Radio Show May 17th, Economic Outlook from ScotiaMcLeod

ScotiaMcLeod’s Economic Outlook

May 13, 2008
SCOTIA ECONOMICS’ OUTLOOK

As the United States remains at risk of a more protracted economic
slowdown with the deleveraging of the consumer and financial sectors,
U.S. Gross Domestic Product (GDP) growth is expected to expand only
1.2% this year and 1.5% in 2009.
The Canadian economy has weakened further against the backdrop of
the intensifying U.S. slowdown - led by the manufacturing sector and
the ongoing erosions in exports. Currently, Scotia Economics is calling
for output growth to expand by 1.3% and 1.9% respectively in Canada
for 2008 and 2009.
Core inflation should remain well below the Bank of Canada's 2%
target throughout 2008-09, as the Canadian dollar continues to smother
the imported inflation that the rest of the world is facing. In the U.S.,
slowing growth is also expected to dampen inflation.
Internationally, Scotia Economics is expecting global growth to slow
both this year and next in response to the slower trajectory in the U.S..
However, growth in Brazil, Russia, and China should continue to
outperform.

INTEREST RATE OUTLOOK

Scotia Economics is forecasting the Bank of Canada to reduce interest
rates by 0.50% to 2.50% at the next policy meeting on June 10th and
then remain on hold for the balance of the year.
In the near term (3-6 months) the Canadian yield curve will likely
move lower, while the 12-month forecast suggests that the curve will
flatten in shape with yields increasing the most in the 2 - year and 30 -
year Government bonds.
We recommend purchasing bonds within the five-to-ten year time
horizon where both the corporate and provincial sectors provide value.

The Federal Reserve is now expected to remain on hold for the time
being, yet it will likely give way to another round of interest rate cuts in
the fourth quarter of 2008. Scotia Economics is forecasting a
cumulative 0.75% rate reduction expected to leave the Fed Funds rate
at 1.25% by the end of the year.
The U.S. Treasury yield curve is expected to flatten in shape over the
summer months, and then steepen again going in the fall as the markets
begin to price in more Fed cuts. Scotia Economics is forecasting yields
to return to their current position over the next 12 months. (See Chart)
Based on this forecast, the most attractive returns will be in five-year
bank or industrial bonds/debentures. The five-year term with the
additional yield pick-up in corporate issues delivers the highest
expected returns over the next 12 months...

ScotiaMcLeod’s Economic Outlook

CURRENCY OUTLOOK

As the Fed has signalled a pause in its easing campaign, the U.S. dollar
is likely to strengthen in the near term, as Central banks in Canada and
the U.K. trim their overnight rates in response to weakening domestic
conditions.
However, looking one year forward Scotia Economics is forecasting a
weaker U.S. dollar, reflecting the deep-seated fiscal and trade shortfalls
and a multi-year period of economic underperformance.
The Canadian dollar is forecast to outperform all currencies other than
the Japanese Yen...

EQUITY STRATEGY

At the start of Q2/08, Scotia Capital portfolio strategist Vincent Delisle
raised his equity weighting to 65% and reduced bonds to 25%. Delisle
believes bonds offer an unattractive proposition at current levels, and
expects lacklustre performance in coming years as rate normalization
eats away at total returns.
Delisle maintained a 10% overweight cash position, looking to
reallocate money into equities under the following considerations:
lower levels and/or when further signs of bottoming emerge.
Lower Levels: Indices could pull back in coming weeks as the flow of
weak data intensifies and confirms recession status. Moreover, most
benchmarks are at overbought levels and we expect a consolidation
period to develop through the summer.
Signs of Bottom: Among recent positive improvements, Delisle notes
the narrowing of credit spreads and that the yield curve has stopped
steepening. However, leading indicators are still heading south and
house prices have not troughed yet. Delisle would consider reducing his
defensive cash position and buying the next pullback as it should
coincide with the worst of the U.S. economic cycle.
Vincent Delisle has been gradually moving away from a short US $
strategy and went underweight Golds at the end of March. As the Fed
hinted at a pause in rate cuts, the dollar could find needed support. His
sector strategy is overweight Financials,. Telecom, Discretionary,
Staples, Technology and Industrials.
Tara Quinn, MBA – Associate,
Portfolio Advisory Group
...
(Disclaimer)

ScotiaMcLeod’s Economic Outlook
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