chemical, Hershey Co, GM, Southwest Airlines, and Starbucks. With about one-fifth of the S&P500 having released so far, 72% have beaten analysts’ earnings expectations but only 53% have beaten revenue expectations suggesting top line pressures relative to expectations in a still slowly growing US economy. The US also auctions 2s, 5s, and 7s next week at fairly large auction sizes before smaller additions to Treasury supply kick in later in the year. We continue to believe that markets are not yet on to the fact that the supply of new Treasuries will taper alongside Fed buying, but this is not materially occurring thus far; just wait for a skipped auction or two. US data risk will be fairly modest and centered upon housing and factory sector releases. Resales on Monday and new home sales on Wednesday are getting closer to being at risk of exhibiting the influences of the full percentage point shock to the 30-year fixed mortgage rate since early May. The mortgage commitment pipeline that locks in rate guarantees first has to be shaken off before the decline in mortgage purchase applications over the past two months starts to show up more significantly in home sales. That’s less true for new home sales that typically close within the month than it is for resales that can take 30-90 days for most of them to close all of the paperwork and exchange hands on the asset. That’s why for the resale picture, we’ll be watching pending home sales as the next leading indicator after mortgage purchase applications for signs of whether housing is holding up into the rate shock period or not. So far pending home sales are resilient as illustrated by May’s large gain (the freshest available), but we doubt this will hold up once higher rates work through the rate hold period. Nevertheless, the sharp unexpected drop in housing starts in June to the lowest seasonally adjusted level since August of last year due to a drop in apartment building will have markets sensitive to any deterioration in broader housing data next week and over coming months. Thursday’s durable


Global Views

Economics

4 July 19, 2013

THE WEEK AHEAD


goods orders should get a decent lift following the prior month’s sharp gain in part because aircraft orders climbed again in June. Tuesday’s Richmond Fed manufacturing gauge will add to factory sector perspectives. Thursday’s jobless claims round out the risks following the sharp recent drop that was likely lower than reality due to seasonal factors that over-compensated for auto sector shutdowns. Shutdowns normally occur at this time of year but are much less prevalent this time either because automakers are reticent to shut down amid high sales volumes or because high sales with existing current line-up decreases the pressure to retool for a revamped Fall line-up. There are two sources of significant domestic risk facing Canadian markets next week. One lands on Tuesday with the May retail sales report. We’re expecting a decent roughly half-point monthly lift to retail sales based on limited advanced data. New auto sales climbed by about 3% in May over April by our seasonally adjusted estimation and that should help lift total sales. A 1.8% rise in gasoline prices might lift sales at gasoline stations, and a modest lift to May’s CPI should also help lift the dollar value of retail sales, but the volume of sales should rise less significantly. Given that many of the other types of sales at retail stores are unobserveable, we’re playing it conservative with only a 0.4% headline lift. The bigger issue entails putting the print in the context of quarterly tracking for growth in the consumer sector. With only one of three months in Q2 in the books combined with the base effect from Q1, we’re tracking Q2 growth in the volume of retail sales of 2.3% at annualized rates over Q1. A 2.2% rise in total consumer spending is factored into our growth forecast of about 1% for Q2 with government spending, housing, and business investment dragging growth downward but net exports exerting a positive effect. The other source of risk lies in the intensification of the Canadian earnings calendar. Twenty-six firms report Q2 earnings next week, including well known names like Rogers, Encana, Loblaws, CP, CN, Goldcorp, Potash Corp, Brookfield, and a number of resource plays. Thus far, only nine firms have reported on the TSX of which five have been consumer service companies, two basic materials, and one financial and one tech stock. A slim majority of five has surpassed analysts’ earnings expectations while five have disappointed revenue expectations. Canada also auctions 2 year notes on Wednesday. European markets will be consumed by three domestic sources of risk in earnings, key sentiment surveys, and UK GDP. Next week will be highly active on the earnings calendar with 476 firms in Europe slated to release and with just over half of those back-end loaded to the last two days of the week. European data risk will start on Wednesday with PMI readings. Europe is expected to remain within recessionary readings on the manufacturing and service sectors when the purchasing managers’ indices are released. Germany is expected to hover near the divide between expansion and contraction in both sectors while France’s ongoing contraction is weighting the EC-composites to the downside. Thursday’s German IFO print for business confidence will be watched for signs of whether the prior month’s pick-up sticks, following a general softening earlier in the year. At risk is that the July IFO reading pushes more significantly into the period of financial market turmoil sparked by Federal Reserve communications on tapering. Second-quarter UK GDP growth is expected to build momentum from the first quarter and come in well north of 2% at quarterly annualized rates. That would be the fastest growth in three quarters and the first time since 2011Q3 that the UK economy posted two back-to-back positive prints. It is not Governor Carney who is uniting the BoE against further stimulus so much as improved data in our opinion. This includes stronger house prices, higher inflation, and firmer economic growth.


Global Views

Economics

5 July 19, 2013

ECONOMIC COMMENTARY

Eventually, interest rates will gravitate higher. Economic fundamentals will change as the global recovery, still hobbled by massive debt burdens, slowly builds renewed momentum. And this economic improvement will eventually allow central bankers, especially those in the advanced nations, to take their collective feet off the monetary accelerators that are providing life-support, first by eliminating the need for unprecedented and unconventional monetary accommodation (i.e. sovereign bond-buying), and then allowing short-term borrowing costs to move off of their recessionary ‘ground zero’. Market forces must be allowed to determine the cost of borrowing. They are needed to prevent resources from being misallocated to less productive areas of economies. In addition, they are needed to pre-empt any renewed asset price bubbles whose contagion effects tend to quickly ripple through an integrated and globalized economy. The flow of credit will be determined, not only by macroeconomic factors, but by the impact of increased regulatory supervision on financial institutions. Four years into the recovery from the Great Recession, policymakers are having a difficult time in normalizing interest rates. For the most part, many advanced countries still require ultra-low interest rates to help relieve debt burdens and support credit-sensitive purchases. Other less indebted nations, advanced or developing alike, find it difficult to break away if capital inflows force local currencies to appreciate and hinder domestic production and export capabilities. Whether it was unintentional or not, the U.S. has moved bond yields off their cycle lows. Over the past three months, the Fed has increasingly debated the timing and extent of ‘tapering’ its QE3 round of unconventional monetary accommodation that was implemented last September to help the struggling economy deal with increasing fiscal restraint. Even after the Fed (in addition to the Bank of Canada and the Bank of England) provided critical guidance to relieve some of the resulting uncertainty, the roughly 20 basis point giveback still leaves the 10-year U.S. Treasury bond yield at 2.50% — about a percentage point above its recent low at the beginning of May. Although there is increasing optimism surrounding the durability of the recovery underway in the U.S. (and Canada as well), no central bank among the advanced economies, and the Fed in particular, is confident enough to contemplate tightening policy — the fear that helped fuel the significant run-up in long-term interest rates since May and undercut equity valuations around the globe. In the developing economies, Brazil has been regularly raising short-term borrowing costs (three 50bp jumps) in a bid to arrest the destabilizing capital outflows that were adding to inflationary pressures and prop up its currency. China too has been tightening credit conditions to moderate its housing boom and rein in its over-leveraged shadow banks. Of particular relevance was the assuaging message provided by Fed Chairman Ben Bernanke at the central bank’s annual mid-year review to Congress, especially to quell the financial market fallout that rippled around the world following the release of the mid-June FOMC minutes that fermented expectations that ‘bond tapering’ equated to ‘Fed tightening’. The U.S. central bank plans to reduce the pace of its non-conventional monetary accommodation (the US$85 billion combined monthly purchases of Treasury bonds and mortgage-backed securities) by the end of this year, and potentially complete the process by mid-2014, though this process is very much dependent upon the United States meeting stronger economic and inflation targets.

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

Normalizing Policy In Abnormal Economic Times

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

09 10 11 12 13

Long-Term Interest Rates --Off The Bottom

Source: Bloomberg, Scotiabank Economics.

10-year gov't yields, %

Japan

U.S.

Canada

Germany

Global Views

Economics

6 July 19, 2013

ECONOMIC COMMENTARY


U.S. policymakers are primarily focused on domestic issues. But the central bank must be attuned to the international repercussions associated with the spillover effects resulting from the renewed financial market volatility. In many overseas countries, widening credit spreads have forced yields even higher alongside generally weaker currencies as capital flows to the stronger US$. The macroeconomic sensitivities will be magnified even further, especially if borrowing costs rise further. For the time being forward guidance remains focussed on keeping short-term borrowing costs at historically low levels for longer. Data dependency is the new mantra of central banks in the advanced nations. Open-ended conditionality has been supplemented by economic objectives in a bid to increase transparency and reduce investor uncertainty. In the U.S., the Fed is targeting a 6½% unemployment rate and a 2% core inflation rate (though how these performance guidelines are reached will also affect policy decisions) to trigger a tightening in policy. The newly minted Governor of the Bank of Canada, Stephen Poloz, indicated that the level of household indebtedness, the degree of economic slack in the economy, and the extent of inflation pressures will be instrumental in determining when interest rate normalization will eventually occur. And Bank of England Governor Mark Carney will be providing his interest rate roadmap in August following the release of an internal report highlighting his available options for forward guidance as well as non-conventional monetary accommodation. For the most part, global economic prospects for 2013 continue to be downgraded, notwithstanding the strengthening in U.S. output growth expected in the second half of this year, the relatively small bounce back in Japanese activity, continuing moderate growth in Canada, minimal gains in the U.K. and lingering recession in the euro zone. The loss of momentum around the world is attributable to the scaling back of growth estimates for a number of the large emerging market economies, and China in particular. China’s reduced outlook for growth reflects the inability of relatively buoyant household spending to fully offset the slower pace of fixed investments attributable to overcapacity, the increasing efforts to constrain credit growth, as well as reduced exports owing to slower global demand and a stronger yuan. Nonetheless, the U.S. economy is recharging its spending batteries, a development that should reinforce the upward trend in borrowing costs. There is considerable pent-up demand by households for ‘big-ticket’ purchases after more than a five-year period of consolidation and balance sheet restructuring. Households are becoming more confident spenders, with the trend reinforced by improving job markets, increased wage gains, and rising home valuations. The construction rebound has become self-reinforcing, with financial institutions becoming more active lenders. The sharply higher production of oil & gas is providing a significant lift to industrial activity, as is the backlog for transportation equipment. The US$ should retain its recent buoyancy — and potentially strengthen further over the next 12 to 18 months — in an environment of relative U.S. economic outperformance among the developed nations. The U.S. is in a position to gradually scale back its dependency on non-conventional monetary accommodation, thereby enhancing the relative attractiveness of U.S. investments and capital inflows. The yen, euro and sterling are at risk of further weakness vis-à-vis the greenback with overseas policies focussed on increasing accommodation. The commodity-sensitivity currencies like the C$ are likely to remain at a discount — and be prone to periodic weakness relative to the US$ — due to reduced demand for resource products in response to a slower-paced China and other emerging market economies.

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

Global Views

Economics

7 July 19, 2013

PROVINCES

Exports led by aerospace, wood products and mining through 2014.

Despite a stronger start to 2013 provincial real GDP growth in Q1, another year of modest expansion for Quebec is likely before stronger net exports underpin economic gains in 2014 (top figure). Considerable government restraint and slower housing activity are expected to limit the boost from consumption. After a post-recession rebound, more cautious real business investment is anticipated through 2014.

A modest improvement in Quebec’s trade deficit is forecast through 2014, with lower import growth given constrained domestic demand building on the existing interprovincial surplus (middle figure). Rising export volumes, supported by a softer Canadian dollar and recovering U.S. output, are projected to be led by aerospace, wood product and mineral shipments.

Driven by emerging market demand, historically high unfilled orders have lifted Quebec’s aerospace export receipts 22% above year earlier levels for the first five months of 2013. Over the next eighteen months Quebec should benefit from production commencing on a new series of larger planes.

Wood products, spurred by the U.S. housing recovery, report a 23% year-over-year increase in shipments for the first five months of 2013 (bottom figure). Though hampered by the long-term decline in newsprint demand, the reopening of some capacity over the past year has helped to raise export receipts from paper products nearly 14% y/y between January and May. Quebec’s food industry, resilient through the recession, is now weathering the closure of a sizable bakery and major meat-packing plant over the past year. Although another shutdown was announced for this Fall, the re-opening of the meat-packing plant is under discussion.

Quebec’s mining production is expected to trend higher through mid-decade, though setbacks include the idling of the Point Noire iron ore pellet plant, a weak equity market for junior mining firms and the deferral of new rail capacity from Sept-Îles to the Labrador mining trough. However, iron ore output will be lifted by the completion of the Mont Wright mine expansion, while gold production ramps up at two mines near Lac Malartic and begins next year at a mine near James Bay. Meanwhile, weak prices are dampening aluminum export receipts and prompting investment delays.

Supported by government incentives and relatively low business costs, software services posted a 5.2% inflation-adjusted gain last year. For the pharmaceutical industry, struggling with layoffs and lab closures, restructured provincial assistance substantially enhances the tax credit for biopharmaceutical R&D salaries.

After the 2010 peak of 51,363 units, housing starts dropped by about 4,000 units by 2012. A more substantial correction to 39,000 units is anticipated for the next two years. Mitigating the risk of a steeper correction towards the 1990s annual average of about 32,000 units is the forecast annual population growth for Quebec of close to 1.0%. While employment growth remains firm, slowing earnings gains are limiting increases in consumer spending.

John Bulmer (416) 866-4212 [email protected]

Quebec — Gradual External Sector Momentum

Quebec Manufacturing Shipments*

4

6

8

10

12

14

00 02 04 06 08 10 12* 12-month moving sum.Source: Statistics Canada.

$ billions

Aerospace

Wood Products

Aluminum

Paper

Quebec’s Real Trade Balance

-35

-30

-25

-20

-15

-10

-5

0

5

07 08 09 10 11 12

$ billions (chained 2007)

Source: Institut de la statistique du Québec.

Interprovincial

International

Total Balance

For more information, see: Provincial Trends: Quebec, July 18, 2013.

Population , April 2013: 8.1 mn. (23% of national)Nominal GDP, 2012: $360 bn. (20% of national)

2000-11 12 13f 14fReal GDP (% change) 1.9 * 1.0 * 1.1 1.8Employment (% change) 1.4 0.8 1.1 1.0Unemployment Rate (%) 8.2 7.8 7.6 7.4

Housing Starts (000s) 45 47 39 39Motor Vehicle Sales (000s) 405 416 417 418____________* 2000-07 estimated; 2012 on an industry basis at basic prices.Source: Institute de la statistique du Quebec; Statistics Canada;Scotiabank Economics, Global Forecast Update , June 27, 2013.

Quebec: Economic Outlook

http://www.gbm.scotiabank.com/English/bns_econ/ptrends_qc.pdf

Global Views

Economics

8 July 19, 2013

LATIN AMERICA

Gradual economic deceleration underway; elections dominate political environment. The pace of economic growth has decelerated modestly, influenced by lower investment activity during the first half of the year. Nevertheless, domestic consumption fuelled by still robust labour market conditions (unemployment rate at 6.4%) and strong retail and construction activity is offsetting the negative implications from a less dynamic external sector and eroding terms of trade. Consumer confidence metrics and auto industry activity still portray an expansionary phase. Also, the construction industry remains relatively solid. A lower growth trajectory prompted the central bank to lower its growth projection to 4.4% for this year.

The monetary context is rapidly changing, as indicated by forward market re-pricing and recent official rhetoric. In mid-July, the Central Bank opted to maintain its policy-setting reference rate unchanged at 5%, stressing the generalized impact of US dollar (USD) strength, more restrictive external financial market conditions and downward adjustments to Chinese growth expectations. However, the official communiqué stressed that current trends might require the adjustment of the monetary policy rate in the months ahead, as the labour market remains tight and local consumption is quite dynamic. Inflation will resume an upward trend in the months to come following the 1.9% y/y registered in June. The latest monetary policy report indicates an end-year inflation rate of 2.4% y/y, within the official 1-3% official target.

The external sector remains strongly influenced by mixed economic performance in the Asia/Pacific region as well as commodity price direction. The inevitable deceleration in Chinese economic growth is having an adverse impact on bilateral trade flows as well as on copper prices which will continue to trend downwards in the 2013-14 period reinforced by a supply-side response. However, improved economic dynamics in Japan and the expected recovery in the US may help improve the external picture in 2014. Meanwhile, the terms of trade erosion may also be a negative issue for the Chilean external sector. The fiscal position remains favourable, as the consolidated public sector balance will maintain a small surplus position in 2013-14.

The Chilean peso (CLP), which suffered deeply from the emerging market selloff in May-June, is showing signs of a tentative recovery. The outlook for Chinese economic growth (which is subject to potentially downside risks) is a major factor of CLP fragility given its direct influence on metal prices. The country’s terms of trade (influenced by persistently high energy costs and declining copper prices) have been deteriorating as the global growth outlook has been subject to increasingly adverse headwinds. Moreover, the steady profit-taking activity affecting the core universe of emerging-market economies as a result of new forward-guidance rhetoric by the US Federal Reserve has also exacerbated a negative market sentiment.

Investor perception of Chile’s sovereign creditworthiness remains solid. All international rating agencies maintain a “stable” outlook for Chile’s credit ratings, which are currently set at: “AA -” (Standard and Poor’s), “A+” (Fitch) and “Aa3” (Moody’s). The process of interest rate normalization and risk re-pricing underway led to a steady widening of sovereign credit (and default swap) spreads in the April-June period, although that is currently being gradually reversed. The Chilean five-year CDS, trading at 87 basis points, still implies the best sovereign credit position within the developing Americas.

The political landscape will be dominated by the presidential and congressional elections scheduled for mid-November 2013. Income inequality is at the core of demands from society. Former President Michelle Bachelet (from the Nueva Mayoria coalition) is the favourite candidate to win the elections. Constitutional, tax, education and energy sector reforms will be part of the government policy agenda. A redefinition of the energy matrix to optimize the benefits of the country’s hydroelectricity potential has become a key issue to be addressed by the new government. Meanwhile, increasing strike activity fuelled by environment protection groups coupled with more stringent regulatory framework continues to affect activity in the mining sector.

Financial market conditions remain systemically sound, yet there are increasing signs of tighter credit restrictions by deposit-taking financial institutions, in particular in loan adjudication to the real estate and commercial credit segments. Lending activity is growing at an annual 10% rate. The cost of domestic finance is poised to increase as a result of the combined effect of increasing long-term interest rates in the United States and higher inflationary expectations converging towards the upper band of the central bank’s tolerance range. The banking sector remains well capitalized, above the minimum requirements.

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

Chile Country Outlook

Global Views

Economics

9 July 19, 2013

LATIN AMERICA

Low inflation, fiscal consolidation and narrow current account deficit set a positive tone for Colombia in the 2013-14 period.

The Colombian economy is on a recovery track following the weaker path observed since mid-2012. The country’s output expanded by 2.8% y/y in the first quarter of the year, with the construction sector leading the recovery while manufacturing continued to lag — particularly the oil and mining industry as a result of strikes at the beginning of the year. On the local demand side, investment growth in machinery and equipment and consumption decelerated significantly. Although the first-quarter real GDP performance was slightly below our expectation, high frequency indicators are showing positive signs in the second quarter of the year. We expect the Colombian economy to expand by 4.2% in 2013 and by 4.6% in 2014, with government stimulus and the central bank’s loose monetary policy to contribute to a pick-up in the second half of the year. Recently, the government cut its growth forecast for this year from 4.8% to 4.5%, while the central bank maintains 4.3% as the more likely rate of expansion. Price stability improved significantly in recent years, with inflation averaging around 3% y/y in the last four years (against a previous average of above 5%). Headline inflation is currently within the central bank’s target range (2-4%) but remains close to the lower limit, leaving the central bank ample room to maneuver if need be. We anticipate that inflation will accelerate to around 2.7% by year-end, as a result of the economic recovery; nonetheless we do not foresee any changes to the monetary policy rate. The central bank has maintained the monetary rate at 3.25% (its lowest in 17 months) since last March, 200 bps lower than a year ago. The government remains committed to fiscal consolidation, although it is already anticipating a slightly higher consolidated public deficit, as spending — particularly at the regional level — will restart after the slowdown in 2012. The central government shortfall is expected to be around 2.4% of GDP in the 2013-14 period. The fiscal reform approved in 2012 and relatively-high commodity prices will provide a positive outlook for the country’s fiscal balance. We anticipate a mild widening of the current account deficit to 3⅓% of GDP in the 2013-14 period; however, the trade balance will likely remain in surplus. Export growth decelerated somewhat in the first half of the year as a result of lower commodity prices and supply shocks that affected the mining sector, while import gains moderated as local demand growth decelerated. In our view, both export and import growth will accelerate in the second half of the year. Additionally, profit repatriation of foreign companies will expand the income deficit. The Colombian peso (COP) has been subject to intensive central bank intervention combined with modest economic growth, loose monetary policy and, more recently, US dollar (USD) strength caused by the shift in Federal Reserve policy expectations. Under these conditions, the currency has lost 6.4% vis-à-vis the USD year-to-date, reaching by the end of June its weakest level in 18 months. Authorities adopted a more aggressive intervention policy this year, purchasing US$4.1 billion in the first six months of the year, which represents 85% of the total amount accumulated in 2012. The International Monetary Fund recently approved a new precautionary flexible credit line worth US$5.8 billion which, together with the US$40.8 billion held in foreign reserves, will support economic management efforts in the case of heightened volatility in global financial markets. We expect the USDCOP rate to close the year around the 1,900 mark. Colombia’s sovereign credit profile continues to improve and could be upgraded in the coming 6-12 months. In April, Standard & Poor’s (S&P) upgraded Colombia from “BBB-” to “BBB”, leaving a “stable” outlook. The move was in response to the economy’s increased resilience in the face of external vulnerabilities, with a stronger fiscal framework to contain the negative effect from a fall in oil prices. Previously, Fitch revised the country’s rating outlook from “stable” to “positive”, leaving the long-term sovereign credit rating at “BBB-”. Moody’s rates the country at “Baa3” with a “positive” outlook. The debt-to-GDP ratio has been consistently decreasing from 36% in 2009 to 32% in 2012 and a fiscal reform approved last year aims to reduce the government debt burden. Colombia’s credit default swaps increased from 80 basis points (bps) in May to 126 bps in July, in response to global risk re-pricing activity but remain in line with Latin American peers such as Peru and Panama.

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

Colombia’s Economic Recovery Underway

Fixed Income Strategy Global Views

10 July 19, 2013

Bank of England MPC Minutes Recap Mark Carney is clearly making an impact in his first few weeks at the helm of the BoE. This week’s MPC minutes put a cat amongst the pigeons with the vote of the July MPC meeting showing a unanimous 9-0 vote against consensus expectations for 7-2. Previously there were 3 dissenters calling for more QE, though they were outvoted for the last 5 months. We have summarised the key elements of the minutes below. Most important of all was:

An expansion of the asset purchase programme remains one means of injecting stimulus, but the Committee would be investigating other options during the month, and it was therefore sensible not to initiate an expansion at this meeting…

In other words, to embark on a new round of QE at the July meeting would have tied the committee’s hands for 3 months. Why vote to do that when the ability to implement other policy tools such as forward guidance can be implemented in just one month after the August Inflation Report? Crucially on that front:

Implementation of thresholds and forward guidance will be made at the time of the August Inflation Report on 7 August, not after the 1 August MPC meeting.

That probably means there should not be any surprises at the August MPC meeting. Rather, any action will come on or after the Inflation Report on 7 August. Key References from the Minutes Markets:

The rise in UK longer-term interest rates was understandable but the rise in short-term interest rates was surprising.

International

The US outlook had softened as had the broader international outlook. Meanwhile the eurozone was looking less bad.

Domestic Economy

Survey indicators had been encouraging;

The Bank revised up its Q2 GDP projection from 0.5% q/q to 0.6% q/q;

Some surveys suggested that H2 might still be relatively weak.

The household savings rate had fallen sharply, but that may reflect the shift in bonus payments

until April to take advantage of the reduction in the top rate of income tax.

Acknowledged the buoyancy of recent housing data, especially the RICS…

…but expressed some doubts that the buoyant consumer data could last too long given

deleveraging by households and relative lack of credit availability.

Agents report showed a majority of firms have seen profits improve;

Few firms expected to boost margins by raising prices.

Immediate policy decision

Further signs that the recovery was in train;

Domestic economic data generally positive…

UK: Wait A Minute Month!

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


11 July 19, 2013


…though earnings growth remained very muted.

It was important to communicate that the implied rise in the expected future path of Bank

Rate had not been warranted…

…appropriate to reinforce the recovery by ensuring that stimulus was not withdrawn

prematurely;

Were the recent rise in market rates to be maintained it would represent a premature

withdrawal, but a statement from the Committee should help.

The Committee’s August response on the merits of forward guidance would shed light on both

the quantum of additional stimulus required and what form it should take.

Guidance on Forward Guidance What might forward guidance look like? Here is one suggestion for the MPC’s next statement:

Against a backdrop of plentiful spare capacity the committee’s view is that it is unlikely that Bank Rate will need to rise until the second half of 2015. The sale of the Bank’s gilt holdings will not commence for some time beyond that date, until a steady pace of sustained growth is assured and the MPC has embarked on a programme of Bank Rate hikes. This commitment is contingent on inflation adjusted for one-off and special factors remaining within a percentage point of the Bank’s 2% target and wage inflation consistent with sustainable increases in unit labour costs. In tandem with the Financial Policy Committee, the MPC will also pay careful attention to housing market indicators for prolonged signs of overheating that could warrant an earlier removal of stimulus or more targeted intervention.

Conclusion Tactically, it did not make sense for the doves on the MPC to vote for more QE at this particular meeting. That is not to say that they no longer see the case for looser policy. Rather, they have been appeased by the promise of alternatives to QE which will be more fully assessed in the August Inflation Report. The doves have turned more consensual, but for how long? Is forward guidance enough to get the dissenters to fall into line with the majority for several months? Upcoming macro data may contribute to a less dovish stance. The minutes acknowledged that the domestic survey and hard activity data had improved. Our view is that with a GDP reading north of 0.5% q/q (with little in the way of one-offs), robust housing data and inflation towards the top end of the target range, it is less compelling to press the emergency button and deliver QE. Forward guidance is probably sufficient at this stage.



12 July 19, 2013

Encouraging hard data in early Q2 There is one month to go before the release of the first estimate of EMU Q2 GDP and looking to

available hard data it seems that, for once, we could be in for a positive surprise. Indeed, there is a high chance that quarterly GDP growth prints in positive territory for the first time in six quarters. Such an outcome would no doubt reinforce the view that, belatedly, a gradual recovery is about to take place.

This relatively optimistic view lies with the positive momentum seen on both the supply and the

consumer sides of the economy in the most recent monthly data. On the supply side, eurozone industrial production enjoyed decent gains in the March/April period. While May’s report proved a little disappointing, with industrial production down by 0.3% m/m, the series is still up by more than 1% on the basis of a 3-month average. That is the strongest performance since the first quarter of 2011.

On the demand side, we only have April data for retail sales, which showed a sharp 1.0% m/m gain. We

cannot exclude the risk of some payback in May, especially in view of bad weather conditions across the continent that could have disrupted households’ consumption. However, improving consumer confidence is rather encouraging and points to some resilience. Finally, exports, which were a big drag on GDP growth at the turn of the year also showed signs of recovering.

All in all, at this stage, a simple regression using these monthly data would suggest a rise in eurozone Q2 GDP of around +0.1%/+0.2% q/q. In view of the industrial production trend in particular, this stronger performance should mainly come from core countries like Germany or France but also, Spain where the pace of contraction could be slowing. However, the situation in Italy still appears to be challenging.

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

Euro Area Q2 GDP To Surprise On Upside?

Table 1: Supply & demand side data


13 July 19, 2013


Will Q2 mark the turning point in the economic cycle or just a temporary catch up from very depressed levels in Q4 12 & Q1 13 GDP ? Looking to the recent upward trend in business surveys, the momentum is encouraging. However, business sentiment still remains at very low levels, consistent with depressed activity. Also, as we mentioned above, after the strong gains seen in the March/April period, both industrial production for May and exports were less buoyant.

This week’s business surveys will provide further clues for Q3 Next week’s July business surveys (PMI/Ifo) will provide clues as to whether the economy can carry

momentum into H2. Thus far, we only had July’s German ZEW report which showed a slight easing in sentiment. However, given the traditional volatility of this survey, we would not draw too conclusively from this outcome. Moreover, the fact that the survey shrugged off the recent financial market movements was encouraging. As such, we would look for some resilience from the likes of the Ifo and PMI, with a bias on the upside.

On the negative side, Brent prices have moved higher. On the positive side, despite market volatility,

equity markets have recovered from the lows seen at the end of June. Also, the traction from the global environment could still offer some support at this stage as gauged by the rebound in the US manufacturing ISM. All in all, we would look for the PMI manufacturing index rising to around 49.4 from 48.8.


Chart 1: Estimate of eurozone GDP & trend in industrial production across countries

Chart 2: Estimate on EMU PMI


14 July 19, 2013


For the German Ifo, we look for a slight improvement from 105.9 to 106.3, mainly reflecting the impact of last month’s rise in the expectations component (which tends to lead the trend in the headline). All in all, business surveys should support the case for some resilience in the recovery in industrial production after the progress made in early Q2. However, the current low readings of the surveys also mean that this pace of improvement is likely to be fairly subdued and that the strong bounce-back seen in early Q2 is unlikely to be repeated. As a result, the performance of Q3 GDP growth could be weaker, closer to a flat quarterly reading.


Chart 3: PMI & Ifo vs. Industrial production

Foreign Exchange Strategy Global Views

15 July 19, 2013

GBP is expected to weaken to 1.45 into year-end and stabilize in 2014. We expect the USD to strengthen broadly against the majors in 2013 based on relative monetary policy, growth, sentiment and flows. The outlook for the UK has improved recently; however from a relative perspective, recent strength in GBP is likely to fade towards the end of the third quarter, with GBP weakening into year-end. The UK macro fundamentals are less favourable than recent data releases would suggest as the outlook for growth is expected to be challenged by a deleveraging consumer, fiscal tightening and weak external demand. Accordingly, the UK is expected to lag well behind the US in terms of growth. From a monetary policy perspective, the fundamental backdrop leaves the Bank of England (BoE) facing a protracted economic recovery with significant downside risks while inflation lies stubbornly above the 2% target. The risk of further asset purchases is low, but the BoE is likely to signal that interest rates will remain on hold until late 2015 or early 2016, creating a clear lag between the beginning of the United States’ and UK’s tightening cycle. Flows into US assets have been strong, as the USD remains the reserve currency of choice, US equities have outperformed the FTSE and the spread between the US and UK 10-year yield has widened (see chart). In addition, sentiment continues to favour long USD and short GBP positions as markets perceive a more favourable path for the USD (at the time of writing the CFTC reported a net short GBP position of -$3bn). Technically, GBPUSD is resting after its early 2013 downtrend (see chart). Accordingly it has temporarily entered a broad range pattern. In the near term, GBP could fall victim to further upside pressure; however ultimately we do not expect it to break above its recent range and that the downtrend re-establishes itself later this year. In the context of broad USD strength, a challenged UK domestic outlook and a central bank who is likely to maintain accommodative policy longer than the US, we expect GBP to face increasing headwinds in 2013 before stabilizing in 2014.

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

GBP Outlook — Driven By Central Bank Policy & Growth Dynamic

100-day MA

Source: Bloomberg & Scotiabank FX. Source: Bloomberg & Scotiabank FX.

GBP: RESTING FROM DOWNTREND US-UK 10 YR YIELD WIDENING

Portfolio Strategy Global Views

16 July 19, 2013

S&P/TSX: Materials weighing on overall earnings Again S&P/TSX Q2 EPS is expected to hit $206, which is 1% above Q1 ($203) and 7% above last year's level

(Q2/12 of $192). On a 12-month trailing basis, S&P/TSX earnings should contract 1% YOY to $822. TSX 12-m trailing EPS has been stuck in the $800-$850 range since Q2/11. Expectations for the Big Three — Energy, Materials, and Financials - are mixed for Q2. Energy (+5% YOY) and Financials (+22%) are expected to deliver higher earnings, while Materials Q2 EPS are slated to drop 23% based on bottom-up figures. Taken together, the Big Three should generate 75% of S&P/TSX total earnings in Q2. See Exhibit 1.

Q2 numbers revised sharply lower. TSX consensus numbers for Q2 have been declining since March, dropping 8% to $206 from $224. Negative revisions were broadly based in the past three months, but Materials have suffered the steepest cut on the back of weaker gold and base metal prices. Materials Q2 EPS was reduced by 31% in the last 3-M. On the positive side, Industrials, Health care, and Staples benefited from modest positive EPS revisions over the same period.

Beat or miss. Based on our regression models, we expect TSX Energy and Financials Q2 EPS to exceed

consensus forecasts; TSX Gold EPS should be in-line with recently revised estimates; while we expect a miss in the Diversified Metals and Mining space. Higher energy prices, a lower C$, and rising long term yields could support the surprise factor for oil & gas producers and life insurance companies.

Headwinds for TSX earnings. The outlook for Canadian index earnings remains challenging for 2013 with upside potential for 2014. TSX earnings should continue to be challenged by lower commodity prices, domestic headwinds, further profit margin erosion, and weak sector breadth. We recently reduced our 2013 and 2014 TSX EPS estimate to $825 and $925, respectively. Please refer to our report entitled Revisiting Earnings and Targets published on July 3, 2013 for further details.

Beat The Street — Q2 Earnings Season Preview

Hugo Ste-Marie (514) 287-4992 [email protected]

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

Exhibit 1 - S&P/TSX Q2/13 EPS Consensus (Bottom-up forecasts)*

*Data as at July 5, 2013. Source: Scotiabank GBM Strategy estimates, CPMS, Bloomberg.

Portfolio Strategy Global Views

17 July 19, 2013

S&P 500: Q2 EPS expected to hit record high S&P 500 Q2 EPS is expected to come in at US$26.40, which would mark a new record high. Q2 EPS is

expected to improve 2.4% sequentially and 3.8% YOY (see Exhibit 2). Discretionary (+15% YOY), Financials (+11%), and Health Care (+10%) should deliver the strongest earnings growth in the U.S. On the top-line, the pace of growth is expected to pick up steam to 3.3% YOY in Q2 from 1.3% in Q1. On a trailing basis, S&P 500 EPS should hit US$99.32 in Q2 compared with US$98.35 in Q1 and US$96.82 in Q4/12.

Q2 consensus is on the high side. S&P 500 Q2 EPS forecasts appear slightly high at US$26.40, in our view. Although YoY growth will be visible and S&P 500 EPS will reach record levels, we believe the Q2 beat ratio will come in at the low end of the 2009-2013 range (62%-80%) given that (1) the pace of improvement in U.S. macro data decelerated in Q2 relative to Q1; (2) the Negative to Positive pre-announcement ratio is high at 5.3; (3) a firmer U.S. dollar is keeping pressure on the top-line of multi-national companies; and (4) preliminary Q2 numbers appear relatively modest so far.

That being said, we still expect S&P 500 earnings growth to continue in coming quarters. The U.S./

global recovery took a pause in Q2, but it should re-accelerate in the back half of of 2013/2014, in our view.

Please refer to our full report for more details.


Hugo Ste-Marie (514) 287-4992 [email protected]

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

Exhibit 2 - S&P 500 EPS – Q2/13 Bottom-Up Consensus

Source: Scotiabank GBM Strategy; S&P.

Global Views

Economics

18 July 19, 2013

KEY DATA PREVIEW

Key Data Preview

CANADA Retail sales for May (July 23) should post a modest rise after gasoline prices and new vehicle sales increased solidly on the month (1.8% and 2.8% respectively by our estimates). The net leaves us looking for a 0.4% m/m increase in overall retail sales. Price effects could be helpful here too as seasonally adjusted CPI was up by 0.2% m/m. Note that retail sales were fairly soft for the preceding two months, running essentially flat since February after a strong start to the year (see chart). The weaker numbers that we have been seeing of late are more in keeping with our general view that Canadian consumers will spend the better part of this year deleveraging — and increasing their spending by a slow rate as a result. UNITED STATES We’re looking for a decent increase in U.S. durable goods orders for June on the back of a second straight strong month of new orders at Boeing (+287 orders after a very strong +232 orders in May). That, combined with strong vehicle assemblies on the month (implying a good amount of just-in-time orders) leaves us anticipating a 1.5% increase in headline orders. The improvement in the ISM manufacturing survey (and its new orders component) in June add to the sense that durable goods orders ought to be strong. Watch out for the non-defense capital goods ex-air metric — shipments in this category show up as investment in U.S. GDP — as it fell somewhat in the spring and could rebound as the sequester-related uncertainty passes. We’re also looking for strength in new home sales and existing home sales in June as all of the major leading indicators (pending home sales, foot traffic at new homes, and mortgage purchase applications) point to strength (see chart). Our forecasts call for a 485k annualized rate of new home sales and a 5.3m annualized rate of existing home sales. The question here is how the rate shock that the U.S. experienced in late May and into June will impact these metrics moving forward, particularly as the July and August numbers — which will be more heavily influenced by the rate increase — are released. The drop in mortgage purchase applications in May and June (which should mainly impact the July numbers) points to this possibility.

A1

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


36

36.5

37

37.5

38

38.5

39

39.5

40

11 12 13

Retail Sales

Retail Sales (Chained Dollars)

C$, Billions

Source: Statistics Canada, Scotiabank Economics

Canadian Retail SalesFlat in 2013

80859095

100105110115120125

11 12 13Mortgage Purchase AppsPending Home Saels

Index Level. 1/1/2011=100

Source: MBA, NAR, Scotiabank Economics

Housing Leading IndicatorsModest PIck-Up... But Watch Out in July!

62

63

64

65

66

67

60

62

64

66

68

70

72

Aug-2011 Apr-2012 Dec-2012 Aug-2013

Orders (1-month lead) (LHS)

Shipments (RHS)

USD,Billions

USD,Billions

Source: US Census Bureau, Scotia Economics

US: Capital Goods Orders & ShipmentsOrders Picking Up?

Global Views

Economics

19 July 19, 2013

KEY DATA PREVIEW


EUROPE The first estimate of second-quarter real GDP will be released in the UK next week (July 25th). We anticipate the report to show a chunky 0.7% q/q expansion following the relatively solid 0.3% q/q gain in the prior quarter. The acceleration is likely to come from a combination of more robust construction and services sector activity, while the industrial sector treads water. More specifically, the construction sector posted an extraordinarily robust pace of expansion during April and showed no signs of softening in May. April’s strength represented payback following a weak March, but in light of the housing market support from the government’s ‘Help to Buy’ scheme, that momentum would seem likely to persist into the second half of the year. Meanwhile the impressive rise in the services sector PMI survey points to a solid pace of expansion in hard services output. Overall, this would be the strongest pace of expansion since the third quarter of 2012, which was buoyed by the London Olympics. However, in contrast to 2012, we would expect less of a payback in the third quarter because the buoyancy of this latest growth number relies less on special factors. LATIN AMERICA After a clear slowdown in the first quarter, high frequency indicators in Mexico will regain significance as we enter the second half of the year. Low public spending as a result of the change in government, coupled with calendar effects and lower industrial production were the main contributors to the poor economic performance. Although we anticipate them to be temporary, the moderation in economic activity seems to be continuing through the second quarter. May retail sales and the monthly economic activity indicator (IGAE) will be released next week offering more information about household consumption and industrial activity in the country. We expect retail sales to have expanded by 3.5% y/y in May, accelerating from the pace registered in the previous few months. Additionally, after considerable volatility in the Mexican IGAE so far this year, we expect economic activity to pick up from an average rate of 1.7% y/y in the previous four months to 2½% y/y in May. ASIA South Korea will release preliminary real GDP data on July 24th. We estimate that output expanded by 0.7% q/q in the second quarter, following a 0.8% q/q gain in the first three months of the year. In year-over-year terms, economic growth likely accelerated to 1.9% from 1.5% in the first quarter. We expect activity to start picking up in the second half of the year, with the nation’s output expansion averaging 2.4% this year as a whole. Business and consumer confidence recorded modest improvements in the second quarter, though this trend has yet to be reflected in the real economy, as indicated by subdued industrial production and personal spending. Similarly, South Korean exports have yet to show a sustainable recovery. The performance of the export-oriented economy (exports of goods and services are equivalent to over 50% of GDP) will greatly depend on the global growth and trade cycles. For the time being, the country’s exporters battle with still-weak global demand and the adverse impact of the substantial depreciation of the Japanese yen (both countries’ manufacturers are major competitors in many export categories). A pick-up in export sector activity will likely become more evident in the coming quarters along with the rebound in global conditions.

A2

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


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

-4

-2

0

2

4

6

8

10

Jan-11 Jan-12 Jan-13

Mexican Economic Activity & Retail Sales

Source: Bloomberg.

y/y % change

Global Economic Activity Indicator

(IGAE)

Retail Sales

Economics

1

Global Views

July 19, 2013

KEY INDICATORS

Key Indicators for the week of July 22 - 26

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

A3

North America

Europe

Country Date Time Indicator Period BNS Consensus LatestMX 07/22 09:00 Retail Sales (INEGI) (y/y) May 3.5 1.0 2.5US 07/22 10:00 Existing Home Sales (mn a.r.) Jun 5.3 5.3 5.2

CA 07/23 08:30 Retail Sales (m/m) May 0.4 0.4 0.1CA 07/23 08:30 Retail Sales ex. Autos (m/m) May -- 0.4 -0.3US 07/23 10:00 Richmond Fed Manufacturing Index Jul 10.0 8.0 8.0

US 07/24 07:00 MBA Mortgage Applications (w/w) Jul 19 -- -- -2.6MX 07/24 09:00 Bi-Weekly Core CPI (% change) Jul 15 -- 0.2 0.0MX 07/24 09:00 Bi-Weekly CPI (% change) Jul 15 -- 0.1 -0.1US 07/24 10:00 New Home Sales (000s a.r.) Jun 485.0 484.0 476.0

US 07/25 08:30 Continuing Claims (000s) Jul 13 3100 2980 3114US 07/25 08:30 Initial Jobless Claims (000s) Jul 20 340 340 334US 07/25 08:30 Durable Goods Orders (m/m) Jun 1.5 1.2 3.7US 07/25 08:30 Durable Goods Orders ex. Trans. (m/m) Jun 0.5 0.5 0.5MX 07/25 09:00 Global Economic Indicator IGAE (y/y) May 2.5 2.1 4.6

MX 07/26 09:00 Trade Balance (US$ mn) Jun P -- -533.0 -469.9US 07/26 09:55 U. of Michigan Consumer Sentiment Jul F 84.0 84.0 83.9

Country Date Time Indicator Period BNS Consensus LatestTU 07/23 07:00 Benchmark Repo Rate (%) Jul 23 4.50 4.50 4.50HU 07/23 08:00 Base Rate (%) Jul 23 4.00 4.00 4.25EC 07/23 10:00 Consumer Confidence Jul A -- -18.3 -18.8

FR 07/24 03:00 Manufacturing PMI Jul P -- 48.8 48.4FR 07/24 03:00 Services PMI Jul P -- 47.5 47.2GE 07/24 03:30 Manufacturing PMI Jul A -- 49.2 48.6GE 07/24 03:30 Services PMI Jul A -- 50.7 50.4EC 07/24 04:00 Composite PMI Jul A -- 49.1 48.7EC 07/24 04:00 Manufacturing PMI Jul A 49.4 49.1 48.8EC 07/24 04:00 Services PMI Jul A -- 48.7 48.3FR 07/24 12:00 Jobseekers Net Change (000s) Jun -- 10.5 0.1

SP 07/25 03:00 Unemployment Rate (%) 2Q -- 27.2 27.2GE 07/25 04:00 IFO Business Climate Survey Jul 106.3 106.1 105.9GE 07/25 04:00 IFO Current Assessment Survey Jul -- 109.7 109.4GE 07/25 04:00 IFO Expectations Survey Jul -- 102.5 102.5UK 07/25 04:30 GDP (q/q) 2Q A 0.7 0.6 0.3UK 07/25 04:30 Index of Services (m/m) May -- 0.2 0.2

Economics

2

Global Views

July 19, 2013

KEY INDICATORS

Key Indicators for the week of July 22 - 26


A4

Asia Pacific

Latin America

Country Date Time Indicator Period BNS Consensus LatestTA 07/21 20:30 Unemployment Rate (%) Jun 4.2 4.2 4.2

JN 07/22 01:00 Supermarket Sales (y/y) Jun -- -- -1.2TA 07/22 04:00 Export Orders (y/y) Jun -- 0.6 -0.4HK 07/22 04:30 CPI (y/y) Jun 4.1 4.1 3.9SK 07/22 07:59 Department Store Sales (y/y) Jun -- -- 1.0

SI 07/23 01:00 CPI (y/y) Jun 1.6 1.6 1.6TA 07/23 04:00 Commercial Sales (y/y) Jun -- -0.3 -1.9TA 07/23 04:00 Industrial Production (y/y) Jun -- 2.5 -0.1NZ 07/23 18:45 Trade Balance (NZD mn) Jun -- 105.0 71.3NZ 07/23 18:45 Exports (NZD bn) Jun -- 4.0 4.1NZ 07/23 18:45 Imports (NZD bn) Jun -- 3.9 4.0JN 07/23 19:50 Merchandise Trade Balance (¥ bn) Jun -- -150.0 -996.4JN 07/23 19:50 Adjusted Merchandise Trade Balance (¥ bn) Jun -- -573.5 -821.0JN 07/23 19:50 Merchandise Trade Exports (y/y) Jun -- 10.0 10.1JN 07/23 19:50 Merchandise Trade Imports (y/y) Jun -- 13.6 10.1AU 07/23 21:30 Consumer Prices (y/y) 2Q 2.5 2.5 2.5CH 07/23 21:45 HSBC Flash China Manufacturing PMI Jul -- 48.5 48.3

NZ 07/24 17:00 RBNZ Official Cash Rate (%) Jul 25 2.50 2.50 2.50SK 07/24 19:00 GDP (q/q) 2Q P 0.7 0.7 0.8SK 07/24 19:00 GDP (y/y) 2Q P 1.9 1.9 1.5PH 07/24 21:00 Imports (y/y) May -- -- 7.4PH 07/24 21:00 Trade Balance (US$ mn) May -- -- -1020.0

PH 07/25 04:00 Overnight Borrowing Rate (%) Jul 25 3.50 3.50 3.50HK 07/25 04:30 Exports (y/y) Jun -- 2.5 -1.0HK 07/25 04:30 Imports (y/y) Jun -- 4.0 1.7HK 07/25 04:30 Trade Balance (HKD bn) Jun -- -48.2 -44.3TH 07/25 06:59 Customs Exports (y/y) Jun -- 1.4 -5.3TH 07/25 06:59 Customs Imports (y/y) Jun -- 8.4 -2.1TH 07/25 06:59 Customs Trade Balance (US$ mn) Jun -- -1825.0 -2304.4SK 07/25 17:00 Consumer Confidence Index Jul -- -- 105.0JN 07/25 19:30 National CPI (y/y) Jun 0.1 0.1 -0.3JN 07/25 19:30 Tokyo CPI (y/y) Jul -- 0.2 0.0

SI 07/26 01:00 Industrial Production (y/y) Jun -- -4.1 2.1TA 07/26 04:00 Leading Index (m/m) Jun -- -- 0.7TA 07/26 04:00 Coincident Index (m/m) Jun -- -- 0.2CH 07/26 21:30 Industrial Profits YTD (y/y) Jun -- -- 12.3

Country Date Time Indicator Period BNS Consensus LatestBZ 07/23 09:30 Current Account (US$ mn) Jun -- -5050.0 -6420.0

BZ 07/25 08:00 Unemployment Rate (%) Jun -- 5.9 5.8

CO 07/26 06:59 Overnight Lending Rate (%) Jul 26 3.25 3.25 3.25

Economics

3

Global Views

July 19, 2013

AUCTIONS

Global Auctions for the week of July 22 - 26


A5

North America

Europe

Asia Pacific

Country Date Time EventUS 07/22 11:00 U.S. Fed to Purchase USD1.25-1.75 Bln NotesUS 07/22 11:30 U.S. to Sell 3-Month BillsUS 07/22 11:30 U.S. to Sell 6-Month Bills

US 07/23 11:00 U.S. Fed to Purchase USD3.00-3.75 Bln NotesUS 07/23 11:30 U.S. to Sell 52-Week BillsUS 07/23 11:30 U.S. to Sell 4-Week BillsUS 07/23 13:00 U.S. to Sell 2-Year Notes

US 07/24 11:00 U.S. Fed to Purchase USD1.25-1.75 Bln NotesCA 07/24 12:00 Canada to Sell 2 Year NotesUS 07/24 13:00 U.S. to Sell 5-Year Notes

US 07/25 11:00 U.S. Fed to Purchase USD4.25-5.25 Bln NotesUS 07/25 13:00 U.S. to Sell 7-Year Notes

US 07/26 11:00 U.S. Fed to Purchase USD1.25-1.75 Bln Notes

Country Date Time EventGE 07/22 05:30 Germany to Sell EUR3 Bln 364-Day BillsFR 07/22 08:50 France to Sell Bills

NE 07/23 04:00 Netherlands to sell BondsSP 07/23 04:30 Spain to Sell 3-Month and 9-Month BillsSZ 07/23 05:30 Switzerland to Sell 91-Day Bills

IT 07/26 05:00 Italy to Sell I/L BondsUK 07/26 06:10 UK to Sell Bills

Country Date Time EventCH 07/21 23:00 Agricul Dev Bank of China to Sell CNY10 Bln 1-Year BondCH 07/21 23:00 Agricul Dev Bank of China to Sell CNY10 Bln 5-year Bond

JN 07/22 23:35 Japan to Sell 2-Month Bill

CH 07/23 23:00 China to Sell 5-Year Bonds

JN 07/24 23:35 Japan to Sell 3-Month BillJN 07/24 23:45 Japan to Sell 20-Year Bonds

Economics

4

Global Views

July 19, 2013

EVENTS


Events for the week of July 22 - 26

A6

North America

Europe

Asia Pacific

Country Date Time EventUS 07/21 U.S. Treasury Secretary Lew Meets with Greece's Samaras

Country Date Time EventSP 19-20 JUL EU Foreign Ministers Meet in Palma de Mallorca, SpainRU 19-20 JUL G20 Finance Ministers and Central Bank Governors Meeting

EC 07/22 03:30 EU Foreign Ministers Hold Meeting in BrusselsGE 07/22 09:00 Merkel Holds Election Rally in Baltic Town of ZingstGE 07/22 11:00 Merkel Holds Election Rally on Baltic Island of UsedomGE 07/22 13:00 Merkel Holds Election Rally on Baltic Island of Ruegen

TU 07/23 07:00 Benchmark Repo RateHU 07/23 08:00 Hungary Base Rate AnnouncementPO 07/23 19:00 Bank of Portugal Releases Bank Lending SurveyEC 07/23 EU General Affairs Ministers Hold Meeting in Brussels

EC 07/24 04:00 ECB Publishes Bank Lending SurveyPO 07/24 Portugal Releases Year-to-Date Budget Report

EC 07/25 04:00 ECB publishes monetary developments in the euro area

EC 07/26 06:00 ECB Announces 3-Year LTRO Repayment

Country Date Time EventPK 07/20/2013 Pakistan Prime Minister Sharif Meets with Political LeadersJN 20-21 JUL Japan Upper House Parliamentary ElectionJN 21-22 JUL BOJ Policy Board Member Sato Speaks in FukushimaAU 21-22 JUL Australian Caucus Meeting on Party Leadership Vote RulesNZ 22-27 JUL New Zealand Minister Woodhouse Leads Delegation to South Korea

SL 07/23 22:00 Reverse Repo Rate

NZ 07/24 17:00 RBNZ Official Cash RateJN 24-25 JUL Japan Prime Minister Abe Begins South East Asia Visit

PH 07/25 04:00 Overnight Borrowing RateUS 07/25 U.S. President Obama Meets with Vietnam President Sang

Latin America

Country Date Time EventCO 07/22 09:30 Colombia's Santos Meets with Venezuela's Maduro

CO 07/23 09:30 Colombia central bank Governor Uribe speaks in Bogota

CO 07/26 Overnight Lending Rate

Economics

5

Global Views

July 19, 2013

Rate Current Rate Next Meeting Scotia's Forecasts Consensus ForecastsBank of Canada – Overnight Target Rate 1.00 September 4, 2013 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 4.00 4.00

Central Bank of the Republic of Turkey – 1 Wk Repo Rate 4.50 July 23, 2013 4.50 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 2.50

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

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

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 9.00 --

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 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 September 19, 2013 5.00 --

BoC: The BoC came in quite dovish in its July 17th statement and MPR, emphasizing that the Canadian economy would be operating below capacity through mid-2015 and forecasting that CPI would remain below 2% until then as well. This leaves us expecting the BoC’s interest rate hold period to coincide with the Fed’s. Fed: The Fed is in blackout mode ahead of the July 31st FOMC meeting. We do not expect the FOMC to adjust its pace of bond purchases at that meeting.

We expect the Hungarian central bank to reduce the policy interest rate by 25 basis points to 4.00% next week. Inflation edged up slightly in June, from 1.8% y/y to 1.9%, but is still below target as demand-side pressures remain subdued. Conversely, the Turkish central bank is unlikely to alter monetary conditions next week. The CPI bounced higher in June, from 6.5% y/y to 8.3%, while the current account continues to widen (on a 12-month basis). Moreover, the lira continues to hover around multi-year lows versus the US dollar, and will remain subject to volatile global capital flows. These factors will deter the authorities from loosening monetary policy for the foreseeable future.

We do not expect any changes to the Colombian monetary policy rate at the next decision on July 26th. Although inflation is close to the lower limit of the central bank’s target range (2-4%), and an economic recovery is underway, we expect the loose policy stance to stay in place for the remainder of the year.

New Zealand’s monetary authorities will meet on July 24th; we do not expect any changes to the benchmark Cash Rate, which has been set at 2.50% since early 2011. In fact, following the June meeting policymakers noted that the rate will likely remain at the current level through the end of the year; we assess that a gradual monetary normalization phase will commence in the first half of 2014.

Global Central Bank Watch

CENTRAL BANKS

A7


North America

Europe

Asia Pacific

Latin America

Africa

Economics

6

Global Views

July 19, 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 19, 2013

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 1.8 (Jun) Housing Starts (000s) 215 202 175 194 (Jun) Housing Starts (millions) 0.78 0.90 0.96 0.84 (Jun) 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 5.0 4.5 3.9 6.0 (Jun) Auto Sales (000s) 1673 1664 1680 1803 (May) Auto Sales (millions) 14.4 15.0 15.3 15.9 (Jun) CPI 1.5 0.9 0.9 1.2 (Jun) CPI 2.1 1.9 1.7 1.8 (Jun) 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$B, ar) 157 343 172 147 (May) Current Acc. Bal. (US$B, ar) 238.8 279.1 237.7 174.9 (May) Merch. Trade Bal. (US$B, ar) 127.1 187.9 171.6 266.3 (May) Merch. Trade Bal. (US$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 1.6 (Jun) 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$B, ar) -57.3 -47.6 -65.6 -148.2 (May) Current Acc. Bal. (US$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 (Apr) CPI 2.0 1.5 1.1 0.9 (Jun) CPI 2.8 2.7 2.8 2.9 (Jun)

Italy Russia Real GDP -2.4 -2.8 -2.4 Real GDP 3.4 2.1 Current Acc. Bal. (US$B, ar) -11.3 25.2 -20.2 13.3 (May) Current Acc. Bal. (US$B, ar) 74.8 12.8 Merch. Trade Bal. (US$B, ar) 13.8 35.7 14.1 60.7 (May) Merch. Trade Bal. (US$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 0.1 (Jun) CPI 3.1 2.5 1.9 1.2 (Jun) CPI 5.1 6.5 7.1 6.9 (Jun)

ECONOMIC STATISTICS

Source: Bloomberg, Global Insight, Scotiabank Economics.

A9

North America

Europe

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

Economics

8

Global Views

July 19, 2013

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$B, ar) 5.9 -7.3 14.4 31.7 (May) Merch. Trade Bal. (US$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 7.7 7.5 (Q2) 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$B, ar) 28.3 39.8 22.8 71.9 (Jun) Merch. Trade Bal. (US$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 8.9 (May) CPI 2.2 1.7 1.4 1.0 (Jun) CPI 2.5 2.5 2.1 2.7 (Jun)

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 4.9 (Jun)

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 0.3 (May) Unemployment Rate (%) 7.0 5.9 6.3 5.8 (Jun) 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)

ECONOMIC STATISTICS

Source: Bloomberg, Global Insight, Scotiabank Economics.

A10

Asia Pacific

Latin America

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

Economics

9

Global Views

July 19, 2013

Interest Rates (%, end of period)

Canada 13Q1 13Q2 Jul/12 Jul/19* United States 13Q1 13Q2 Jul/12 Jul/19*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 1.01 1.03 3-mo. T-bill 0.07 0.03 0.03 0.02 10-yr Gov’t Bond 1.87 2.44 2.43 2.37 10-yr Gov’t Bond 1.85 2.49 2.58 2.49 30-yr Gov’t Bond 2.50 2.90 2.93 2.90 30-yr Gov’t Bond 3.10 3.50 3.63 3.58 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 0.11 0.17 3-mo. T-bill 0.01 0.03 0.03 0.03 10-yr Gov’t Bond 1.29 1.73 1.56 1.52 10-yr Gov’t Bond 2.03 2.35 2.19 2.19 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 2.33 2.29

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 3.74 3.67 10-yr Gov’t Bond 0.55 0.85 0.82 0.81 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 1.04 1.04 ¥/US$ 94.22 99.14 99.22 100.38CADUSD 0.98 0.95 0.96 0.96 US¢/Australian$ 1.04 0.91 0.90 0.92GBPUSD 1.520 1.521 1.511 1.525 Chinese Yuan/US$ 6.21 6.14 6.14 6.14EURUSD 1.282 1.301 1.307 1.314 South Korean Won/US$ 1111 1142 1124 1122JPYEUR 0.83 0.78 0.77 0.76 Mexican Peso/US$ 12.331 12.931 12.817 12.541USDCHF 0.95 0.95 0.95 0.94 Brazilian Real/US$ 2.022 2.232 2.267 2.235

Equity Markets (index, end of period)

United States (DJIA) 14579 14910 15464 15527 U.K. (FT100) 6412 6215 6545 6612 United States (S&P500) 1569 1606 1680 1689 Germany (Dax) 7795 7959 8213 8317 Canada (S&P/TSX) 12750 12129 12462 12649 France (CAC40) 3731 3739 3855 3914 Mexico (IPC) 44077 40623 40330 39989 Japan (Nikkei) 12398 13677 14506 14590 Brazil (Bovespa) 56352 47457 45533 47457 Hong Kong (Hang Seng) 22300 20803 21277 21362 Italy (BCI) 851 849 864 882 South Korea (Composite) 2005 1863 1870 1871

Commodity Prices (end of period)

Pulp (US$/tonne) 900 950 950 950 Copper (US$/lb) 3.44 3.06 3.14 3.14 Newsprint (US$/tonne) 610 605 605 605 Zinc (US$/lb) 0.85 0.83 0.84 0.83 Lumber (US$/mfbm) 408 292 311 320 Gold (US$/oz) 1598.25 1192.00 1279.75 1295.75 WTI Oil (US$/bbl) 97.23 96.56 105.95 108.32 Silver (US$/oz) 28.64 18.86 19.66 19.42 Natural Gas (US$/mmbtu) 4.02 3.57 3.64 3.78 CRB (index) 296.39 275.62 286.66 291.32

FINANCIAL STATISTICS

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

A11

DISCLAIMER Global Views

Fixed Income Strategy (London) www.gbm.scotiabank.com © 2012, The Bank of Nova Scotia This material, its content, or any copy of it, may not be altered in any way, transmitted to, copied or distributed to any other party without the prior express written consent of ScotiabankTM. This material has not been prepared by a member of the research department of Scotiabank, it is solely for the use of sophisticated institutional investors, and this material does not constitute investment advice or any personal recommendation to invest in a financial instrument or “investment research” as defined by the Financial Services Authority. This material is provided for information and discussion purposes only. An investment decision should not be made solely on the basis of the contents of this publication. It is not to be construed as a solicitation or an offer to buy or sell any financial instruments and has no regard to the specific investment objectives, financial situation or particular needs of any recipient. It is not intended to provide legal, tax, accounting or other advice and recipients should obtain specific professional advice from their own legal, tax, accounting or other appropriate professional advisers before embarking on any course of action. The information in this material is based on publicly available information and although it has been compiled or obtained from sources believed to be reliable, such information has not been independently verified and no guarantee, representation or warranty, express or implied, is made as to its accuracy, completeness or correctness. Information included in this material related to comparison performance (whether past or future) or simulated performance (whether past or future) is not a reliable indicator of future returns. This presentation is not directed to or intended for use by any person resident or located in any country where the distribution of such information is contrary to the laws of such country. Scotiabank its directors, officers, employees or clients may currently or from time to time own or hold interests in long or short positions in any securities referred to herein, and may at any time make purchases or sales of these securities as principal or agent. Scotiabank may also have provided or may provide investment banking, capital markets or other services to the companies referred to in this communication.

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July 19, 2013


July 19, 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.


Portfolio Strategy The following analysts certify that (1) the views expressed in this report in connection with securities or issuers they analyze accurately reflect their personal views and (2) no part of their compensation was, is, or will be directly or indirectly, related to the specific recommendations or views expressed by them in this report: Hugo Ste-Marie, and Vincent Delisle This research report was prepared by employees of Scotia Capital Inc. who have the title of Analyst. All pricing of securities in reports is based on the closing price of the securities’ principal marketplace on the night before the publication date, unless otherwise explicitly stated. All Equity Research Analysts report to the Head of Equity Research. The Head of Equity Research reports to the Managing Director, Head of Institutional Equity Sales, Trading and Research, who is not and does not report to the Head of the Investment Banking Department. Scotiabank, Global Banking and Markets has policies that are reasonably designed to prevent or control the sharing of material non-public information across internal information barriers, such as between Investment Banking and Research. The compensation of the research analyst who prepared this report is based on several factors, including but not limited to, the overall profitability of Scotiabank, Global Banking and Markets and the revenues generated from its various departments, including investment banking. Furthermore, the research analyst's compensation is charged as an expense to various Scotiabank, Global Banking and Markets departments, including investment banking. Research Analysts may not receive compensation from the companies they cover. Non-U.S. analysts may not be associated persons of Scotia Capital (USA) Inc. and therefore may not be subject to NASD Rule 2711 restrictions on communications with subject company, public appearances and trading securities held by the analysts. General Disclosures This report has been prepared by analysts who are employed by the Research Department of Scotiabank, Global Banking and Markets. 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. All other trademarks are acknowledged as belonging to their respective owners and the display of such trademarks is for informational use only. Scotiabank, Global Banking and Markets Research produces research reports under a single marketing identity referred to as “Globally-branded research” under U.S. rules. This research is produced on a single global research platform with one set of rules which meet the most stringent standards set by regulators in the various jurisdictions in which the research reports are produced. In addition, the analysts who produce the research reports, regardless of location, are subject to one set of policies designed to meet the most stringent rules established by regulators in the various jurisdictions where the research reports are produced. This report is provided to you for informational purposes only. This report is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any securities and/or commodity futures contracts. The securities mentioned in this report may neither be suitable for all investors nor eligible for sale in some jurisdictions where the report is distributed. The information and opinions contained herein have been compiled or arrived at from sources believed reliable, however, Scotiabank, Global Banking and Markets makes no representation or warranty, express or implied, as to their accuracy or completeness. Scotiabank, Global Banking and Markets has policies designed to make best efforts to ensure that the information contained in this report is current as of the date of this report, unless otherwise specified. Any prices that are stated in this report are for informational purposes only. Scotiabank, Global Banking and Markets makes no representation that any transaction may be or could have been effected at those prices. Any opinions expressed herein are those of the author(s) and are subject to change without notice and may differ or be contrary from the opinions expressed by other departments of Scotiabank, Global Banking and Markets or any of its affiliates. Neither Scotiabank, Global Banking and Markets nor its affiliates accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents.

July 19, 2013

Global Views

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Global Views 07-19-13 - Scotiabank Global Banking … · Vincent Delisle & Hugo Ste-Marie 2-9 ... we’ll see how effectively the Japanese Diet can implement the trickier ... Global