Global Views 03-07-14

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Global Views

Weekly commentary on economic and financial market developments March 7, 2014

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Asia To Dominate As March Break Fever Hits North America .................................................................. Derek Holt

Auto Industry Drives Growth In Mexico ........................................................................................... Carlos Gomes

Latin America Regional Outlook ................................................................................ Daniela Blancas & Pablo Bréard

Hong Kong’s Economic Outlook 2014-15 ......................................................................................... Tuuli McCully

Country Allocation In Local Currency Bonds .................................................................. Araceli Espinosa & Joe Kogan

Has The Eurozone Recovery Already Peaked? ............................................................................... Frédéric Prêtet

Latin America Week Ahead: For The Week Of March 10 - 14 ........................................................... Eduardo Suárez

Asset Mix March Update: DM-EM Divide Prevails ............................................................................. Vincent Delisle

2-8 Economics

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

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

Global Auctions Calendar ....................................................................................................................... A6-A7

Events Calendar .......................................................................................................................................... A8

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

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

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

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

A1-A13 Forecasts & Data

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17-18 Portfolio Strategy

15-16 Foreign Exchange Strategy

12-14 Fixed Income Strategy

9-11 Emerging Markets Strategy

Economics

2 March 7, 2014

Global Views THE WEEK AHEAD

Asia To Dominate As March Break Fever Hits North America

Please see our full indicator, central bank, auction and event calendars on pp. A3-A9.

Asia-Pacific — No March Break Here

March break? Heck no, not in Asia as the region will be hard at work while North America takes the kids on vacation. Is Asia’s classroom time excessive, or is this the model for other countries to emulate from a competitiveness standpoint? Countries like Indonesia, Korea and Japan lead the OECD in the average number of days per year spent in school at the primary school level while countries like Canada and the US lag behind the OECD average. Students in Russia and Argentina have the shortest school years by far. Let the debate rage on, and include broader metrics like quality of teaching. Regardless, much of the global market focus will be on developments in Asia next week if for no other reason than by default as North America will largely shut down for the week.

At the top of the list of influences will be China as the country releases a wave of key macroeconomic updates. Volatile export growth is expected to cool, and along with it so is CPI inflation. Barring a large surprise that stands up to scrutiny of the details, the trade figures should be looked through, as volatility in Chinese export figures reflects persistent problems with over-invoicing that occurs for a variety of reasons. If consensus is right on inflation, then expect the softest print since last May as inflation falls back down toward the lower end of the post-crisis range. That would be encouraging to the People’s Bank of China in its efforts to cool excessive credit growth and short-term market liquidity even if its efforts are otherwise bearing little fruit. We’ll know both the trade and CPI prints into the Monday market open. Then the focus shifts toward expectations for cooler credit growth after the seasonal surge in January, and updates on industrial output and foreign direct investment activity.

Not to be outdone, Japan will also be in the spotlight with the second Bank of Japan policy meeting in under a month. Monetary policy overkill won’t end at that, however, as April has two BoJ policy meetings on schedule for April 8th and 30th. That’s a lot of time spent meeting over a little more than two months if no further action results. Recall that the central bank doubled the maximum amount of its loan support program at the February meeting. It is likely to stand pat next week. While consensus expects a sharp 3.9% annualized contraction in Japan’s economy in Q2 in response to a three percentage point increase in the sales tax rate to 8% (with another 2% planned for next year), the issue is whether the negative shock persists beyond Q2 such that the focus for additional BoJ easing may be upon how the economy performs into Q3. Also note that consensus expects a small downward revision to Japan’s 2013Q4 growth rate next week to a tepid 0.2% q/q.

Regional central banks will also provide fresh policy assessments next week. The Reserve Bank of New Zealand is expected to hike its official cash rate by 25bps to 2.75% by all but one economist in the Bloomberg consensus. Much of the economy’s slack has been closed off as recent growth has improved. The Bank of Korea, Bank Indonesia, and Bank of Thailand are also expected to leave their main policy rates unchanged.

A$ watchers will have an eye on job figures next week and will be mindful of the risk of three losses in a row. While it showcased some strength in recent reports on retail sales and trade, Australia has not grown one job on net over the period from May of last year through January of this year in large part due to the fizzling out of the global resource investment boom.

The Reserve Bank of India received welcome news on inflation in the January print, but will it repeat in next week’s February release? CPI inflation has fallen from a cycle peak of 11.2% y/y in November to 8.8% in January amid a multi-staged RBI approach to targeting lower inflation. Over the period since November, the rupee has gained 1% against the greenback. Also watch Indian releases for trade and industrial production.

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

150 170 190 210 230

RussiaArgentina

PortugalTurkey

ItalyChina

EstoniaLuxembourg

SpainGreece

ChileBelgium (Fl.)

United StatesAustriaIcelandIreland

IsraelBelgium (Fr.)

CanadaHungary

EU21 avg.Poland

OECD avg.Finland

Slovak RepublicEnglandNorway

ScotlandSloveniaGermany

New ZealandNetherlands

AustraliaCzech Republic

DenmarkBrazil

MexicoJapan

South KoreaIndonesia

Source: OECD.

number of primary school days

Canadian, U.S. School Years Below OECD Average

Economics

3 March 7, 2014


… continued from previous page

Trade figures out of the Philippines, and South Korea’s unemployment rate round out the releases.

US — Tracking A Weak Q1 Consumer

A light US schedule will keep the focus on two factors next week. One will be further tracking evidence on how US consumer spending is faring in 2014Q1. Before we know February’s retail sales print that will be released on Thursday, we are tracking 1.5% q/q annualized growth in US consumer spending given what’s in the books for total consumer spending in January and given the 2013Q4 handoff. That’s just over half the 2.6% revised growth pace in total consumer spending that was registered in Q4. Will February change the picture for the better? Probably not is our feel. A small 0.7% m/m rise in vehicle sales will have a negligible impact on headline retail sales. A 1.5% m/m rise in gasoline prices will lift headline retail sales by less than 0.1% m/m. Our belief is that much of the weakness in consumer spending this quarter is related to adverse weather effects as pent-up demand lies in the wings waiting to be unleashed into Q2. The fact that consumer confidence has held up well, including the University of Michigan’s sentiment survey that is poised for an update on Friday, also lends itself to the interpretation that the underlying conditions facing consumers remain more constructive than what is reflected in weather-disrupted spending.

The second factor in play will be Vice Chair-nominee Stanley Fischer’s delayed confirmation hearing before the Senate Banking Committee on Thursday along with proceedings for pending governors Lael Brainard and Jerome Powell (a term extension). The original hearing was to have been on March 4th but was delayed by snow in Washington. Fischer then gives his first speech as vice chairman-designate on Friday at Stanford University.

The US auctions 3s, 10s and 30s next week.

Europe — Two Views On German Exports

European markets may pose modest data risk to global markets over the course of the week ahead and with most of the focus upon Germany and the UK. Has Germany’s export machine sputtered to a stall? That depends upon which measure is used. Consensus thinks much of the drop in the euro-value of exports during December might revert higher in January, but the trend would still remain weak. In fact, as the accompanying chart for nominal exports depicts, this headline measure of German exports have largely moved sideways for an extended period after recovering nicely from the depths of the global crisis. By contrast, the volume of exports is well through previous records and on a strongly growing trend (second chart) and that’s what matters to GDP growth even if it’s not the first print markets see. This is the opposite from Japan where Abenomics-induced yen depreciation has sparked improvement in the value of exports but not so much in the volume of exports.

Was the improvement in the UK trade balance temporary in December? Quite possibly, and consensus thinks the sharp narrowing in the trade deficit from 3.6 billion in November to less than one-third of that in December will reverse lower toward something in the middle and start 2014Q1 off on defensive footings. That said, even tempered enthusiasm resulting from December’s trade deficit could still result in a full quarter improvement over the depths registered in the trade deficit over much of 2013H2. Of course, the way in which the trade deficit sharply narrowed in December was not terribly enviable, as imports largely collapsed. We’ll have a better feel for how all of this matters to Q1 UK GDP growth when the National Institute of Economic & Social Research (NIESR) releases its monthly GDP estimate for February after the economy reportedly grew by 0.8% m/m in January.


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German Export Values AreMoving Sideways...

Source: German Federal Statistical Office, Bloomberg, Scotiabank Economics.

EUR bns

Nominal Exports

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...But German Export VolumesAre Rising

Source: German Federal Statistical Office, Bloomberg, Scotiabank Economics.

index, 2005 = 100

RealExports

Economics

4 March 7, 2014



European industrial production figures, and French inflation round out the lesser hits.

Canada — Heading South

Canadian markets will be very quiet next week as the annual March school break gives rise to a light schedule unless we’re talking about airplane routes headed south this winter. This is partly because of March break that commences in Ontario, Nova Scotia and Newfoundland. Other provinces were either earlier (like Quebec and New Brunswick) or will have their March breaks later. The timing of March break also depends upon whether the kids are in public or private school, and individual school boards. As observed in the first chart in this article, Canada is well down the list by way of global standards for the cumulative number of days spent in school at the primary school level, below the OECD average, but above the US. Even if not for March break, Canada would still only be average within the OECD while the US would remain below.

The only release will be housing starts for the month of February on Wednesday. Starts have declined by about 10% since October and to the lowest seasonally adjusted level since April of last year. Multiple housing unit starts including condos, townhomes and semis have fallen by 13% over this period while single family housing starts have declined by about half that percentage pace. As long as this miserable winter has been — with apologies to skiers — the declining trend began before the worst of the weather began to strike. The lagged negative effects of cooling new condo sales, inventory excesses in condominiums, and a mature cycle may be additional reasons for the cooling pattern but so might plain old condo-induced volatility in the figures that persistently track within a 160-250k range from 2010 onward. It’s possible that this declining trend is arrested in the February print given a 17% m/m rise in the volume of housing permits in January that reversed all of the prior month’s slide. While the multiple unit (condos, semis and townhomes) permits are lumpy and volatile, what was encouraging about January’s permit figures was the 12% rise in single dwelling permits. That reflects more encouraging evidence on new home sales so far very early in the new year as reflected in the accompanying chart for January sales compared to prior months of January in the Greater Toronto Area including the suburbs. The only question mark against permits strength is whether harsh weather delayed putting shovels in the ground. As the accompanying chart demonstrates, this has been a record year for cumulative snowfall over November through February in Calgary, while Toronto has had the heaviest snowfall since 2008-09 and Montreal’s snow has not been all that abnormal but still elevated. All of these readings need to be supplemented by extreme and persistent cold temperatures that disrupt outdoor work, and the effects of the ice storm across much of eastern Canada on December 21st-22nd.

There are no auctions or events on the calendar. Earnings season continues, however, with 22 companies on the TSX slated to release including names like Quebecor and Power Financial Corp.

Also recall that daylight savings time means the clocks in the US and Canada go forward one hour this weekend.


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Source: Government of Canada,Scotiabank Economics.

cumulative snowfall November - February, cms

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January GTA New Home Sales - Total

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Sales Of New Homes In Toronto

Source: RealNet, Scotiabank Economics.

Economics

5 March 7, 2014

Global Views

AUTOS

Mexico’s auto industry has been the clear winner since NAFTA. Industry output (assemblies and parts) has advanced at an annual rate of nearly 6% per annum, triple the growth in the remaining manufacturing sectors. As a result, autos have doubled their share of manufacturing activity over the past two decades to more than 15%, and have accounted for nearly one-third of the increase in overall industrial activity since 1994. By way of comparison, autos have declined in Canada to 10% of overall manufacturing, and are even lower in the United States. Despite the recent expansion in the U.S. South, the sector’s importance in the United States has dropped to only 9% of manufacturing output.

Exports of motor vehicles and parts have increased an average of 12% annually since 1994, two percentage points faster than Mexico’s overall export growth. As a result, the industry now accounts for more than 20% of Mexico’s foreign receipts, up from less than 14% in the mid-1990s. Auto parts were the original industry driver, reflecting their integration into the North American supply chain. Exports of auto parts from Mexico soared at an annualized 18% through 2000, as the Detroit Three and their suppliers set up plants in Mexico to export low-cost auto parts from Mexico to the United States and Canada. Mexico became the largest auto parts exporter to the United States in 1998, surpassing Canada. Even with some moderation in the pace of growth over the past decade, auto parts exports from Mexico have continued to gain share in the U.S. market, and now account for 34% of overall U.S. auto parts imports, up from 23% two decades ago. Each vehicle built in the United States now contains more than US$4,000 of Mexican-made parts — quadruple the level of the mid-1990s. In contrast, the value of Canadian auto parts exported to the largest NAFTA member peaked in 2005 and has been declining by nearly 3% annually over the past eight years.

Over the past decade, investment in Mexico’s auto industry has shifted towards assemblies as the Detroit Three and other global automakers began searching for lower-cost jurisdictions from which to export vehicles globally. In particular, facing labour costs of more than US$40 per hour both in Japan and Germany and rising transportation costs to North America, foreign automakers found Mexico the ideal location for new assembly plants. As a result, Japanese and European automakers are now the main drivers of the rapid expansion of vehicle assembly capacity in Mexico. These automakers have consistently produced more vehicles in Mexico than the Detroit Three since 2007, and now account for more than 60% of overall vehicle output.

The importance of foreign automakers will continue to grow as investment in Mexico’s auto industry climbed to US$2.9 bn last year — nearly double the average of the past decade. Nissan opened a new assembly plant in Mexico late last year, while Mazda and Honda will begin production at new facilities in the first quarter. Audi is also building its first plant in Mexico — a US$1.3 bn assembly facility that by mid-2016 will be the sole global source for the luxury Q5 SUV. BMW is also in advanced talks with Mexican officials to build a US$1.5 bn factory to assemble Series 1 and Series 3 models.

Aside from labour costs that are less than 20% of the level in the rest of North America, Mexico also has free trade agreements with more than 40 nations, providing automakers with duty free access to more than one billion people across the globe. As a result, while the United States remains the largest destination for Mexican-built cars, trucks and auto parts, Mexico has become a low-cost production base from which to export globally. More than half of Mexico’s vehicle output is shipped to its northern neighbour, but exports outside of North America are growing at a faster pace than shipments to its NAFTA partners, and now account for more than 20% of Mexico’s overall auto industry exports. This is in sharp contrast to the Canadian auto industry which still remains almost exclusively focused on the United States. Ninety-seven per cent of Canada’s auto exports are destined to its NAFTA partners, primarily the United States.

Carlos Gomes (416) 866-4735 [email protected]

Auto Industry Drives Growth In Mexico

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Auto Industry's Share of Manufacturing Activity

Mexico

Canada

U.S.

Source: INEGI, BEA, Statistics Canada, Scotiabank Economics.

Economics

6 March 7, 2014

Global Views

LATIN AMERICA

Divergent trends among Latin American economies.

Positive Regional Growth Impact from Improved Global Economic Conditions

The global economy is in acceleration mode on the back of the recovery evidenced in developed economies and the relatively stable momentum in the core group of emerging-market economies. Latin American growth prospects are promising, with economic conditions in the US and Europe improving, while China maintains a solid — albeit somewhat lower — pace of expansion. We estimate that the Latin American real GDP will grow by around 3.0% y/y in the 2014-15 period. A material improvement in the US economic outlook will have positive effects on trade flows in both Mexico and Colombia, influenced as well by developments in global energy markets, while China’s stable growth trajectory will imply solid demand for commodity-exporting trade-intensive countries such as Peru and Chile. All of these four economies count on credible monetary policy regimes and solid macroeconomic frameworks, which provide enough flexibility to adjust in the case of a less benign international context. While the pace of economic activity remains very soft in Brazil, there are signs of modest and gradual acceleration in the current year. Following a decade of fast growth, Uruguay is experiencing a period of economic deceleration influenced by high inflation and weakened growth prospects in its key neighbouring countries. Finally, stagflation risk, exacerbated by heightened political uncertainties, has emerged in both Argentina and Venezuela.

Heightened Financial Market Stress Deepens Intra-Regional Credit Differentiation

The normalization of monetary policy in the developed countries led by the US Federal Reserve will remain a key issue driving periods of high volatility in emerging markets. Long-term US interest rates have been in ascendancy since early May 2013, triggering asset re-allocation in favour of more-developed markets (emerging markets account for less than 30% of the world equity market capitalization). Flight-to-liquidity trading dynamics have caused sharp swings in emerging-market equity and debt securities; yet the global perception of Latin American sovereign credit risk varies from country to country. Reform-oriented economies such as Mexico and Colombia have been subject to credit rating upgrades over the past few months; while peripheral countries such as Venezuela and Argentina will remain as distressed credits in the foreseeable future. The US dollar has become more attractive on the back of a positive US economic cycle and the gradual unwinding of monetary stimulus, leading to currency adjustments and monetary policy shifts. There is evidence of increased dollarization of investment/loan portfolios among high-net-worth investors. Nevertheless, the undervalued Mexican peso has the potential to recover faster than other Latin American currencies after the current phase of increased market stress subsides. The Colombian peso may be subject to sporadic bouts of volatility, prompting intervention by the authorities, while the Brazilian real will continue to suffer from lackluster economic recovery conditions and the need for fiscal consolidation.

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

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

Latin America Regional Outlook

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Regional GDP Growth

Source: Bloomberg, Scotiabank Economics.

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1934

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Mexico

Colombia

Peru

Brazil

Venezuela

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Sovereign Debt Profile -Credit Default Swaps

Source: Thomson Reuters.

Economics

7 March 7, 2014

Global Views LATIN AMERICA


Divergent Inflation Drivers Lead to Uneven Monetary Policy Adjustments

Inflation trends are moving in multiple directions within the region. Colombia, Peru, Chile and Mexico present a manageable inflation outlook, whereas both Brazil and Uruguay have been confronting steadily increasing pressures. Venezuela and Argentina continue to flirt with hyperinflation. Brazil executed a pre-emptive monetary tightening phase (with 350 basis points in rate hikes) over the past twelve months to counteract emerging inflationary pressures and mitigate the adverse effect of capital outflows triggered by both local and external factors. Meanwhile, with inflation relatively under control, most Latin American countries (excluding Brazil, Argentina and Uruguay) have adopted a pro-growth monetary policy bias. The financially integrated core countries of Latin America are well prepared to face an adverse external shock. Brazil accounts for 50% of the US$750 billion in international reserves held by Latin American central banks. In brief, central banks have both the tools and the institutional strength to intervene and aptly communicate their policy adjustments without causing significant negative implications for investor sentiment.

Domestic Financial Sector Strength Reduces Dependence on External Funding Sources

Most countries count on well-capitalized and provisioned local financial institutions. Moreover, the steady development of local-currency credit and securities markets provide a structural shield to counteract the negative spillovers from intensified currency market volatility in countries such as Mexico, Chile, Colombia and Peru. Mexico, and to a lesser degree Colombia, Peru and Chile present an attractive alternative for international fixed-income investors as all of these countries have been focusing on developing a deeper domestic bond market and boosting national savings through the development of private pension funds. We expect this trend to remain in place; however, a steady improvement in US growth and fiscal conditions will intensify demand for the US dollar and US dollar-denominated securities in the coming two years.

Regional Governance Affected by Structural Reforms and Leadership Succession

Regional integration initiatives (such as the Pacific Alliance or Mercosur trade agreements), the electoral cycles in Colombia, Brazil and Uruguay in 2014, the transition to the new government in Chile, and the implementation of reforms in Mexico will shape the political landscape in Latin America. Additionally, increasing demands to improve infrastructure in Brazil and to contain drug-related violence in Mexico and Colombia, coupled with social tensions and political instability in Venezuela and Argentina will remain as key factors affecting investor sentiment.


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

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Colombia Mexico

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International FX Reserves

Source: Bloomberg.

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Consumer Price Inflation


Economics

8 March 7, 2014

Global Views

ASIA

Household spending underpins solid economic growth momentum; a pick-up in global demand will support the territory’s exporters.

Housing market impacted by the administration’s efforts to curb real estate speculation.

Hong Kong’s economic outlook remains favourable. The territory’s output grew by 3.0% y/y in the final quarter of 2013, following a 2.8% y/y expansion in the July-September period. Output advanced by 2.9% in 2013 as a whole. While net exports were a drag on growth, domestic demand maintained solid momentum. Private consumption is the main growth engine, as tight labour supply supports household income gains; at 3.1%, the unemployment rate is at a 16-year low. Consumer spending gains are further underpinned by robust tourism activity; arrivals increased by 12% in 2013 as a whole, with visitors from Mainland China accounting for 75% of total arrivals. While public infrastructure projects continue to buttress the economy, private sector residential construction is set to cool, reflecting the ongoing decline in residential property sales. We expect Hong Kong’s real GDP growth to average 3½% in 2014-15, supported by a pick-up in global demand.

Loose monetary conditions in the US largely determine the local interest rate environment due to the fixed exchange rate. The timing of the Lunar New Year caused the inflation rate to pick up to 4.6% y/y in January from 4.3% the month before. We expect consumer price gains to ease slightly in the coming months, with the headline inflation rate hovering within the 3-4% y/y range in 2014-15; food prices and housing rents are key determinants of inflation as they account for nearly 60% of the consumer price index.

The property segment is the largest risk factor for Hong Kong’s economic outlook. The government continues its efforts to curb speculative property market transactions in a negative real interest rate environment; indeed, the number of Hong Kong’s home sale transactions has continued to decline, recording an over 30% y/y drop in the first two months of the year. Meanwhile, house price inflation has weakened substantially, yet it remains in positive territory; territory-wide private property price inflation eased to 5.2% y/y in January, from around 30% in early 2013. Increased supply, combined with an eventual rise in mortgage rates and a potential rush by speculators to sell their properties, creates a risk of a price correction.

Hong Kong enjoys a strong sovereign credit profile, supported by a solid external position and low gross public debt (of around 30% of GDP). Moreover, budgetary surpluses since 2005 have allowed the territory to accumulate sizable fiscal reserves, equivalent to a third of GDP. In the absence of independent monetary policy, fiscal policy is the only tool for dealing with external shocks. Fiscal surpluses will likely average 2¼% of GDP in 2014-15. On the external front, the current account surplus is set to increase moderately, reflecting an improving trade performance as global demand recuperates; we expect the surplus to hover around 3% of GDP in 2014-15. Steady financial services provision to foreign investors in mainland China will keep the services balance in a substantial surplus.

Despite recent volatility, the Hong Kong dollar (HKD) will likely remain near the 7.8 peg against the US dollar (USD) for the foreseeable future. Supported by sizable foreign reserves of US$312 billion (equivalent to almost 110% of annual output), combined with a current account surplus, the commitment to the fixed exchange rate regime continues to be maintained, as reiterated by the Hong Kong Monetary Authority.

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

Hong Kong’s Economic Outlook 2014-15

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Emerging Markets Strategy

9 March 7, 2014

Global Views

The following article was published on March 6, 2014.

Market-weighted vs. fundamentals-weighted indices in equities

What is the right way to set country allocations for emerging market bonds? The recent debate on alternative weighting mechanisms for domestic stock indices is helpful as a starting point. In equities, constructing allocations based on market capitalization has a number of advantages. Such allocation represents a passive, buy and hold strategy. As long as there is no new issuance, no turnover of the portfolio is required to adjust to relative movements in stock prices. Transaction costs are minimized as a result. Those costs are further reduced by the fact that higher capitalization stocks, which represent the bulk of the portfolio, are also the most liquid. The capitalization-weighted portfolio is the only portfolio that everyone in the market can hold. If a new investor were to allocate a large sum of new money into equities according to capitalization-implied weights, relative market prices of those equities should be unaffected.

In the last decade, some equity investors have recommended a fundamentals-based indexation strategy using variables such as book value, income, revenues, or total employees in lieu of market capitalization.1

They criticize the construction of traditional indices because they lead investors to increase their exposure to companies whose stock price has gone up. If prices go up for the wrong reasons, such an increased allocation would be undesirable. A fundamentals-weighted index wouldn’t force an increase in exposure in response to such mispricings, goes the argument.

Proponents of traditional indices reply to this criticism in one of two ways. Some argue that market pricing is efficient and it is difficult to earn excess returns; therefore, you might as well invest in a way that minimizes transaction costs. Alternatively, they argue that fundamentals-based indexing is not a passive index at all but rather an active value-investing strategy that many equity investors have espoused for decades.2

Indexing in EM debt

The problems of traditional indices are more acute for emerging markets debt than for domestic equities. Consider as an example the case of Venezuela, which typically has significant weight in most emerging market indices. Mismanagement of the country’s fiscal accounts and an overvalued official exchange rate has led the country to issue a significant amount of debt over the past decade. Indexed investors have been forced to reward Venezuela for these wasteful practices by buying more and more of that debt. Volatility in Venezuelan bonds is so large that whether you are overweight or underweight Venezuela may be the biggest determinant of performance relative to the benchmark. As a result, many investors are loathe to deviate too far from that benchmark for fear of underperforming.

The problem is not as bad as these arguments would suggest, however. With yields of around 15%, one could easily argue that Venezuelan assets are cheap, and therefore there is nothing wrong with including Venezuela in a portfolio. Moreover, Venezuela is one of the most liquid assets in emerging markets debt with quarterly turnover of $20bn according to EMTA, in part thanks to the large amount of issuance. Still, the example demonstrates the potential problems, ones that are particularly relevant to local currency bonds.

Country Allocation In Local Currency Bonds

We discuss the advantages and disadvantages of allocating money to emerging market bonds by market capitalization relative to alternative fundamental measures. The weighting scheme chosen can have large implications for how we view non-resident holdings in some Latin American countries. For example, while non-residents already hold the majority of local currency bonds in Peru, weighting by GDP rather than by amount outstanding would suggest non-residents should eventually invest even more, perhaps once the uncertainty around tapering is resolved.

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

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


10 March 7, 2014

Global Views

We have several concerns around allocating money to local currency government bonds according to the relative amount of investable securities available to the typical investor. First, as the Venezuela example makes clear, the amount of debt outstanding is not a good measure of a country’s importance to the global economy. Many Latin American countries have been reducing their indebtedness at the same time as they have been increasing production and exports. Second, the investable set of local currency assets is changing, and expanding, as countries simplify the administrative headaches of investing in their local markets in an attempt to attract capital and increase liquidity. Investors who can invest in those countries now are probably better off doing so rather than waiting for the bonds to be included in an index. Third, and related to this issue, the argument that markets are efficient (and therefore investing in just a subset of the market is sufficient) doesn’t apply. Considering that local markets in many Latin American countries were dominated by pension funds and effectively closed to foreigners, there was little reason to expect such efficiency. Potential returns could be higher or lower than in more open countries, since, until recently, there was no set of common investors to drive a convergence in yields.

Other weightings

Of course, a natural alternative weighting for country allocation is the country’s GDP. In a previous article (“Are investors abandoning EM bonds?”), we presented the evolution of non-resident holdings of local currency government bonds as a percentage of bonds outstanding. In Figure 1, we graph the same data as a percentage of GDP. Mexico is the country with the largest foreign holdings in Latin America by this measure, but holdings in Hungary and Malaysia are slightly larger. Meanwhile, Peru has only one-third of the foreign investment as Mexico, and the number for Colombia is one-sixth.

This ordering of foreign investment corresponds to the ease of investment, with Mexico the easiest thanks to the ability to purchase Mbonos through global clearing systems, and Colombia the most difficult as a result of the need to open local accounts. Peru lies in the middle, with the availability of GDNs offsetting the need for local accounts for some investors. It is this large divergence in current holding patterns that is most revealing in demonstrating how far foreign investment in local currency bonds may be from a long-run equilibrium.




Figure 1. Non-resident ownership of local bonds as a percentage of GDP

Source: IIF, Scotiabank GBM.


11 March 7, 2014

Global Views

In Figure 2, we provide a comparison of non-resident ownership when measured as a % of GDP versus as a % of the amount outstanding, with important implications for future allocations. For example, non-resident ownership of Peru soberanos has fallen over the past few months from 61% to 53%, in what would seem to some observers a reasonable adjustment after excesses caused by QE. Yet, that cursory analysis ignores the fact that Peru has relatively little securitized debt, and even less debt that can be purchased by foreigners. Foreign allocations to Peru are only 4% of GDP. Thus, foreigners may eventually wish to increase exposure to Peru, perhaps after the current uncertainty over tapering has passed.

We also show the absolute amount of USD-equivalent investment in each country. Notice for example that even though non-resident holdings in Brazil are significantly smaller than in Mexico when measured as a percentage of GDP or amount outstanding, they are actually slightly larger in absolute terms. Meanwhile, investments in Peru are relatively tiny. These numbers are important to the extent that investors may want to limit their absolute exposure to any one country, even it if means allocating less to that country than some weighting schemes may suggest.

Moreover, some countries may serve as proxies for others. For example, suppose a fixed income investor would like exposure to Colombia but does not yet have local accounts. He may wish to add exposure to countries with similar fundamental economic drivers instead. Peru would probably be a better proxy than Mexico in that case.

Weightings based on GDP are just one of many options. Depending on one’s goals and investment hypothesis, weightings based on say exports, capital stock, or population could be justified. Our point here is that as investors continue to expand into local currency emerging market bonds, they could well choose different weightings than simply those implied by amounts outstanding, with significant implications for the outlook for EM inflows to particular countries.

Endnotes: 1 The case for fundamentals-based indexing was made in Robert Arnott, Jason Hsu, and Philip Moore, “Fundamental Indexation,” Research Affiliates Working Paper, 2004. 2 Criticisms include David Blitz and Laurens Swinkels, “Fundamental indexation: an active value strategy in disguise,” 2008 Working Paper, and Clifford Asness, “The Value of fundamental Indexing,” Institutional Investor, October 2006.




Country as % of GDP as % of Outstanding in bn of USD

Hungary 16% 37% 21

Malaysia 14% 28% 45

Mexico 12% 37% 140

Poland 12% 34% 64

Brazil 7% 17% 145

Turkey 6% 22% 41

Thailand 5% 17% 18

Korea 5% 10% 55

Czech Republic 5% 12% 8

Peru 4% 52% 8

Indonesia 4% 33% 29

Colombia 2% 7% 6

India 1% 1% 14

Russia 1% 25% 29

Figure 2. Non-resident ownership of local bonds around the world

Source: IIF, individual country statistics. Most data is for December 2013.

Fixed Income Strategy

12 March 7, 2014

Global Views

Q1 growth momentum starting on a good footing!

In front of the EU parliament and at the last meeting, the ECB president expressed confidence in the Eurozone recovery, pointing in particular to strengthening domestic demand in the Q4 GDP report. It is true that behind the +0.3% q/q gain in Q4 GDP, both household spending and fixed investment increased for the third quarter in a row. These developments helped the ECB president to point out that the recovery could be increasingly driven by domestic demand, meaning that it is becoming more sustainable. This optimism was illustrated in the ECB’s new macroeconomic forecasts, with the prospect of close to 2.0% growth in 2016!

The first available data for January suggest that this momentum has indeed further to go in Q1 and the pace of recovery could be accelerating.

Eurozone retail sales rebounded 1.6% m/m. While it is true that this jump came after a -1.3% m/m loss in December, January retail sales are nonetheless already up 1.2% vs. the Q4 average, the strongest performance since the Lehman collapse, which bodes well for strengthening household consumption in the Q1 GDP report.

Early supply side data coming from Germany are also encouraging with manufacturing orders and industrial production rising +1.2% m/m and +0.8% m/m respectively, also pointing to a good carry-over entering into Q1.

Finally, Q1 GDP growth could benefit from an extra boost as warmer than usual temperatures will likely support activity in the construction sector.

However, beyond Q1 GDP strength, recent business surveys started to send a more mixed signal. On one side, we had a further gain in EU Commission business sentiment as well as in the German Ifo, which leads the Eurozone recovery, in February. These elements were stressed by the ECB president at the last press conference. On the other side however, the manufacturing PMI and the Ifo expectations component softened, although it is true that, at this stage, they remain consistent with an increase in activity and the recovery scenario.

A point of stress nonetheless is that history shows that both the PMI manufacturing index and the German Ifo expectations component are more leading surveys and the most accurate to predict turning points in the economic cycle. So, the February weakness should not be underestimated and will be watched closely. One moth does not make a trend but there is the risk, in our view, of additional weakening ahead.

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

Has The Eurozone Recovery Already Peaked?

Chart 1: Euro business survey could have peaked!


13 March 7, 2014

Global Views


But the outlook on Q2 could be more fragile

Indeed, softer global demand and the past appreciation of the euro could start to weigh more heavily on business sentiment. While improving domestic demand is encouraging, the Eurozone growth scenario remains highly dependent onthe traction in external demand. Last year, while Eurozone GDP contracted by 0.4% overall, net traded added +0.5%. In the last quarter, this positive contribution from net trade was also +0.4% on the back of a +1.2% q/q rise in exports.

To assess the impact of softer global demand, German business surveys will be at the forefront given the high sensitivity of this economy to external demand. In this country, the share of exports to the euro area in total exports has declined almost 10% over less than a decade. As a result, for Germany, the export market share can now be roughly split as 1/3 to the euro area, 1/3 to other European countries and 1/3 outside Europe. Outside Europe, the BRICs alone account for 12% of total exports, which is more than the 8% share for the US. In this regard, softer trends in the US ISM manufacturing or Chinese PMI indexes already suggest less traction from this angle.

Regarding the euro, it has increased by more than 5% in nominal effective terms over the past year and by close to 10% since its low point in June 2012. In theory, a 10% increase in the euro exchange rate has a negative impact of around 1.4% on both GDP and inflation over a two year horizon. So, we could be about to feel the impact of this past appreciation on business sentiment, and the comments from the ECB president on the “very importance” of the euro at the last meeting suggests rising nervousness on this point.

All in all, when we mix up all these different factors, there is a growing risk that further softness in both the manufacturing PMI and German Ifo expectations component, which would then spill over to other surveys. Regarding traditional metrics for the manufacturing PMI, at this stage, it points to a risk of the index moving back closer to the 50 expansion/recession line in the not too distant future.


Chart 2: German’s rising sensitivity to extra-euro demand

Table 1: Impact of 10% rise in the euro nominal effective exchange rate


14 March 7, 2014

Global Views


To sum up, there is rising risk that the traction from external demand could start to ease, putting downside risk to the recovery scenario. As a result, there is increasing need to strengthen the support from the domestic side of the economy. Easing financial conditions through, in particular, higher equity markets and the rally in interest rates in peripherals countries could contribute to this and offset lower external demand. Upcoming business surveys will help to assess how this balance of power between domestic & external demand is evolving.


Chart 3: PMI manufacturing index at risk?

Foreign Exchange Strategy

15 March 7, 2014

Global Views

Next week’s US data pipeline is relatively slim, but we still are scheduled to get a couple of tier-1 data points, including retail sales, which have the drawback that they will be hard to interpret due to distortive weather patterns. In addition, Chinese lending data should also be monitored, although this data will be more important once the decisions from the recent leadership meetings start feeding into the data. In the LATAM central bank world, we have the BCRP and BCCh rate decisions and BanRep’s minutes in the pipeline. In Peru, Governor Velarde has already erased most of the uncertainty by stating he does not believe any adjustments to the reference rate are necessary. In Colombia, several board members have signaled they don't see a need to adjust rates over the foreseeable future, but we still find it important to monitor the minutes for signs that the rise in inflation, combined with the weakening of COP could lead to higher vigilance / lower COP weakness appetite. Finally, the BCCh is also set to meet. Our sense is the Chilean central bank’s board sees need for further easing, but that there is likely to be a pause in next week’s meeting.

Week-ahead views:

Brazil: The BCB’s latest minutes signaled that further rate cuts are in the pipeline, but how much more tightening remains to be done remains an important question. Our base case is that the tightening cycle will be done after 1 more 25bps move, but this week’s IBGE IPCA inflation print will be important to monitor. Despite still sluggish growth, the resilience of inflationary pressures has kept the central bank on a tightening bias, and our sense is that authorities have determined that inflation is a bigger threat than slow growth (which, in our view, is more the result of lack of reforms and extended household and government balance sheets than slack capacity). Taking the former argument into account, our view is that IPCA will be the week’s key release, but we are also scheduled to get industrial production, retail sales and monthly economic activity index which should all be monitored. We are currently neutral on BRL.

Chile: Consensus looks for the BCCh to cut rates by another 25bps in next week’s MPC meeting, but we believe that based on the latest minutes there is a reasonable chance that the central bank will elect to pause for one meeting as it gathers further information on the state of the economy. Given the cuts are already priced, and the fact that our local trading desk has seen local institutional players unwinding their long USD positions, we see some room to the downside for USD/CLP next week. Our strategic bias remains to be long MXN/CLP, but we see some downside for our view next week, as local players reduce their USD exposure.

Colombia: We expect few surprises on the monetary stance guidance from BanRep’s MPC meeting minutes next week, as inflation remains in the bottom half of the target, but drifting upwards, while board members have repeatedly signaled they plan to stay on hold for some time. However, where we do see emerging room for a change in stance is FX, as the lagged inflation pass-through from the weakening we have seen in COP could be the wildcard that pushes inflation towards the other end of the central bank’s target rage. On the FX front, next week’s trade balance (and the next release of industrial production data — scheduled for March 17th) will be important as it will provide us insight into whether the weakening of the peso has provided enough relief to manufacturers and agricultural commodity producers to reduce appetite for a weaker COP.

Mexico: Next week, industrial and manufacturing production will be watched in order to gauge whether the construction sector has continued its late 2013 bounce into 2014 (after a very weak performance in 2013, it almost reached “flat” in December), and how strongly the disruptions in US economic activity have fed into the manufacturing sector of its southern neighbour. Our sense is that local bearish sentiment in part stems from the disappointing growth we have seen with the new government, and continued weakness could further erode consumer confidence (thus making the recovery less strong). On top of industrial production, gross fixed investment and ANTAD same store sales could serve as indicators of confidence, both for consumers and retailers. USD/MXN has finally broken free of the 13.18-13.36 range we had seen it trading in for most of February 2014, and is now testing support at 13.1279 (the 100-day moving average), a break of this level opens the way for a downside move towards 13.0312.

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

Latin America Week Ahead: For The Week Of March 10 - 14

Foreign Exchange Strategy

16 March 7, 2014

Global Views


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

xxx

xxx

xxx

Peru: Ahead of next week’s BCRP MPC meeting, Governor Velarde seemed to dissipate whatever uncertainty there was on what he plans to do with the reference rate (consensus was already looking for no change) by stating that no interest adjustments are needed. Governor Velarde said he expects double-digit growth in mining, and the infrastructure pipeline (US$13bn planned for 2014 and US$12bn planned for 2015), should further boost growth back above last year’s disappointing results (which were still among the strongest in the region). The other important information items to look for next week are the trade balance, and monthly economic activity index. The trade balance is expected to remain in surplus territory (US$550mn), while economic activity is expected to remain around 5%. From a trading perspective, our local trading desk highlighted the US$1,130mn in BCRP USD-linked certificates of deposit which mature this month, which could help support the USD/PEN cross if they are not rolled over.

Portfolio Strategy

17 March 7, 2014

Global Views

This comment was originally published on March 4, 2014. Overweight (OW); Market Weight (MW); Underweight (UW)

Reiterate modest equity OW. Harsh weather has been blamed for disappointing U.S. economic activity so far in 2014 and we expect macro visibility to improve in Q2. The most recent ISM/PMI updates echo more optimistic scenarios for the U.S. and Western Europe, and we believe U.S. (and U.K) monetary policy normalization will continue, thus pushing bond yields higher. Still, emerging markets (EM) momentum remains challenging and threatens a broader global pick-up. World GDP growth is slated to accelerate in 2014, a first since 2011, but approaching the 4.0% sweet spot may prove elusive in the absence of faster EM growth. Our recommended tactical asset mix (versus a neutral benchmark) is unchanged at +5% Equities; -10% Bonds; +5% Cash (see Exhibit 11, next page).

Fragile BRICs. As investors ponder the risk of escalating tensions in Ukraine, it is worth highlighting that EM fears have spanned the globe in recent months. Brazil and India are battling inflation, weaker currencies, and rising real rates hamper the domestic outlook. In China, manufacturing appears stalled, GDP growth is slowing, and recent RMB weakness has startled investors. Russia now finds itself in a challenging economic and political situation. For EM, the combination of superior momentum in the U.S./Europe and BRIC problems will continue to weigh on sentiment, thus extending the DM over EM performance advantage.

Tactical Models. Our asset mix indicators continue to point to a modest equity OW position in U.S. and Canada. See exhibit 12. Technicals represent Equities’ main support right now with both the TSX and S&P 500 trading above 200-day moving averages, hence the modest Equity over Bonds tactical signal. Still, other equity-friendly components used in our asset mix models, such as macro momentum (PMI) and earnings revisions (especially for TSX), are expected to improve in Q2. In terms of global equity allocation, the DM over EM signal remains elevated. EM (LatAm and Asia) ranks poorly on PMI, price momentum, earnings revisions, and technicals, i.e. all of the metrics we track. One interesting change, however, is that the DM line-up now pegs Europe and Canada ahead of the U.S. We are increasing our recommended weighting in Canada (+2%) and Europe (+1%), lowering U.S. (-1%) and EM-Asia (-2%) exposure. Relative to the MSCI World, we are now OW Canada.

Asset Mix March Update: DM-EM Divide Prevails

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

3.0%3.5%

3.6%

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Global Manufacturing PMI - LHS

IMF World Real GDP Growth - RHS

Exhibit 9 — Global Manufacturing PMI Exhibit 10 — World Manufacturing PMI & GDP Growth (1998-2014)

*China PMI: Average of Government PMI & Markit/HSBC PMI Source: Scotiabank GBM Portfolio Strategy, Bloomberg.

Source: Scotiabank GBM Portfolio Strategy, Bloomberg.

Portfolio Strategy

18 March 7, 2014

Global Views

Canada has moved up the ranks in recent months in our global equity screen. The TSX now scores better than the both the MSCI World and S&P 500 on relative metrics such as earnings revisions ratio, price momentum, and PMI. To be sure, Canadian dollar weakness could challenge TSX leadership in coming months, but the offset could come from higher YoY commodity prices helping TSX forward earnings. Our TSX vs. S&P 500 barometer (see exhibit 13) has been sending a near constant TSX UW signal since 2010 and we do not yet see a sustained period of TSX outperformance. Still, investors should question the global voices who suddenly express concerns about pending Canadian equity “underperformance”. In the last three years, the TSX has already underperformed the S&P 500 by 53% (total return, in US$).

See Exhibit 13 for Canada versus U.S. barometer; exhibit 14 for DM versus EM.


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

Change FromBenchmark Recommended Last

Equities 60% 65% Canada (TSX) 5% 7% +2% U.S. (S&P 500) 22% 25% -1% MSCI EAFE 18% 23% +1% (1. Europe, 2. Japan, 3. Australia)

Far East ex-Japan 10% 7% -2% LatAm 5% 3%

Bonds 40% 30% Government 30% 16% Corporate 10% 14%

Cash (91-D Tbills) 0% 5%

Asset Mix Q1/14 Trend Q4-13 Q3-13 Q2-13 Q1-13 Q4-12

Equity vs. Bonds (U.S.) +7% - +14% +9% +15% +14% +8%

Equity vs. Bonds (Canada) +9% - +12% +1% +0% +9% +6%

Sector Strategy (S&P 500)

Cyclical vs. Defensive Sectors +5% - +7% +5% +0% +7% +3%

Global Equity

Canada OW + MW OW UW MW MW

U.S. OW - OW OW OW MW UW

Europe (Western Europe) OW + OW MW OW OW OW

Far East (ex-Japan) UW - UW UW UW OW MW

LatAm UW = UW UW UW UW MW

Exhibit 11 — Scotiabank GBM Asset Mix — March 2014 Update Exhibit 12 — Tactical Asset Mix Signals — March 2014

Source: Scotiabank GBM Portfolio Strategy estimates Source: Scotiabank GBM Portfolio Strategy estimates

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TSX Less S&P 500 3M Rolling (in CAD) - RHS

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Exhibit 13 — Canada vs. U.S. Barometer Exhibit 14 — Developed vs. Emerging Markets

Source: Scotiabank GBM Portfolio Strategy estimates, Bloomberg. Source: Scotiabank GBM Portfolio Strategy estimates, Bloomberg.

Economics

19 March 7, 2014

Global Views KEY DATA PREVIEW

Key Data Preview

CANADA

Canadian housing starts for the month of February (March 12) could potentially perk up after building permits were strong in November and January — stronger than any of the levels of housing starts that we saw during that period, pointing to a good pipeline of permits to spur building. We’re looking for a 190k SAAR print. Note however that even a ‘strong’ housing starts number would mean very little as the process of seasonal adjustment adds a very considerable amount to the level of activity in February — the actual amount of residential construction during Canada’s frozen Februaries is quite low (i.e., 30% below the average amount of monthly housing starts for any given year). The not-seasonally-adjusted housing starts numbers typically pick up in absolute terms in April/May at which point monthly changes become more significant.

UNITED STATES

Retail sales (March 13) should come in at a fairly muted 0.1% m/m in February. The key issue here is weather. Although we think that the impact of inclement weather on the broader economy is often overstated, retail sales are one of the areas whose fortunes seem to wax and wane in winters with the path, extent, and intensity of Nor’easter storms. As the table to the right shows, retail sales have been below trend during all of the months in which the most intense Nor’easter storms have hit the U.S. eastern seaboard. Although the intensity of the storms as measured by the National Oceanographic and Atmospheric Administration’s Northeast Snowfall Impact Scale were towards the lower end of the spectrum, the fact that a cumulative 7 days in February experienced storms that were considered ‘major’ points to softness in retail sales. We’re not looking for an outright contraction in retail sales because vehicle sales edged up on the month (15.27m annualized vs. 15.16m in January) and gasoline prices were moderately higher on average (+1% m/m).

The U.S. budget statement for the month of February (March 12) will provide an update on the extent to which the U.S. deficit continues to decline. So far during this US government fiscal year (which started in October 2013), the deficit has come in at USD 184bn, a substantial reduction on the USD 290bn deficit through January 2013. From here on in, the year-on-year comparison becomes more difficult as the tax hikes implemented at the start of 2013 imply that year-on-year revenue growth will be a product of higher national income generation — and not higher marginal tax rates. Nevertheless, assuming that there is even slight year-on-year improvement in the run-rate deficit from here on in, then the budget deficit will notch an improvement in excess of USD 100bn, in line with the CBO’s projections (see chart).

A1

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


StormStorm Rank

T-1 Storm T+1

March-93 1 0.8 -0.8 1.6 -1.33

January-96 2 0.8 -0.8 1.6 -1.33

February-03 3 0.5 -1.4 1.8 -1.70

January-05 4 1.2 -0.6 0.9 -1.10

February-07 5 -0.5 0.2 1 -0.03

February-10 6 0 0.1 2.2 -0.67

February-94 7 -0.6 1.6 1.9 0.63

Source: NOAA, Census Bureau, Scotiabank Economics

Deviation of Storm from 3-Month

Average (% Points)

Retail Sales During Months With Significant Northeast Snowstorms

Retail Sales, M/M % Change

Big Northeast Storms Cause Big Drops in Retail Sales… (But Effects Ebb For Smaller Storms)

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USD, billions % of GDP

US Budget Defict:Rapid Improvement, Still Huge

Source: CBO, Scotiabank Economics

forecast

Economics

20 March 7, 2014

Global Views KEY DATA PREVIEW


EUROPE

Following the gain in German industrial production (IP) of 0.8% m/m in January, we expect the euro area IP figure to reflect the same upward dynamic, also rising by around 0.8% m/m. After better-than-expected January retail sales data last week, this report will likely confirm that the euro area economy is starting the first quarter of 2014 on a fairly good footing. In terms of carryover entering into the first quarter, IP in January would indeed already be up at least 0.8% q/q vs. the prior quarter (and compared to a 0.3% gain in that period). While there could be some payback in February/March, it is nonetheless a good start and given the warmer-than-usual temperatures in the region, we would expect construction activity to provide a boost for the first-quarter GDP number as well. With data portraying a solid first-quarter GDP print, the European Central Bank’s case for optimism on the growth cycle will be strengthened. However, questions arise when we look to the second quarter, given the recent mixed results in business surveys and sentiment indicators. For more insights, see article “Has the Eurozone recovery already peaked?” earlier in this publication.

LATIN AMERICA

After the biggest yearly contraction since 2009, industrial activity in Mexico is expected to rebound in the first half of the year; however, weather-related delays in the US will probably impact Mexican industrial output, mainly in the manufacturing sector. Additionally, the construction segment, which accounts for one fifth of total industrial activity and is the major laggard in industrial performance, continues to underperform and, although base effects could point to a recovery, this sub-sector will remain restrained. Nevertheless, the government has already announced an infrastructure plan that will support the construction sector by the second or third quarter of the year. In our view, the industrial production outlook is somewhat positive but the recovery will be gradual.

ASIA/PACIFIC

A monetary tightening cycle is approaching in New Zealand. We expect the Reserve Bank of New Zealand (RBNZ) to increase the official cash rate by 25 basis points to 2.75% at the March 12th policy meeting, becoming the first central bank among the developed economies to hike rates. Following the most recent monetary policy meeting at end-January, the RBNZ implied that a higher interest rate environment is needed and that it “expects to start this adjustment soon” in order to maintain inflation near the 2% target mid-point. A recent pick-up in inflation and solid economic growth momentum justify a tighter monetary policy stance.

The Bank of Thailand (BoT) will also hold a monetary policy meeting on March 12th. We expect the BoT to lower the benchmark repo rate by 25 basis points to 2.0% in order to support economic activity amid persisting social and political unrest. The ongoing turbulence is eroding consumer and business confidence, which in turn is reflected in weak economic growth momentum. Real GDP gains slowed to 0.6% y/y in the final quarter of 2013 from 2.7% in the July-September period. Furthermore, inflation remains low, at 1.2% y/y in February. Core inflation is comfortably within the BoT’s 0.5-3.0% target range. At the most recent meeting in January three out of seven policymakers voted for a reduction in the policy rate. The previous rate cut took place at end-November during the early stage of political unrest.

A2


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


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forecast

Economics

1

Global Views

March 7, 2014

KEY INDICATORS

Key Indicators for the week of March 10 – 14

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

A3

North America

Europe

Country Date Time Indicator Period BNS Consensus LatestCA 03/10 08:15 Housing Starts (000s a.r.) Feb 190.0 190.0 180.1

US 03/11 10:00 Wholesale Inventories (m/m) Jan -- 0.5 0.3

US 03/12 07:00 MBA Mortgage Applications (w/w) MAR 7 -- -- 9.4CA 03/12 09:00 Teranet - National Bank HPI (y/y) Feb -- -- 4.5US 03/12 14:00 Treasury Budget (US$ bn) Feb -- -218.0 -10.4

CA 03/13 08:30 Capacity Utilization (%) 4Q -- 82.1 81.7CA 03/13 08:30 New Housing Price Index (m/m) Jan -- 0.1 0.1US 03/13 08:30 Continuing Claims (000s) MAR 1 -- -- 2907US 03/13 08:30 Initial Jobless Claims (000s) MAR 8 330 330 323US 03/13 08:30 Export Prices (m/m) Feb -- 0.7 0.1US 03/13 08:30 Import Prices (m/m) Feb -- 0.7 0.1US 03/13 08:30 Retail Sales (m/m) Feb 0.1 0.2 -0.4US 03/13 08:30 Retail Sales ex. Autos (m/m) Feb 0.1 0.2 0.0MX 03/13 10:00 Industrial Production (m/m) Jan -- -- -0.5MX 03/13 10:00 Industrial Production (y/y) Jan -- 0.6 -0.3US 03/13 10:00 Business Inventories (m/m) Jan -- 0.4 0.5

US 03/14 08:30 PPI (m/m) Feb 0.3 0.2 0.2US 03/14 08:30 PPI (y/y) Feb 1.2 1.1 1.2US 03/14 08:30 PPI ex. Food & Energy (m/m) Feb -- 0.1 0.2US 03/14 08:30 PPI ex. Food & Energy (y/y) Feb -- 1.5 1.3US 03/14 09:55 U. of Michigan Consumer Sentiment Mar P -- 82.0 81.6

Country Date Time Indicator Period BNS Consensus LatestFR 03/10 03:45 Industrial Production (m/m) Jan 0.6 0.3 -0.3FR 03/10 03:45 Manufacturing Production (m/m) Jan 0.3 0.3 0.0SP 03/10 04:00 Industrial Output NSA (y/y) Jan -- 4.3 3.5IT 03/10 05:00 Industrial Production (y/y) Jan -- 0.1 -0.7SP 03/10 06:59 Budget Balance YTD (€ mn) Dec -- -- -40606.0

GE 03/11 03:00 Current Account (€ bn) Jan -- 15.3 23.5GE 03/11 03:00 Trade Balance (€ bn) Jan -- 15.0 14.2IT 03/11 05:00 Real GDP (q/q) 4Q F 0.1 0.1 0.1UK 03/11 05:30 Industrial Production (m/m) Jan -- 0.2 0.4UK 03/11 05:30 Manufacturing Production (m/m) Jan -- 0.3 0.3GR 03/11 06:00 Real GDP NSA (y/y) 4Q F -2.6 -- -2.6PO 03/11 07:00 Real GDP (q/q) 4Q F 0.5 0.5 0.5

SP 03/12 04:00 CPI (y/y) Feb F -0.1 -0.1 -0.1SP 03/12 04:00 CPI - EU Harmonized (y/y) Feb F 0.0 0.0 0.0UK 03/12 05:30 Visible Trade Balance (£ mn) Jan -- -8600.0 -7717.0EC 03/12 06:00 Industrial Production (m/m) Jan 0.8 0.5 -0.7

FR 03/13 03:45 CPI (y/y) Feb 1.0 0.9 0.7FR 03/13 03:45 CPI - EU Harmonized (m/m) Feb 0.6 0.5 -0.6FR 03/13 03:45 CPI - EU Harmonized (y/y) Feb 1.1 1.0 0.8SP 03/13 04:00 Real Retail Sales (y/y) Jan -- -- 0.0IT 03/13 05:00 CPI - EU Harmonized (y/y) Feb F 0.5 0.5 0.5

GE 03/14 03:00 CPI (y/y) Feb F 1.2 1.2 1.2GE 03/14 03:00 CPI - EU Harmonized (y/y) Feb F 1.0 1.0 1.0RU 03/14 05:30 One-Week Auction Rate (%) Mar 14 7.00 7.00 7.00EC 03/14 06:00 Employment (q/q) 4Q -- -- 0.0

Economics

2

Global Views

March 7, 2014

KEY INDICATORS



A4

Asia Pacific

Country Date Time Indicator Period BNS Consensus LatestCH 03/08 06:59 Exports (y/y) Feb -- 7.5 10.6CH 03/08 06:59 Imports (y/y) Feb -- 7.6 10.0CH 03/08 06:59 Trade Balance (USD bn) Feb -- 14.5 31.9CH 03/08 20:30 CPI (y/y) Feb 2.3 2.1 2.5CH 03/08 20:30 PPI (y/y) Feb -- -1.9 -1.6

NZ 03/09 17:45 Manufacturing Activity 4Q -- -- 4.7JN 03/09 19:50 Bank Lending (y/y) Feb -- 2.4 2.3JN 03/09 19:50 Current Account (¥ bn) Jan -- -1411.8 -638.6JN 03/09 19:50 GDP (q/q) 4Q F 0.30 0.20 0.30JN 03/09 19:50 Trade Balance - BOP Basis (¥ bn) Jan -- -2589.6 -1212.6

JN 03/10 01:00 Eco Watchers Survey (current) Feb -- 54.1 54.7JN 03/10 01:00 Eco Watchers Survey (outlook) Feb -- 50.5 49.0CH 03/10 06:59 Aggregate Financing (CNY bn) Feb -- 1312.9 2584.5CH 03/10 06:59 New Yuan Loans (bn) Feb -- 730.0 1320.0NZ 03/10 06:59 REINZ House Sales (y/y) Feb -- -- -4.3NZ 03/10 06:59 REINZ Housing Price Index (m/m) Feb -- -- -2.4IN 03/10 07:59 Exports (y/y) Feb -- -- 3.80IN 03/10 07:59 Imports (y/y) Feb -- -- -18.00JN 03/10 19:50 Japan Money Stock M2 (y/y) Feb -- 4.40 4.40JN 03/10 19:50 Japan Money Stock M3 (y/y) Feb -- 3.5 3.5PH 03/10 21:00 Exports (y/y) Jan -- 8.6 15.8PH 03/10 21:00 Unemployment Rate (%) Jan 6.5 -- 6.5

JN 03/11 07:59 BoJ Monetary Base Target (¥ tn) Mar 11 -- -- 270.0SK 03/11 19:00 Unemployment Rate (%) Feb 3.2 3.2 3.2JN 03/11 19:50 Tertiary Industry Index (m/m) Jan -- 0.6 -0.4AU 03/11 20:30 Home Loans (%) Jan -- 0.5 -1.9AU 03/11 20:30 Investment Lending (% change) Jan -- -- 2.9

JN 03/12 01:00 Consumer Confidence Feb -- 40.0 40.5TH 03/12 03:30 BoT Repo Rate (%) Mar 12 2.00 2.00 2.25IN 03/12 08:00 CPI (y/y) Feb 8.5 8.3 8.8IN 03/12 08:00 Industrial Production (y/y) Jan -- -1.0 -0.6NZ 03/12 16:00 RBNZ Official Cash Rate (%) Mar 13 2.75 2.75 2.50JN 03/12 19:50 Machine Orders (m/m) Jan -- 7.1 -15.7AU 03/12 20:00 Consumer Inflation Expectation (%) Mar -- -- 2.3AU 03/12 20:30 Employment (000s) Feb -- 15.0 -3.7AU 03/12 20:30 Unemployment Rate (%) Feb 6.0 6.0 6.0SK 03/12 21:00 BoK Base Rate (%) Mar 13 2.50 2.50 2.50

MA 03/13 00:01 Industrial Production (y/y) Jan -- 4.3 4.8CH 03/13 01:30 Fixed Asset Investment YTD (y/y) Feb -- 19.4 19.6HK 03/13 04:30 Industrial Production (y/y) 4Q -- -- -0.9ID 03/13 06:59 BI Reference Interest Rate (%) Mar 13 7.50 7.50 7.50NZ 03/13 17:30 Business NZ PMI Feb -- -- 56.2SI 03/13 22:00 Unemployment Rate (%) 4Q F 1.8 -- 1.8

JN 03/14 00:30 Capacity Utilization (m/m) Jan -- -- 2.2JN 03/14 00:30 Industrial Production (y/y) Jan F -- -- 10.6SI 03/14 01:00 Retail Sales (y/y) Jan -- -3.1 -5.5IN 03/14 02:30 Monthly Wholesale Prices (y/y) Feb 4.9 4.9 5.1CH 03/14 06:59 Actual FDI (y/y) Feb -- 6.7 16.1

Economics

3

Global Views

March 7, 2014

KEY INDICATORS



A5

Latin America

Country Date Time Indicator Period BNS Consensus LatestPE 03/10 06:59 Trade Balance (USD mn) Jan -- -- 552.5

BZ 03/11 08:00 Industrial Production SA (m/m) Jan -- 2.5 -3.5BZ 03/11 08:00 Industrial Production (y/y) Jan -- -3.6 -2.3

BZ 03/12 08:00 IBGE Inflation IPCA (m/m) Feb -- 0.7 0.6BZ 03/12 08:00 IBGE Inflation IPCA (y/y) Feb -- 5.6 5.6CO 03/12 17:00 Trade Balance (US$ mn) Jan -- 117.4 556.6

BZ 03/13 08:00 Retail Sales (m/m) Jan -- -0.4 -0.2BZ 03/13 08:00 Retail Sales (y/y) Jan -- 4.7 4.0CL 03/13 17:00 Nominal Overnight Rate Target (%) Mar 13 4.25 4.00 4.25PE 03/13 19:00 Reference Rate (%) Mar 4.00 4.00 4.00

PE 03/14 06:59 Economic Activity Index NSA (y/y) Jan -- -- 5.0PE 03/14 06:59 Unemployment Rate (%) Feb -- -- 6.4BZ 03/14 07:30 Economic Activity Index SA (m/m) Jan -- 0.6 -1.4BZ 03/14 07:30 Economic Activity Index NSA (y/y) Jan -- 0.2 0.7

Economics

4

Global Views

March 7, 2014

AUCTIONS

Global Auctions for the week of March 10 – 14


A6

North America

Europe

Country Date Time EventUS 03/10 11:00 U.S. Fed to Purchase USD2.25-2.75 Bln NotesUS 03/10 11:30 3M High Yield RateUS 03/10 11:30 3M Direct Accepted %US 03/10 11:30 3M Bid/Cover RatioUS 03/10 11:30 3M Indirect Accepted %US 03/10 11:30 6M Direct Accepted %US 03/10 11:30 6M Indirect Accepted %US 03/10 11:30 6M High Yield RateUS 03/10 11:30 6M Bid/Cover RatioUS 03/10 11:30 U.S. to Sell 3-Month BillsUS 03/10 11:30 U.S. to Sell 6-Month Bills

CA 03/11 10:30 Canada to Sell CAD4.2 Bln 98-Day BillsCA 03/11 10:30 Canada to Sell CAD1.650 Bln 182-Day BillsCA 03/11 10:30 Canada to Sell CAD1.650 Bln 364-Day BillsUS 03/11 11:00 U.S. Fed to Purchase USD1.00-1.25 Bln NotesUS 03/11 11:30 4W Direct Accepted %US 03/11 11:30 4W Indirect Accepted %US 03/11 11:30 4W Bid/Cover RatioUS 03/11 11:30 4W High Yield RateUS 03/11 11:30 U.S. to Sell 4-Week BillsUS 03/11 13:00 3Y Direct Accepted %US 03/11 13:00 3Y Indirect Accepted %US 03/11 13:00 3Y Bid/Cover RatioUS 03/11 13:00 3Y High Yield RateUS 03/11 13:00 U.S. to Sell 3-Year Notes

US 03/12 11:00 U.S. Fed to Purchase USD0.75-1.00 Bln NotesUS 03/12 13:00 10Y High Yield RateUS 03/12 13:00 10Y Bid/Cover RatioUS 03/12 13:00 10Y Indirect Accepted %US 03/12 13:00 U.S. to Sell 10-Year Notes ReopeningUS 03/12 13:00 10Y Direct Accepted %

US 03/13 11:00 U.S. Fed to Purchase USD3.25-4.00 Bln NotesUS 03/13 13:00 30Y High Yield RateUS 03/13 13:00 30Y Direct Accepted %US 03/13 13:00 30Y Bid/Cover RatioUS 03/13 13:00 30Y Indirect Accepted %US 03/13 13:00 U.S. to Sell 30-Year Bonds Reopening

US 03/14 11:00 U.S. Fed to Purchase USD1.00-1.25 Bln Notes

Country Date Time EventGE 03/10 06:30 Germany to Sell EUR2 Bln Bills

NE 03/11 05:30 Netherlands to Sell 2017 BondsSP 03/11 05:30 Spain to Sell 6-Month and 12-Month BillsNO 03/11 06:00 Norway to Sell BondsUK 03/11 06:30 U.K. to Sell GBP3 Bln 2.75% 2024 Bonds

IT 03/12 06:00 Italy to Sell BillsSW 03/12 06:03 Sweden to Sell BondsSZ 03/12 06:30 Switzerland to Sell BondsGE 03/12 06:30 Germany to Sell EUR4 Bln 0.25% 2016 Bonds

Economics

5

Global Views

March 7, 2014

AUCTIONS

Global Auctions for the week of March 10 – 14


A7

Asia Pacific

Europe (continued from previous page)

Country Date Time EventIT 03/13 06:00 Italy to Sell 3-Year BondsIR 03/13 06:00 Ireland to Sell Up to EUR 1Bln BondsUK 03/13 06:30 U.K. to Sell GBP1.5 Bln 0.125% I/L 2019 Bonds

Country Date Time EventCH 03/09 23:00 China to Sell 3-Year Saving BondsCH 03/09 23:00 China to Sell 5-Year Saving Bonds

AU 03/10 20:00 Australia Plans to Sell Treasury Indexed Bonds

CH 03/11 23:00 China to Sell 3-Year Bonds

JN 03/12 04:00 Japan Auction for Enhanced-LiquidityJN 03/12 23:35 Japan to Sell 3-Month Bill

NZ 03/13 21:05 New Zealand Plans to Sell NZD200 Mln Inflation-Indexed BondJN 03/13 23:45 Japan to Sell 5-Year Bonds

Economics

6

Global Views

March 7, 2014

EVENTS


Events for the week of March 10 – 14

A8

North America

Europe

Latin America

Country Date Time EventUS 03/10 06:15 Fed's Plosser, Bank of France's Noyer Speak on Panel in ParisUS 03/10 12:40 Fed's Evans to Speak in Columbus, Georgia

US 03/12 14:00 Treasury Sec Lew testifies before House Budget Committee

US 03/13 09:30 Senate Banking Nomination Hearing for Fischer, Brainard, PowellCA 03/13 12:00 Canadian Minister Oliver Speaks in Montreal

US 03/14 21:45 Fischer Speaks in Stanford, California

Country Date Time EventGE 03/09 13:00 Cameron, Merkel to Open CeBIT Tech Fair in Hanover

US 03/10 06:15 Fed's Plosser, Bank of France's Noyer Speak on Panel in ParisEC 03/10 07:30 Cyprus's Georgiades Speaks at Bruegel in BrusselsEC 03/10 09:00 Euro-Area Finance Ministers Meet in BrusselsGE 03/10 13:00 Merkel Addresses CDU Innovation Conference in DresdenEC 03/10 EU, U.S. Hold Trade Talks in Brussels

EC 03/11 04:00 EU Finance Ministers Meet in BrusselsUK 03/11 05:30 BOE's Carney, Fisher, Miles, Weale Speak in LondonPO 03/11 Bank of Portugal Releases Data on Banks

SP 03/12 04:00 ECB's Linde Speaks in MadridEC 03/12 04:00 ECB's Praet Speaks in FrankfurtPO 03/12 05:00 Portugal's Coelho, IMF's Thomsen Speak at Conference in LisbonEC 03/12 06:00 ECB's Coeure, Issing Speak in FrankfurtEC 03/12 09:00 ECB's Mersch Speaks in FrankfurtGE 03/12 German Cabinet Passes 2014 Federal Draft Budget

EC 03/13 05:00 ECB Publishes Monthly ReportEC 03/13 11:45 EU's Van Rompuy Speaks at Ecommerce Europe

RU 03/14 05:30 One-Week Auction RateEC 03/14 07:00 ECB Announces 3-Year LTRO RepaymentGE 03/14 07:30 Merkel Attends ZDH Trade Group Congress: MunichEC 03/14 EU Sovereign Debt Rating May Be Published by Moody's

Asia Pacific

Country Date Time EventNZ 03/10 17:00 N.Z. Government 7-Month Financial StatementsJN 03/10 00:00 BOJ 2014 Monetary Base Target

AU 03/11 00:00 RBA's Philip Lowe Speaks at Sydney Institute

TH 03/12 03:30 BoT Benchmark Interest RateNZ 03/12 16:00 RBNZ Official Cash RateNZ 03/12 16:05 RBNZ Governor Wheeler News ConferenceSK 03/12 21:00 BoK 7-Day Repo RateID 03/12 Bank Indonesia Reference Rate

JN 03/13 19:50 Bank of Japan February 17-18 meeting minutes

Country Date Time EventCL 03/13 17:00 Nominal Overnight Rate Target (%)PE 03/13 19:00 Reference Rate (%)

Economics

7

Global Views

March 7, 2014

Global Central Bank Watch

CENTRAL BANKS

A9


NORTH AMERICARate Current Rate Next Meeting Scotia's Forecasts Consensus ForecastsBank of Canada – Overnight Target Rate 1.00 April 16, 2014 1.00 --

Federal Reserve – Federal Funds Target Rate 0.25 March 19, 2014 0.25 --

Banco de México – Overnight Rate 3.50 March 21, 2014 3.50 --

EUROPERate Current Rate Next Meeting Scotia's Forecasts Consensus ForecastsEuropean Central Bank – Refinancing Rate 0.25 April 3, 2014 0.25 --

Bank of England – Bank Rate 0.50 April 10, 2014 0.50 0.50

Swiss National Bank – Libor Target Rate 0.00 March 20, 2014 0.00 --

Central Bank of Russia – One-Week Auction Rate 7.00 March 14, 2014 7.00 7.00

Hungarian National Bank – Base Rate 2.70 March 25, 2014 2.70 2.60

Central Bank of the Republic of Turkey – 1 Wk Repo Rate 10.00 March 18, 2014 10.00 --

Sweden Riksbank – Repo Rate 0.75 April 9, 2014 0.75 --

Norges Bank – Deposit Rate 1.50 March 27, 2014 1.50 --

ASIA PACIFICRate Current Rate Next Meeting Scotia's Forecasts Consensus ForecastsReserve Bank of Australia – Cash Target Rate 2.50 March 31, 2014 2.50 --

Reserve Bank of New Zealand – Cash Rate 2.50 March 12, 2014 2.75 2.75

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

Reserve Bank of India – Repo Rate 8.00 April 1, 2014 8.00 --

Bank of Korea – Bank Rate 2.50 March 12, 2014 2.50 2.50

Bank of Thailand – Repo Rate 2.25 March 12, 2014 2.00 2.00

Bank Indonesia – Reference Interest Rate 7.50 March 13, 2014 7.50 7.50

LATIN AMERICA

Rate Current Rate Next Meeting Scotia's Forecasts Consensus ForecastsBanco Central do Brasil – Selic Rate 10.75 April 2, 2014 10.75 --

Banco Central de Chile – Overnight Rate 4.25 March 13, 2014 4.25 4.00

Banco de la República de Colombia – Lending Rate 3.25 March 21, 2014 3.25 3.25

Banco Central de Reserva del Perú – Reference Rate 4.00 March 13, 2014 4.00 4.00

AFRICARate Current Rate Next Meeting Scotia's Forecasts Consensus ForecastsSouth African Reserve Bank – Repo Rate 5.50 March 27, 2014 5.50 --

Fed: We expect the FOMC to continue tapering the pace of its asset purchases at its meeting on March 19. The main questions ahead of the meeting concern the Fed’s forward guidance for interest rates. With the unemployment rate approaching the Fed’s 6.5% threshold, it would make sense for the FOMC to change the wording of its statement, which currently says that the current level of interest rates will be appropriate “well past the time that the unemployment rate declines below 6-1/2 percent.” This will be Janet Yellen’s first meeting as FOMC chair, and she’ll be thrust directly into the fire as she handles a full press conference following the rate announcement.

After reducing the reference rate by 25 basis points (bps) to 4.25% last month, the central bank of Chile will continue to ease monetary conditions by at least 25 bps more in the coming months. However, in our view, the possibility of leaving the rate unchanged next week is relatively high as the currency continues to weaken against the US dollar and inflation – although transitory – has been increasing. Nevertheless, economic activity continues to decelerate. In Peru, the central bank will likely maintain the reference rate unchanged at 4.0% for the foreseeable future, using other instruments, such as reserves requirements to ease monetary conditions.

After raising the policy rate by 150 basis points to 7% at an unscheduled meeting on March 3rd, the Russian central bank will likely leave interest rates unchanged next week. The unexpected rate hike came in response to the further sharp depreciation of the ruble in February on the back of the eruption of political tensions in Ukraine, in which Russia became involved in the Crimean region. The currency has since stabilized to some degree, and the bank maintains a vast amount of foreign reserves to counter excessive volatility in the coming weeks and months (worth US$493 billion). Though the authorities have hinted at further room for temporary rate hikes if needed, they also note the potential negative impact on the economic outlook, which has been downgraded in recent months.

South Korean inflationary pressures remain low, with consumer price inflation at 1.0% y/y in February. Accordingly, the Bank of Korea’s monetary policy stance will likely remain accommodative in the coming quarters, with the benchmark rate set at 2.50%. In Indonesia, a modest monetary tightening bias will remain in place; nevertheless, we do not expect a rate hike to take place next week. The reference rate was raised by 175 basis points between June and November to the current level of 7.50%, and another small increase may take place in the coming months. Tighter monetary conditions will help limit inflationary pressures and support the Indonesian rupiah. We expect changes to the monetary policy stance in both Thailand and New Zealand next week; for further insights, please refer to the Asia/Pacific Key Data Preview on page A2.

North America

Europe

Asia Pacific

Latin America

Africa

Economics

8

Global Views

March 7, 2014

FORECASTS

A10

Forecasts as at February 28, 2014* 2000-12 2013e 2014f 2015f 2000-12 2013e 2014f 2015f

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

World13.7 2.9 3.4 3.6

Canada 2.2 2.0 2.2 2.5 2.1 0.9 1.2 1.9 United States 1.9 1.9 2.8 3.0 2.5 1.5 1.6 1.9 Mexico 2.4 1.1 2.7 3.7 4.7 4.0 4.2 4.0

United Kingdom 1.7 1.9 2.5 1.8 2.3 2.0 2.1 2.4 Euro zone 1.3 -0.4 1.0 1.3 2.1 0.8 1.1 1.3

Japan 0.9 1.6 1.4 1.2 -0.3 1.6 1.5 2.1 Australia 3.1 2.4 2.7 2.9 3.0 2.7 3.0 2.9 China 9.3 7.7 7.3 7.0 2.4 2.5 2.8 3.5 India 7.2 4.7 5.2 5.7 6.7 6.2 6.6 6.3 Korea 4.3 2.8 3.4 3.5 3.1 1.1 2.2 2.5 Thailand 4.2 2.8 3.5 4.5 2.7 1.7 2.5 2.8

Brazil 3.4 2.3 2.0 2.5 6.5 6.0 6.0 5.5 Chile 4.5 4.0 4.1 4.5 2.9 3.0 3.1 3.0 Peru 5.7 5.1 5.4 5.6 2.6 2.9 3.0 2.5

Central Bank Rates (%, end of period) 13Q4 14Q1f 14Q2f 14Q3f 14Q4f 15Q1f 15Q2f 15Q3f

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 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25Bank of England 0.50 0.50 0.50 0.50 0.50 0.75 1.00 1.25Swiss National Bank 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Reserve Bank of Australia 2.50 2.50 2.50 2.50 2.75 3.00 3.25 3.50

Exchange Rates (end of period)

Canadian Dollar (USDCAD) 1.06 1.13 1.15 1.12 1.11 1.10 1.10 1.10Canadian Dollar (CADUSD) 0.94 0.88 0.87 0.89 0.90 0.91 0.91 0.91Euro (EURUSD) 1.37 1.40 1.37 1.33 1.30 1.28 1.26 1.25Sterling (GBPUSD) 1.66 1.65 1.66 1.65 1.64 1.64 1.63 1.61Yen (USDJPY) 105 102 104 107 109 110 111 112Australian Dollar (AUDUSD) 0.89 0.87 0.86 0.88 0.88 0.89 0.89 0.89Chinese Yuan (USDCNY) 6.1 6.1 6.1 6.0 6.0 5.9 5.9 5.9Mexican Peso (USDMXN) 13.0 13.5 13.1 13.2 13.4 13.4 13.4 13.5Brazilian Real (USDBRL) 2.36 2.55 2.40 2.45 2.50 2.52 2.55 2.55

Commodities (annual average) 2000-12 2013 2014f 2015f

WTI Oil (US$/bbl) 60 98 95 92Brent Oil (US$/bbl) 62 109 108 108Nymex Natural Gas (US$/mmbtu) 5.45 3.73 5.20 4.75

Copper (US$/lb) 2.22 3.32 3.18 3.10Zinc (US$/lb) 0.78 0.87 0.98 1.40Nickel (US$/lb) 7.64 6.80 6.90 8.00Gold, London PM Fix (US$/oz) 745 1,410 1,320 1,375

Pulp (US$/tonne) 730 941 985 985Newsprint (US$/tonne) 585 608 616 635Lumber (US$/mfbm) 274 356 390 400

1 World GDP for 2003-12 are IMF PPP estimates; 2013-15f are Scotiabank Economics' estimates based on a 2012 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' report for additional forecasts & commentary.

Brazil

India South Korea Thailand

Chile Peru

Japan

Canada

United States

Mexico

United Kingdom

Australia China

Euro Zone

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

Economics

9

Global Views

March 7, 2014

ECONOMIC STATISTICS

Source: Bloomberg, Global Insight, Scotiabank Economics.

A11

North America

Canada 2013 13Q3 13Q4 Latest United States 2013 13Q3 13Q4 Latest Real GDP (annual rates) 2.0 2.7 2.9 Real GDP (annual rates) 1.9 4.1 2.4 Current Acc. Bal. (C$B, ar) -60.7 -59.2 -64.0 Current Acc. Bal. (US$B, ar) -379 Merch. Trade Bal. (C$B, ar) -7.4 -5.1 -10.6 -2.1 (Jan) Merch. Trade Bal. (US$B, ar) -704 -714 -687 -712 (Jan) Industrial Production 0.4 0.8 0.5 2.3 (Jan) Industrial Production 2.6 2.4 3.4 3.2 (Jan) Housing Starts (000s) 187 195 195 180 (Jan) Housing Starts (millions) 0.93 0.88 1.02 0.88 (Jan) Employment 1.3 1.3 1.0 0.5 (Feb) Employment 1.7 1.8 1.8 1.5 (Feb) Unemployment Rate (%) 7.1 7.1 7.0 7.0 (Feb) Unemployment Rate (%) 7.4 7.2 7.0 6.7 (Feb) Retail Sales 2.5 3.2 3.1 3.4 (Dec) Retail Sales 4.3 4.7 3.8 2.6 (Jan) Auto Sales (000s) 1745 1786 1760 1660 (Dec) Auto Sales (millions) 15.5 15.7 15.6 15.3 (Feb) CPI 0.9 1.1 0.9 1.5 (Jan) CPI 1.5 1.6 1.2 1.6 (Jan) IPPI 0.4 0.8 0.5 -2.3 (Jan) PPI 1.2 1.2 0.8 1.5 (Jan) Pre-tax Corp. Profits -2.6 1.2 2.9 Pre-tax Corp. Profits 3.5

Mexico Real GDP 1.1 1.4 0.7 Current Acc. Bal. (US$B, ar) -22.3 -22.5 -18.6 Merch. Trade Bal. (US$B, ar) -1.0 -4.1 7.4 -38.3 (Jan) Industrial Production -0.7 -0.5 -0.4 -0.3 (Dec) CPI 3.8 3.4 3.7 4.2 (Feb)

Euro Zone 2013 13Q3 13Q4 Latest Germany 2013 13Q3 13Q4 Latest Real GDP -0.4 -0.3 0.5 Real GDP 0.5 0.6 1.4 Current Acc. Bal. (US$B, ar) 288 259 474 547 (Dec) Current Acc. Bal. (US$B, ar) 267.6 235.2 357.0 386.6 (Dec) Merch. Trade Bal. (US$B, ar) 230.3 209.1 283.3 229.2 (Dec) Merch. Trade Bal. (US$B, ar) 265.7 261.3 286.4 298.1 (Dec) Industrial Production -0.7 -1.1 1.4 1.2 (Dec) Industrial Production 0.0 -0.1 2.9 5.0 (Jan) Unemployment Rate (%) 12.0 12.1 12.0 12.0 (Jan) Unemployment Rate (%) 6.9 6.8 6.9 6.8 (Feb) CPI 1.4 1.3 0.8 0.8 (Jan) CPI 1.5 1.6 1.3 1.2 (Feb)

France United Kingdom Real GDP 0.3 0.3 0.8 Real GDP 1.8 1.9 2.7 Current Acc. Bal. (US$B, ar) -44.1 -49.7 -41.2 -6.1 (Dec) Current Acc. Bal. (US$B, ar) -167.6 Merch. Trade Bal. (US$B, ar) -46.8 -49.1 -46.4 -50.5 (Jan) Merch. Trade Bal. (US$B, ar) -169.4 -183.8 -175.1 -151.6 (Dec) Industrial Production -0.4 -1.3 0.7 0.5 (Dec) Industrial Production -0.3 -0.3 2.3 1.8 (Dec) Unemployment Rate (%) 10.8 10.9 10.8 10.9 (Jan) Unemployment Rate (%) 7.6 7.2 (Nov) CPI 0.9 0.9 0.6 0.7 (Jan) CPI 2.6 2.7 2.1 1.8 (Jan)

Italy Russia Real GDP -1.9 -1.9 -0.8 Real GDP 1.2 Current Acc. Bal. (US$B, ar) 16.2 28.5 47.0 30.4 (Dec) Current Acc. Bal. (US$B, ar) 33.0 0.6 4.7 Merch. Trade Bal. (US$B, ar) 40.3 41.4 58.6 59.5 (Dec) Merch. Trade Bal. (US$B, ar) 14.9 14.4 15.0 15.8 (Dec) Industrial Production -3.0 -3.8 -0.3 -0.7 (Dec) Industrial Production 0.4 0.6 1.4 -0.2 (Jan) CPI 1.2 1.0 0.6 0.6 (Jan) CPI 6.8 6.4 6.4 6.2 (Feb)

Europe

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

Economics

10

Global Views

March 7, 2014

ECONOMIC STATISTICS

Source: Bloomberg, Global Insight, Scotiabank Economics.

A12

Asia Pacific

Australia 2013 13Q3 13Q4 Latest Japan 2013 13Q3 13Q4 Latest Real GDP 2.4 2.4 2.8 Real GDP 1.6 2.4 2.7 Current Acc. Bal. (US$B, ar) -44.0 -54.9 -41.6 Current Acc. Bal. (US$B, ar) 34.3 54.5 -53.6 -74.1 (Dec) Merch. Trade Bal. (US$B, ar) 20.2 12.6 20.8 8.3 (Jan) Merch. Trade Bal. (US$B, ar) -117.3 -119.2 -152.1 -210.0 (Jan) Industrial Production 3.6 2.1 2.8 Industrial Production -0.6 1.9 5.7 10.6 (Jan) Unemployment Rate (%) 5.7 5.7 5.8 6.0 (Jan) Unemployment Rate (%) 4.0 4.0 3.9 3.7 (Jan) CPI 2.4 2.2 2.7 CPI 0.4 0.9 1.4 1.4 (Jan)

South Korea China Real GDP 2.8 3.3 3.9 Real GDP 7.7 7.8 7.7 Current Acc. Bal. (US$B, ar) 70.7 75.9 87.8 43.3 (Jan) Current Acc. Bal. (US$B, ar) 188.6 Merch. Trade Bal. (US$B, ar) 44.1 43.1 53.2 11.1 (Feb) Merch. Trade Bal. (US$B, ar) 259.2 244.2 360.3 382.4 (Jan) Industrial Production 0.2 1.0 0.7 1.6 (Jan) Industrial Production 9.7 10.2 9.7 9.7 (Dec) CPI 1.3 1.4 1.1 1.0 (Feb) CPI 2.5 3.1 2.5 2.5 (Jan)

Thailand India Real GDP 2.9 2.7 0.6 Real GDP 4.6 4.8 4.7 Current Acc. Bal. (US$B, ar) -2.8 -0.9 5.2 Current Acc. Bal. (US$B, ar) -49.3 -5.2 -4.2 Merch. Trade Bal. (US$B, ar) 0.5 1.7 1.3 -0.7 (Jan) Merch. Trade Bal. (US$B, ar) -12.9 -9.9 -10.0 -9.9 (Jan) Industrial Production -3.0 -3.9 -6.7 -6.6 (Jan) Industrial Production 0.5 1.9 -1.1 -0.6 (Dec) CPI 2.2 1.7 1.7 2.0 (Feb) WPI 6.3 6.6 7.0 5.0 (Jan)

Indonesia Real GDP 5.8 5.6 5.7 Current Acc. Bal. (US$B, ar) -28.5 -8.5 -4.0 Merch. Trade Bal. (US$B, ar) -0.3 -1.0 0.8 -0.4 (Jan) Industrial Production 5.6 7.2 0.1 0.6 (Dec) CPI 6.4 8.0 8.0 7.7 (Feb)

Brazil 2013 13Q3 13Q4 Latest Chile 2013 13Q3 13Q4 Latest Real GDP 2.1 1.9 1.7 Real GDP 4.7 Current Acc. Bal. (US$B, ar) -81.4 -68.5 -83.8 Current Acc. Bal. (US$B, ar) -13.8 Merch. Trade Bal. (US$B, ar) 2.6 5.9 16.7 -25.5 (Feb) Merch. Trade Bal. (US$B, ar) 9.0 -1.8 2.4 14.8 (Feb) Industrial Production 1.2 0.3 -0.2 -3.0 (Dec) Industrial Production 3.0 4.9 2.5 -1.7 (Jan) CPI 6.2 6.1 5.8 5.6 (Jan) CPI 1.9 2.2 2.3 3.2 (Feb)

Peru Colombia Real GDP 2.2 4.5 5.1 Real GDP 5.1 Current Acc. Bal. (US$B, ar) -10.2 -2.5 -2.2 Current Acc. Bal. (US$B, ar) -3.6 Merch. Trade Bal. (US$B, ar) 0.0 0.1 0.1 0.6 (Dec) Merch. Trade Bal. (US$B, ar) 0.2 0.0 0.1 0.6 (Dec) Unemployment Rate (%) 5.9 5.8 5.8 6.4 (Jan) Industrial Production -1.9 -1.5 0.3 1.5 (Dec) CPI 2.8 3.1 2.9 17.2 (Feb) CPI 2.0 2.3 1.8 2.3 (Feb)

Latin America

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

Economics

11

Global Views

March 7, 2014

FINANCIAL STATISTICS

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

A13

Interest Rates (%, end of period)

Canada 13Q3 13Q4 Feb/28 Mar/07* United States 13Q3 13Q4 Feb/28 Mar/07*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 0.97 0.92 0.84 0.84 3-mo. T-bill 0.01 0.07 0.04 0.04 10-yr Gov’t Bond 2.54 2.76 2.45 2.45 10-yr Gov’t Bond 2.61 3.03 2.69 2.69 30-yr Gov’t Bond 3.07 3.23 2.96 2.96 30-yr Gov’t Bond 3.68 3.97 3.62 3.62 Prime 3.00 3.00 3.00 3.00 Prime 3.25 3.25 3.25 3.25 FX Reserves (US$B) 71.3 71.8 72.7 (Jan) FX Reserves (US$B) 136.7 133.5 133.4 (Jan)

Germany France 3-mo. Interbank 0.15 0.24 0.23 0.23 3-mo. T-bill 0.06 0.15 0.13 0.13 10-yr Gov’t Bond 1.78 1.93 1.63 1.63 10-yr Gov’t Bond 2.32 2.56 2.20 2.20 FX Reserves (US$B) 65.7 67.4 66.9 (Jan) FX Reserves (US$B) 54.6 50.8 54.5 (Jan)

Euro Zone United Kingdom Refinancing Rate 0.50 0.25 0.25 0.25 Repo Rate 0.50 0.50 0.50 0.50 Overnight Rate 0.18 0.45 0.16 0.16 3-mo. T-bill 0.40 0.40 0.39 0.39 FX Reserves (US$B) 332.5 331.2 337.9 (Jan) 10-yr Gov’t Bond 2.72 3.02 2.73 2.73

FX Reserves (US$B) 93.3 92.4 92.6 (Jan)

Japan Australia Discount Rate 0.30 0.30 0.30 0.30 Cash Rate 2.50 2.50 2.50 2.50 3-mo. Libor 0.09 0.09 0.08 0.08 10-yr Gov’t Bond 3.81 4.24 4.02 4.02 10-yr Gov’t Bond 0.69 0.74 0.59 0.59 FX Reserves (US$B) 45.9 49.7 43.4 (Jan) FX Reserves (US$B) 1240.8 1237.2 1246.2 (Jan)

Exchange Rates (end of period)

USDCAD 1.03 1.06 1.11 1.11 ¥/US$ 98.27 105.31 102.14 102.14CADUSD 0.97 0.94 0.90 0.90 US¢/Australian$ 0.93 0.89 0.89 0.89GBPUSD 1.619 1.656 1.674 1.674 Chinese Yuan/US$ 6.12 6.05 6.15 6.15EURUSD 1.353 1.374 1.380 1.380 South Korean Won/US$ 1075 1050 1068 1068JPYEUR 0.75 0.69 0.71 0.71 Mexican Peso/US$ 13.091 13.037 13.253 13.253USDCHF 0.90 0.89 0.88 0.88 Brazilian Real/US$ 2.217 2.362 2.339 2.339

Equity Markets (index, end of period)

United States (DJIA) 15130 16577 16354 16354 U.K. (FT100) 6462 6749 6822 6822 United States (S&P500) 1682 1848 1866 1866 Germany (Dax) 8594 9552 9677 9677 Canada (S&P/TSX) 12787 13622 14272 14272 France (CAC40) 4143 4296 4405 4405 Mexico (IPC) 40185 42727 38955 38955 Japan (Nikkei) 14456 16291 14841 14841 Brazil (Bovespa) 52338 51507 47342 47342 Hong Kong (Hang Seng) 22860 23306 22837 22837 Italy (BCI) 950 1041 1110 1110 South Korea (Composite) 1997 2011 1980 1980

Commodity Prices (end of period)

Pulp (US$/tonne) 945 990 1010 1010 Copper (US$/lb) 3.31 3.35 3.22 3.22 Newsprint (US$/tonne) 605 605 605 605 Zinc (US$/lb) 0.85 0.95 0.96 0.96 Lumber (US$/mfbm) 359 372 362 363 Gold (US$/oz) 1326.50 1204.50 1326.50 1326.50 WTI Oil (US$/bbl) 102.33 98.42 102.17 102.17 Silver (US$/oz) 21.68 19.50 21.27 21.27 Natural Gas (US$/mmbtu) 3.56 4.23 4.61 4.61 CRB (index) 285.54 280.17 301.23 301.23

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