Economic monitor by Steven Bicego

Economic Monitor June 28, 2011

Prepared by: Dr. Martin Murenbeeld, Chief Economist William Tharp, Senior Economist

ECONOMIC MONITOR

Financial Markets Overview 1.►

2.►

3.►

We have pushed back the date for a BANK OF CANADA interest rate increase to June of 2012. At present, North American growth is too anemic and inflation is about to follow oil prices down, relieving concerns that higher inflation expectations could become a problem. Business credit growth is picking up but, to the extent that this is used for productivity enhancing investments, it is not something that the Bank will want to curb prematurely. Consumer credit growth is decelerating, but there is some uncertainty about mortgage credit and the housing market which may yet prompt an earlier tightening move if activity does not slacken. The FED funds target rate is likely to remain in the range of 0% to 0.25% for the rest of this year and until at least mid-2012. The Fed clearly has no date in mind for its first rate hike and will want to see how both unemployment and core inflation look early next year before contemplating a timetable. At present, with the payroll tax holiday and other fiscal stimulus measures set to end this year, economic growth is unlikely to be much above 2% in the first half of 2012. If so, unemployment will remain too high and core inflation too low for the Fed to tighten policy at that time. The Fed is not expected to begin a new round of quantitative easing this year, following completion of QE2 in June. The end of QE2 is not expected to affect BOND YIELDS much, or for long, as the date has been well advertised and yields are currently being pushed lower by economic weakness and the prospective easing of headline inflation. Over the next few months that portion of the economic slowdown attributable to a shortage of Japanese parts will ease, and lower gasoline prices will allow consumer spending to accelerate somewhat, both at home and abroad. As a result, the 10year bond yield is apt to gradually rise from below 3.0% towards the 3.25% to 3.50% range by early fall. But it won’t likely stay that high for long as markets begin to worry about a renewed slowdown in early 2012.

by William Tharp Yields will also swing up and down according to economic and financial developments in Greece and other European countries, but the precise timing is hard to predict. A Greek default appears likely eventually but may be postponed long enough for the European banking system to shore up its defenses, thereby limiting collateral damage. 4.►

The CANADIAN DOLLAR is expected to move within a range of 97 to 103 for most of the remainder of this year in reaction to slowing global growth and a ratcheting down of commodity prices. Within that time there will likely be several aborted rallies for both commodity prices and the dollar as investors re-enter the market too early. We note, however, that Mid-east unrest remains a significant wild card for oil prices. Towards the end of the year, or in early 2012, we expect the loonie to begin a renewed rise assuming that the slowdown in Asia is ending and commodity prices begin to rise.

5.►

The US DOLLAR is apt to gain modestly against the commodity currencies in the immediate future but eventually lose ground once global growth reaccelerates. It is apt to bounce around against the European currencies, albeit with a rising trend as European growth slows, and lose ground to the Asian currencies. The Indian rupee won’t likely embark on a sustained rise, however, until Indian stocks are poised for sustained gains (which might be towards the end of the summer). Despite a weak economy, the yen is likely to be somewhat stronger as insurance money flows in to settle earthquake claims and as global equity markets recover (and the US dollar returns to being the key carry trade currency).

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12-I

12-II

69.49 1.005 99.5 80.00 156.9 1.395 102.5 6.420 45.00

69.58 1.005 99.5 79.50 155.9 1.380 102.5 6.380 44.80

69.28 0.995 100.5 79.50 156.2 1.370 103.5 6.300 44.20

0.87 -0.03

0.02 2.93 3.25 0.13 2.91

0.89 2.90 3.00 1.00 2.01

0.84 -0.05

0.06 2.90 3.25 0.13 2.84

0.90 2.85 3.00 1.00 1.95

0.85 -0.10

0.07 2.85 3.25 0.13 2.78

0.92 2.75 3.00 1.00 1.83

0.85 -0.10

0.10 2.95 3.25 0.13 2.85

0.95 2.85 3.00 1.00 1.90

0.84 -0.05

0.11 3.10 3.25 0.13 2.99

0.95 3.05 3.00 1.00 2.10

0.83 -0.05

0.12 3.05 3.25 0.13 2.93

0.95 3.00 3.00 1.00 2.05

68.58 0.980 102.0 79.00 156.4 1.360 105.1 6.220 43.60

1.00 -0.05

0.15 3.00 3.33 0.17 2.85

1.15 2.95 3.17 1.17 1.80

68.09 0.955 104.7 79.50 154.1 1.340 107.9 6.140 43.00

1.08 -0.05

0.32 3.15 3.58 0.33 2.83

1.40 3.10 3.42 1.42 1.70

69.06 0.950 105.3 81.00 150.7 1.310 108.4 6.080 42.25

12-III

This is our “baseline” scenario for the next four quarters. It is updated monthly. For alternative scenarios the reader may consult the Financial Monitor.

0.83 -0.13

Interest Rate Differential (Canada-US) Treasury Bill 0.58 0.83 Bonds-10yr 0.21 0.17

0.96 3.31 3.00 1.00 2.35

0.13 3.44 3.25 0.13 3.31

0.16 2.72 3.25 0.13 2.56

United States Treasury Bill (90-day) Treasury Bond (10-yr) Prime Fed Funds Target Spread: 10-yr - T Bills

0.97 3.08 3.00 1.00 2.11

68.83 0.990 101.01 80.10 156.8 1.400 104.04 6.460 45.00

Scenario B: Recovery Weak But No Further Stimulus

0.14 2.91 3.25 0.13 2.77

0.74 2.93 2.83 0.83 2.19

INTEREST RATES Canada Treasury Bill (91-day) Government Bond (10-yr) Prime Target Overnight Rate Spread: 10-yr - T Bills

* Index based on CDN$, Euro, Pound, Yen

68.37 0.986 101.40 80.90 159.9 1.429 104.43 6.474 45.00

71.18 69.75 1.013 0.986 98.71 101.39 82.60 82.30 158.1 159.4 1.359 1.367 98.76 100.46 6.661 6.585 44.86 45.27

74.55 1.039 96.25 85.90 155.1 1.291 90.34 6.770 46.49

Aug

US Dollar Index* Can. Dollar CDN/US Can. Dollar US/CDN Japanese Yen British Pound Euro Australian Dollar Chinese Yuan Rmb Indian Rupee

Jul

Scenario B: Global Recovery Pace Decelerates Temporarily; US Dollar Mixed

27-Jun

Projected Sep 11-IV

CURRENCIES

10-III

Actual 10-IV 11-I

June 28, 2011 Forecast - Base Scenario

ECONOMIC MONITOR

by Stephen Gaskin

Stock Market Outlook for the Rest of 2011 Overview North American stock markets began the year poised to perform well. The US economy appeared to be sustaining its recovery and emerging markets continued their strong growth. Strong emerging country economic growth was particularly beneficial for Canadian equities as it supported rising commodity prices which encouraged investment in Canadian commodity producers. As the table below indicates, the 52 week returns on North American equities have been solid.

S&P/TSX AND COMMODITY PRICES

16000

900

S&P/TSX

14000

800

BOC Commodity Price Index 12000

700

10000

600

8000

500

6000

400 300

4000

Last month: May 2011

2000 88

200

1. US Economic Policy

Percent changes as of June 24, 2011 Since Apr 29 YTD 52-week TSX -9.5 -3.9 10.4 DJI -6.7 3.2 17.8 S&P 500 -6.7 1.2 18.2 NASDAQ -7.4 0.3 19.7 As the year progressed, however, a number of risks materialized and negatively impacted investor sentiment. US equity markets peaked on April 29 (the TSX peaked on April 5). Some of the risks were anticipated and prompted us to issue a caution about equity markets in the weekly Financial Monitor on April 8, 2011. (Since our new format was adopted on April 15, 2011, we have maintained a “caution/neutral” stance on equities). And the updated quarterly equity market projections in the May 26 Market Monitor also pointed to some equity market weakness through 2011 Q4. How are North American equity markets likely to perform for the rest of the year? We identify four key risk areas: monetary and fiscal policy, the US economic ‘soft patch’, overseas developments, and oil/geopolitical concerns. For the remainder of the year, we feel the risks to stock markets are somewhat weighted to the downside; there is a significant probability that stock markets could dip by a further 5% to 15% from their current levels in the second half of 2011.

At the beginning of 2011, after the passage of the Tax-Relief Act in December 2010, and the commencement of QE2, it appeared as though US fiscal and monetary policy was sufficient to sustain economic growth at levels capable of slowly reducing unemployment and bringing the inflation rate back to the Fed’s informal 2% target. In short, a deflationary episode seemed a declining probability event and unemployment was moving in the right direction. But as it turned out, US economic growth was lower than anticipated. Cue the end of the Fed’s quantitative easing program in June. Although the Fed has pledged to maintain low interest rates for “an extended period of time”, and will likely also maintain the size of its balance sheet, the end of QE2 signals the end of additional monetary stimulus just as the US economy is showing signs of slowing down – and this worries markets. One might conclude, therefore, that conditions would be ripe for more monetary stimulus; and although we anticipate this will happen beyond 2011, we feel that the Fed’s battered credibility, as well as the recent rise in core inflation, will prevent it from acting further to stimulate the economy this year. On the fiscal side of the ledger, the provisions of the Tax Relief Act will largely expire at the end of 2011. At this point, strained government finances (at all levels), and the need to address large Federal budget deficits are likely to result in fiscal withdrawal which will act as a further drag on US economic growth.

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Further into the future, the government will also have to address unfunded entitlement programs in order to satisfy the market that it has a long-term plan to deal with large and persistent budget deficits. All said, the financial crisis dealt a blow to the ability of US fiscal and monetary policy to respond to additional economic shocks. The prospective ‘sterilization’ of US policy tools, at least in the near-term, is worrying to stock markets because a number of potential risks continue to threaten the US economy. 2. US Economic ‘Soft Patch’ Although US fiscal and monetary policy stimulus was successful in boosting asset prices (with the notable exception of US housing), little progress has been made in resolving global imbalances that lie at the root of the financial crisis and continue to hinder the labour market recovery in the US. ENERGY AND FOOD PRICES 160

250

United Nations Food Price Index 2002-2004 =100 200

120

150

100

West Texas Intermediate $US/bl

50 02

Last month: May 2011 06

In addition to high unemployment, the prices of many commodities, food and energy in particular, have risen substantially over the course of the year and eaten into households’ disposable incomes – in North America, but even more acutely in emerging markets where food and energy comprise a larger share of household budgets. The net effect of these price increases is less money left over to support private consumer demand. The prospect of slowing global consumer demand is a negative for stock markets, although there is a good probability that lower energy prices in the second half of the year will free up households’ disposable income. In the US,

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however, the combined impact of stagnating consumer spending and reduced fiscal expenditures makes it hard to identify the sources of significant economic growth in the near-term. 3. Overseas Developments The European debt crisis has weighed on markets since it began in late 2009 – although the seeds of the crisis were sown much earlier and lie in the accumulation of imbalances within the European Union. These imbalances are perpetuated by the rigidity of the European currency regime which does not allow un-competitive countries to improve their competitiveness temporarily by devaluing their currency. The compression of interest rate spreads between peripheral, less-competitive, European countries (Greece, Portugal, Ireland, and Spain) and Germany also facilitated a large run-up in debt that crystallized in the current fragile and unpredictable state of affairs. At some point, we expect that Greece will default on its loans, or that it will leave the Euro and return to the Drachma – at a much lower exchange rate – which, like a default, would result in losses for holders of Greek debt. Thus far, the European Central Bank and the IMF have successfully papered over the problem as Greece has continued to ram through tough austerity measures to reduce its budget deficit. However, Greece may be approaching the limits of its willingness to endure further austerity; as the recent confidence vote illustrates, Parliament, and main street Greeks, may not be willing to bend much further. At that point, the ECB and IMF would be forced to decide if they will continue to support Greece, or allow it to default. The conclusion to be taken from this discussion is that the situation in Greece is very precarious. In the event of a Greek default, European banks would bear losses, as would (to a lesser extent) banks outside of Europe (including Canada and the US) who have lent directly to Greece, or indirectly to banks that hold Greek debt. Runs on the banking system are possible. The domino effect of capital losses across the global banking system is a very unsettling prospect for stock markets, and will be for quite some time until a resolution is reached.

ECONOMIC MONITOR

The Chinese economy has been the driving force underpinning global economic growth. However, in the past few months, the market has increasingly realized that China may be a victim of its own success. Strong export led growth in China, fueled by ultra-loose monetary and fiscal policy and the rapid inclusion of many Chinese citizens into a growing middle class, has increased global demand for a wide array of commodities and has led to price inflation.

be under control and that a bubbling Chinese housing market may be overdue for a correction that would result in a ‘hard landing’ for the Chinese economy. Chinese copper consumption, which is an indicator of Chinese economic growth, has recently started to trend downward. The markets will no doubt keep a close eye on the fortunes of China, and India for that matter, for signs of a slowdown.

160

250

140

200

120

150

100

-2

10 8

CHINA COPPER CONSUMPTION

300

CHINA INFLATION AND OIL Chinese CPI, yoy % change WTI ($US/bl)

000 tonnes

100 50 0

-4 2005

Last month: May 2011 2006

2007

2008

2009

2010

CHINA INTEREST AND RESERVE RATES

2 1 0 2007

Central Bank Lending Rate Small Bank Reserve Ratio Large Bank Reserve Ratio

Last month: June 2011

2008

Last month: April 2011 2009

2010

2011

The Japanese earthquake has also been a negative factor for global growth, and in particular for North American growth because of Japan’s integral role in automotive supply chains. However, as the Japanese economy continues to recover from the devastating earthquake, we expect it will contribute positively to global growth going forward. This should provide a small boost to the stock market’s growth expectations. 4. High Oil Prices and Geopolitical Tensions At the beginning of 2011, oil prices were up from their recession lows on the back of increasing end user demand, investor interest, and because of increased interest as a hedge against inflation. However, the coming of the ‘Arab Spring’, capped by the revolt in Libya, which produces about 2% of the world’s oil (the high quality, light sweet crude variety), elevated the risk of social unrest spreading to larger oil producers in the Middle East and drove up the price of oil.

7 2008

2009

2010

2011

Policy tightening in China threatens to downshift the engine of global growth and reduce corporate earnings. In the event of a ‘soft landing’, inflation would ease without too great an impact on growth. However, markets fear that inflation may not

Year-over-year percent change 2007

2011

Chinese demand has manifested most clearly in higher food and energy prices. And Chinese households spend a greater proportion of their income on these items than their developed world counterparts. Consequently, Chinese citizens are more vulnerable to price shocks – a point not lost on the Chinese government that is ever-fearful of social unrest. As a result, Chinese policy makers have responded in earnest to try to get ahead of the curve on inflation by raising the central bank lending rate and the reserve ratios of both large and small banks. 8

-50 -100

The effects of high oil prices on stock markets have been discussed above, but suffice to say that as long as instability in North Africa and the Middle East (MENA) persists, the price of oil will be higher than it would otherwise be, and households worldwide will be paying more for food and energy, leaving them DundeeWealth

less to spend on discretionary goods and services. Elevated oil prices will also make the battle against inflation in emerging markets harder to win, and potentially handcuff the ability of monetary policy in the developed world to further stimulate the economy without sacrificing inflation targets. Iran’s nuclear ambitions add a further wild-card. The situation in the MENA is negatively weighing on stock markets insomuch as it negatively impacts the prospect for global growth. Until a durable solution quells the unrest, oil prices will contain an elevated risk premium.

Summary The factors impacting stock markets at present and in the next six months are biased toward the downside. Consequently, we feel there is a meaningful probability that stocks will suffer additional losses in the second half of 2011, likely in the range of 5% to 15% from their current levels.

Exchange Rate Rigidity - An Opinion on Stupidity Milton Friedman must be rolling over in his grave! He believed in floating currencies because he knew that over time countries would show natural divergences in output, productivity, wage rates, and social/economic policies. Such divergences would, in a fixed exchange rate system, lead to significant external imbalances; some countries would end up with large surpluses and some with large deficits. It was always so! But prior to WW-I such imbalances were corrected through domestic deflation and depression. In modern economic systems, however, where there are unions, extensive social programs with transfer payments and other entitlements, together with inflexible wages and salaries, Friedman recognized this wouldn’t work. The unemployed would vote (or otherwise force) governments advocating deflationary/depressioninducing policies out of office. Let me be clear: today’s economic crises result in large part directly from governments’ attempts to fix and/or tamper with exchange rates. Take the crisis in Europe: even the economically challenged must by now have concluded the best prescription for Greece is massive currency devaluation. But such is impossible under the present arrangement. Greece is uncompetitive; domestic wages and productivity are seriously out of line with German wages and productivity, and so are Greek social policies. That every Greek today drives a Mercedes and retires at 58 is not a testament to Greek ingenuity DundeeWealth

by Martin Murenbeeld

but to the idiocy of Greece being in the Eurosystem and the stupidity of Greece’s lenders and bankers. Greece cannot repay the debt it has run up out of future GDP; it will accordingly default. Had Greece not been in the Eurosystem, there would have been no convergence of Greek-German interest rates. In the absence of convergence the markets would have been significantly less receptive to government borrowing. And the Greek drachma would have declined periodically against the deutsche mark/euro to make up for Greece’s relatively high wages, low productivity, and costly social policies. So would the currencies of the other PIIGS had they not adopted the euro! (Did the reader per chance hear David Cameron thank God the UK had not adopted the euro?) The proof is in the chart overleaf: the currencies of the PIIGS declined consistently against the deutsche mark prior to 1999 when the Eurosystem commenced. Only those dreaming in 1999 of far-off Euro-political nirvana thought this would change. It didn’t and it almost certainly won’t in the foreseeable future! To keep Greece in the Eurosystem Germany and the other surplus countries will have to transfer much of this surplus to Greece’s creditors. We’ll see how they like this! As evidenced by its massive external imbalance, the US dollar is also much too rigid versus other currencies (except the Canadian dollar: it floats). In the first instance, the US has a whopping deficit in its

ECONOMIC MONITOR

PIIGS EXCHANGE RATES January 1957 to December 1998 Units per Deutsche Mark: January 1957 = 100

100

Index Value

Ireland

21.1

Italy

15.0

Spain

10.9

Portugal

Log Scale

Greece

Euro introduced January 1999

6.7 4.3

57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01

energy trade; this deficit bleeds dollars directly and indirectly into the coffers of OPEC, Russia and other oil-exporting countries. Such countries have been loathe to let their currencies rise significantly, and the US government has been loathe to raise the domestic price of oil by other means. As such, oil-exporters are awash in dollar reserves. They put these dollars to work in the world’s capital markets where this liquidity is lent to, among others, Greece and the rest of the PIIGS!

The PIIGS currencies declined dramatically against the German deutsche mark over the years, before the advent of the euro. The Greek drachma, for example, declined by 96% from 1957 to 1999. With such a history, it is somewhat surprising that a crisis did not occur sooner.

One can argue that the US and Greece should change their ways. But this is spitting into the wind; the US will not be, and does not want to be, like China, and Greece will not be like Germany, euro or no euro. And because of that, when currencies aren’t flexible, there will be crises!

So that is where we stand today, with crises all around. Someone once said that one fool can ask more questions than 10 wise men can answer. Similarly, one stupid theory–fixed exchange rates–can The US also has huge trade and private investment turn the world economy into a mess which will take deficits with China. Because of the rigidity of the more than ten wise men, and a number of years, to renminbi/dollar exchange rate, China’s reserves correct. are now in excess of $3.0 trillion. Where is all this money invested? In the paper of the US and Greek Did I mention we like gold? governments, among other things! In short, China’s external surplus is feeding the Greek and American external deficits.

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MONTHLY REVIEW ► CANADA – ECONOMIC GROWTH

CANADA GROSS DOMESTIC PRODUCT

12 10 8

Too much of the first quarter’s 3.9% GDP growth came from inventory accumulation. Consumer spending has turned soft.

6 4

2 0 -2 -4 -6 -8

annualized growth rate

-10 80

Last quarter: 2011 Q1 90

CANADA MONTHLY GDP

1.0 0.8 0.6 0.4

While March saw some improvement over February, the trend for growth is down.

0.2

0.0 -0.2 -0.4 -0.6 -0.8 -1.0 -1.2

Percent change month-to-month 2008

2009

Last month: March 2011 2010

2011

CANADA GDP FORECAST Forecast through 2012

6 4

We expect future growth to be relatively weak.

0 -2 -4 -6 -8

Annualized quarterly rate of change 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

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ECONOMIC MONITOR

MONTHLY REVIEW ► CANADA – ECONOMIC GROWTH

CANADA LEADING INDICATOR 2.0 1.5 1.0

The leading indicator has been quite strong.

0.5 0.0 -0.5 -1.0 -1.5

Last month: May 2011

Percent change month-over-month

-2.0 2007

2008

2009

2010

2011

CANADA JOB CREATION

80 60 40 20

But job creation appears to be slowing...

0 -20 -40 -60 -80 -100

000s, 3-month moving average

Last month: May 2011

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

CANADA UNEMPLOYMENT RATE

14 13 12 11

...even though the unemployment rate is falling.

10 9 8 7 6 5 4

Percent

Last month: May 2011

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

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MONTHLY REVIEW ► CANADA – ECONOMIC GROWTH

CANADA MANUFACTURING SHIPMENTS

20 10

Manufacturing shipments fell back in April.

0 -10 -20 -30

Percent change year-over-year

Last month: April 2011

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

2.4

CANADA INVENTORY-TO-SHIPMENTS RATIO

2.2 2.0

The inventory ratio rose slightly.

1.8 1.6 1.4 1.2

Last month: April 2011

1.0

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

CANADA MANUFACTURING NEW ORDERS

40 30 20

After a surge in March, new orders were the weakest since December.

10 0 -10 -20 -30 -40

Percent change year-over-year

Last month: April 2011

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

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ECONOMIC MONITOR

MONTHLY REVIEW ► CANADA – ECONOMIC GROWTH

CANADA RETAIL SALES

16 12 8

Retail sales have flattened out since November, even though gasoline prices were rising.

4 0 -4 -8 -12

Percent change year-over-year

Last month: April 2011

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

CANADA HOUSING STARTS

300

Housing starts have been subdued since February. Lower mortgage rates may buoy the housing market for several more months, but we expect a weakening trend to begin fairly soon.

250

200

150

100

000s, total, all areas

Last month: May 2011

50 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

CANADA NEW MOTOR VEHICLE SALES

180 160

New vehicle sales have been fairly constant from September to April. Anecdotal reports say May was down, but parts shortages (Japanese earthquake) were a factor.

140

120 100 80 60 40

000s, s.a.

Last month: April 2011

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

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MONTHLY REVIEW ► CANADA – INFLATION

CANADA CONSUMER PRICE INFLATION

5.0 4.0

Headline inflation remained at 3.3% in April. Bigger-thanexpected declines in gasoline prices could see the headline rate fall below 2.5% by July, and possibly down to 2.0% in the fall.

3.0

Target band

2.0 1.0 Total CPI

0.0

Core CPI

-1.0

Last month: April 2011

Percent change year-over-year

-2.0 2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

CANADA INDUSTRIAL PRODUCT PRICE INFLATION

10 8 6

The IPPI has been at 5.0% for the last two months and will be slower than the CPI to come down.

2 0 -2 -4 -6 -8 -10

Percent change year-over-year

Last month: April 2011

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

CANADA AVERAGE WEEKLY EARNINGS

12 10

Public Administration

Industry wage gains remain near 4.0% per year. Public sector increases are closer to 2.0%.

6 4

Industry

2 0 -2 -4 -6

Percent change year-over-year

Last month: March 2011

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

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ECONOMIC MONITOR

MONTHLY REVIEW ► CANADA – INFLATION

NEW HOUSE PRICES St. John's Halifax

April 2011

Fredericton Montreal

New house price increases are still high in some cities, but Calgary and Edmonton, after an earlier boom, are relatively weak.

Ottawa-Hull

Toronto Kitchener Winnipeg Regina Saskatoon Calgary Edmonton Vancouver

Percent change year-over-year

Victoria

-3

-2

-1

Percent change year-over-year

Index, 2007=100

100

CANADA NEW HOUSE PRICES

110

Nationally, new house prices were up 1.9% in April and saw modest acceleration. (Resale house prices are up more sharply, see chart on page 18).

-4

-8

Last month: April 2011 30

-12 81

Source: Statistics Canada New House Price Index

12 10

Inflation expectations were slightly above 2% in May with some slippage from April.

CANADA INFLATION EXPECTATIONS Difference (inflation expectation) Long term bond Real Return Bonds

6 4 2 0

Last month: May 2011 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

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MONTHLY REVIEW ► CANADA – INFLATION

CANADA HOURLY COMPENSATION

8 7

Average 1982 to Latest: 3.85%

Hourly compensation has been rebounding.

5 4 3 2 1 0 -1

Percent change year-over-year

Last quarter: 2011 Q1

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

CANADA LABOUR PRODUCTIVITY Average 1982 to latest: 1.37%

4 3

The recent gain in productivity has lost some steam.

2 1 0 -1 -2 -3

Percent change year-over-year

Last quarter: 2011 Q1

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

8 6

CANADA UNIT LABOUR COSTS Average 1982 to latest: 2.47%

Unit labour cost increases have risen to above 2% per year.

2 0

-2 -4

Percent change year-over-year

Last quarter: 2011 Q1

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

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ECONOMIC MONITOR

MONTHLY REVIEW ► CANADA – DEBT AND CREDIT Canadian consumer credit growth has been slowing. Mortgage credit growth has accelerated in recent months but may be set to slow after April. Business credit growth appears to be breaking out of the doldrums, however.

CANADA CONSUMER CREDIT GROWTH

450

CANADA CONSUMER CREDIT

500

$ volume, billions

400

350

250 200 150

100

-5 -10

300

Percent change year-over-year

Last month: April 2011

72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

CANADA RESIDENTIAL MORTGAGE CREDIT GROWTH

Last month: April 2011

0 07

CANADA RESIDENTIAL MORTGAGE CREDIT

1200

$ volume, billions 20

1000

800

600

400

200

-5

Percent change year-over-year

Last month: April 2011

Last month: April 2011 0

72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

CANADA SHORT-TERM BUSINESS CREDIT GROWTH

CANADA SHORT-TERM BUSINESS CREDIT

450

$ volume, billions

400

30 350

25 20

300

10 5

100

-10 -20

Percent change year-over-year

Last month: May 2011

72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

200 150

-5 -15

250

Last month: May 2011

0 07

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MONTHLY REVIEW ► CANADA – DEBT AND CREDIT

US AND CANADA DEBT-TO-INCOME RATIOS

170

US household and unincorporated businesses

160

Canada’s debt-to-income ratio nudged higher in the first quarter (mainly an increase in mortgage debt brought on by low mortgage rates and the prospect of tighter mortgage lending rules).

150 140

US household

130 120 110

Canada household and unincorporated businesses

100 90 80

Last quarter: 2011 Q1

Percent of personal disposable income

70 98

CANADA INTEREST PAYMENTS 12 11 10

The interest portion of debt repayment is still relatively low (but low interest rates have sparked a surge in borrowing – just as in Greece, Ireland and Portugal).

Total interest

7 6

Mortgage interest

5 4 3

Consumer interest

2 1

Last quarter: 2011 Q1

Percentage of disposable income

0 90

CANADA SAVINGS RATE

24 22 20 18

The savings rate is nudging higher but could shoot up if/when the housing market turns down.

14 12 10 8 6 4 2

Percentage of disposable income

0 81

DundeeWealth

Last quarter: 2011 Q1 95

ECONOMIC MONITOR

MONTHLY REVIEW ► CANADA – WEALTH CREATION

CANADA CORPORATE PROFITS BEFORE TAXES

260 240

Profits continued to rise in the first quarter but still have some way to go to reach the pre-crisis peak.

200

180

160

140

120

100

Last quarter: 2011 Q1

20 80

Percent change year-over-year

S&P/TSX Composite (month end)

5 4

S&P/TSX COMPOSITE

16000

220

Stock prices, on the other hand, almost reached the pre-crisis peak before pulling back in April.

Percent of GDP

Total (bn$)

14000

12000

10000

8000

6000

4000

-15

2000

-30

Last month: May 2011

-45

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

CANADA AVERAGE HOUSE PRICE (RESALES) 400 360

House prices continue to rise on average, although an excessive increase in Vancouver (especially high-end homes) has distorted the numbers.

$000

Percent change year-over-year

35 30

320

280

240

200

160

120

-5

-10

Last month: May 2011

0 81

-15

Source: Canadian Real Estate Association

DundeeWealth

MONTHLY REVIEW ► CANADA – FINANCIAL MARKETS

CANADIAN DOLLAR

110 105 100 95

The Canadian dollar is apt to correct further downward, along with most commodity prices.

85 80 75 70 65 60

Daily, last date: June 24, 2011

US cents

55 98

OIL PRICE

High oil prices have given the Canadian dollar strong support, but prices need to fall further if global growth is to reaccelerate.

150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0

New York Crude

Weekly, Friday data Last date: June 24, 2011

US$/bbl 79

CANADA INTEREST RATES

22 20 18

Short-term rates appear unlikely to be raised until next year. Bond yields are still trending lower (along with potential economic growth) in all of the developed countries.

16 14

T-bills

12 10

10-year bond

8 6 4 2 0

Percent

Last month: May 2011

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

DundeeWealth

ECONOMIC MONITOR

MONTHLY REVIEW ► CANADA – FINANCIAL MARKETS

CANADA-US INTEREST RATE DIFFERENTIALS

7 6 5

5-year differential

Canadian interest rates remain higher than US rates at the short end of the yield curve.

90-day differential

3 2 1 0 -1 -2

Last month: May 2011

-3 82

CANADA-US LONG TERM YIELD DIFFERENTIAL

1.4 1.2

10-Year

1.0 0.8

Ten year yields are about equal but US 30-year yields are quite a bit higher.

0.6

0.4 0.2 0.0 -0.2

30-Year

-0.4 -0.6

Weekly Last date: June 24, 2011

-0.8 -1.0 97

CANADA’S CURRENT ACCOUNT 16

Canada’s current account deficit is still large, though falling.

Billion $

48 36

-4

-12

-8

-24

-12

-36

-16 -20

Seasonally adjusted 93 94

Billion $, 4-quarter sum

95 96 97 98 99 00 01 02 03

Last quarter: 2011 Q1

-48 -60

04 05 06 07 08 09 10 11

DundeeWealth

MONTHLY REVIEW ► UNITED STATES – ECONOMIC GROWTH

US GROSS DOMESTIC PRODUCT

10 8 6

Weak consumer spending (thanks to higher gasoline prices) saw economic growth slide to just 1.9% in the first quarter. Weak wage growth was also a factor.

2 0 -2 -4 -6 -8 80

US GDP FORECAST

Growth may improve somewhat in the second half of 2011 as gasoline prices ebb and Japanese auto parts reappear on the market following the disruptive earthquake in March. But following an initial bounce, we expect growth to disappoint.

Last quarter: 2011 Q1

Annualized growth rate

-10

Forecast through 2012

6 4

2 0 -2 -4 -6

Annualized quarterly rate of change -8 00

US LEADING INDICATOR

1.5 1.0

Although the leading indicator rebounded in May, we expect future numbers to be less impressive.

0.5

0.0 -0.5 -1.0

Last month: May 2011

Percent change month-to-month

-1.5 2007

DundeeWealth

2008

2009

2010

2011

ECONOMIC MONITOR

MONTHLY REVIEW ► UNITED STATES – ECONOMIC GROWTH

US ISM MANUFACTURING INDEX

Below 50 indicates contraction

A big decline in the manufacturing index in May reflected slowing global growth.

50 40 30

Last month: May 2011

Index

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

US ISM SERVICES INDEX

Below 50 indicates contraction 70

The services sector index rose slightly in May but is not particularly strong for a period of economic recovery.

50 40 30

Last month: May 2011

Index

20 97

US INDUSTRIAL CAPACITY UTILIZATION 90 88 86 84 82

The capacity utilization ratio appears to be flattening out at a low level.

80 78 76

Average 80.4

74 72 70 68 66 64

Percent

Last month: May 2011

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

DundeeWealth

MONTHLY REVIEW ► UNITED STATES – ECONOMIC GROWTH

US CONSUMER CONFIDENCE INDEX

160 140 120

Consumers were less happy in June.

100

80 60 40 20 0

Last month: June 2011

1985 = 100

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

After three good months, May’s job creation fell back to a disappointing 54,000, bringing the three month moving average down a bit. It will fall further in June.

600 500 400 300 200 100 0 -100 -200 -300 -400 -500 -600 -700 -800

US JOB CREATION

000s, monthly change 3-month moving average

Last month: May 2011

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

US UNEMPLOYMENT RATE

11 10 9

After reaching a low of 8.8% in March, the unemployment rate rose to 9.1% in May.

7 6 5 4 3

Percent

Last month: May 2011

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

DundeeWealth

ECONOMIC MONITOR

MONTHLY REVIEW UNITED STATES â&#x20AC;&#x201C; ECONOMIC GROWTH

Retail sales fell between April and May (even before price increases were removed). Nevertheless, the year-over-year increase is still very large, and spread over many categories. In that light, recent weakness does not look aberrant.

US RETAIL SALES Nominal

15 10

5 0 -5 -10 -15

Last month: May 2011

Percent change year-over-year

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

US HOUSING STARTS

2.7 2.5 2.3 2.1 1.9

Housing starts remain depressed.

1.7 1.5 1.3 1.1 0.9 0.7 0.5 0.3

Millions of dwelling units

Last month: May 2011

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

US NEW AND EXISTING HOME SALES

1600

000s

000s 1400 1200

New home sales remain weak and existing home sales include repossessed house sales, which are depressing prices.

7700 7000

New home sales

6300

Existing home sales

1000

5600

800

4900

600

4200

400

3500

200 0

2800

Last month: May 2011

2100

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

DundeeWealth

MONTHLY REVIEW UNITED STATES â&#x20AC;&#x201C; INFLATION

US CONSUMER PRICE INFLATION

Seasonally Adjusted

14 12

Headline inflation rose to 3.3% in May and will likely go slightly higher in June before trending down. Core inflation rose to 1.5%.

Total

Core

6 4 2 0 -2

Last month: May 2011

Percent change year-over-year

-4

68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

US PRODUCER PRICE INFLATION

20 15

Total 10

Producer prices hit a new cyclical high of 7.2% in May but may start falling as soon as this month.

Core

5 0 -5

Last month: May 2011

Percent change year-over-year -10

68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

US EMPLOYMENT COST

6.5

Includes benefits

6.0 5.5 5.0

Even with benefits included, employment cost increases remain unusually small.

Average 3.68

4.5

4.0 3.5 3.0 2.5 2.0 1.5 83

DundeeWealth

Last quarter: 2011 Q1

Percent change year-over-year

1.0

ECONOMIC MONITOR

MONTHLY REVIEW UNITED STATES â&#x20AC;&#x201C; INFLATION

US HOURLY COMPENSATION INDEX

8 7

1989 to date average: 3.85

Hourly compensation is edging up.

5 4 3 2 1 0

Percent change year-over-year

Last quarter: 2011-Q1

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

US PRODUCTIVITY 7 6 5

And productivity has fallen back.

1989 to date Average: 2.35

4 3 2 1 0 -1

Percent change year-over-year

Last quarter: 2011-Q1

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

US UNIT LABOUR COSTS 6

1989 to date Average: 1.48

5 4 3

The resultant increase in unit labour costs suggests a slowdown in corporate profit growth ahead.

2 1 0 -1 -2 -3 -4

Percent change year-over-year

Last quarter: 2011-Q1

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

DundeeWealth

MONTHLY REVIEW UNITED STATES – INFLATION

CASE-SHILLER HOME PRICE INDEX

230

Resale house prices continue to fall, but there was a glimmer of hope in April when prices were virtually unchanged from March.

Percent change year-over-year

Case-Shiller Index, s.a.

210

20 15

190

170

150

130

-5

110

-10

-15

Last month: April 2011

Jan 2000 = 100

50 00

-20 -25

US INFLATION EXPECTATIONS

Difference Long-term Bond 30-yr Inflation-Protected Bonds

6 5

Inflation expectations, while elevated (gasoline prices), slipped a notch in May.

The “difference” is a measure of inflation expectations!

3 2 1

Last month: May 2011

Percent

US MONEY SUPPLY GROWTH

US money supply growth has reaccelerated, the result of quantitative easing.

8 4 0 -4 -8

Percent change year-over-year

Last quarter: 2011 Q1

68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

DundeeWealth

ECONOMIC MONITOR

MONTHLY REVIEW UNITED STATES – MONEY SUPPLY GROWTH

US MONETARY BASE

3000

Percent change year-over-year

Monetary base bn$

QE2 has pushed up the growth rate of the monetary base.

125

2500

100

2000

1500

1000

500

Last month: May 2011 0 2007

-25 2008

2009

2010

US M1 MONEY SUPPLY

2875

M1 + sweeps money supply bn$

And M1 growth has also accelerated.

2011

Percent change year-over-year

2750

2625

2500

2375

2250

4 2

2125

Last month: April 2011 2000 2007

9100

0 2008

2009

2010

US M2 MONEY SUPPLY

Percent change year-over-year

8500

M2 Money supply bn$

8800

M2 growth is up too, but the higher rate still lags behind that of the pre-crisis years – an indication that the increased supply of money is not circulating rapidly and having very little impact on inflation.

2011

9 8

8200

7900

7600

3 2

7300

Last month: May 2011 7000 2007

0 2008

2009

2010

2011

DundeeWealth

MONTHLY REVIEW UNITED STATES â&#x20AC;&#x201C; DEBT AND CREDIT

US CONSUMER INSTALLMENT CREDIT

2600

Total credit outstanding 2575 billion dollars

Consumer installment credit continued to grow in April.

6 4

2500

2475

2450

-2

2425

-4

2400

-6

1000 900

Last month: April 2011

-8 -10

2008

2009

2010

2011

US COMMERCIAL AND INDUSTRIAL LOANS Total credit outstanding billion dollars

Percent change year-over-year

10 5

600

500

-5

400

-10

300

-15 -20

Last month: May 2011

0 2007

-10

-20

-25 -30

2008

2009

2010

2011

US CONSUMER INSTALLMENT CREDIT

10 5 0

-30 -40

700

100

US COMMERCIAL AND INDUSTRIAL LOANS

800

200

2525

2350 2007

2550

2375

And C&I loan growth also shows continued improvement. Good for the banking sector!

Percent change year-over-year

-5

Percent change year-over-year

Last month: May 2011

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

DundeeWealth

-10

Percent change year-over-year

Last month: April 2011

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

ECONOMIC MONITOR

MONTHLY REVIEW UNITED STATES – FINANCIAL MARKETS

US INTEREST RATES

The Fed confirmed on June 22 that QE2 would end this month, as scheduled. But it also repeated that interest rates would remain unusually low for an extended period.

Bond Yields – 10-year

9 6

T-Bills

3 0

Last month: May 2011

Percent

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

AAA CORPORATE BOND YIELDS

7.5

Moody’s AAA Yield

Treasury yields have recently moved down more than better grade corporate yields.

3.5

Moody’s AAA – US 10-year rate spread

7.0

3.0

6.5

2.5

6.0

2.0

5.5

1.5

5.0

1.0

4.5 4.0

2-Jul-07

14-Jan-08

0.5

Daily Last day: June 22, 2011

Percent 28-Jul-08

9-Feb-09

24-Aug-09

8-Mar-10

0.0 20-Sep-10

4-Apr-11

source: Federal Reserve

HIGH-YIELD BOND YIELDS 24 22

And low grade corporate yields have been rising as slowing economic growth increases financial risk.

Merrill Lynch High Yield Corporate Bonds less US 10-year rate spread

Merrill Lynch High Yield Corporate Bond Yield

Daily Last day: June 22, 2011

4 2

Percent

3-Jul-07

15-Jan-08

2 0

29-Jul-08

10-Feb-09 25-Aug-09

9-Mar-10

20-Sep-10

5-Apr-11

DundeeWealth

MONTHLY REVIEW FOREIGN EXCHANGE RATES

CHINESE RENMINBI (YUAN)

Axis inverted 4

The renminbi continues to edge higher. But Congress is getting impatient again with the slow pace of appreciation.

6 7

Last month: May 2011

Units/US$

86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

JAPANESE YEN

75 80 85 90

The yen is pushing to break through 80. Insurance inflows and repayment of yen loans are the main factors.

100 105 110 115 120 125 130 135

Daily, last date: June 24, 2011

Units per US Dollar

140 02

POUND STERLING AND EURO 225

The euro continues to wobble, dragged down by sovereign debt worries and potential related banking sector problems. While we expect the euro to trend lower in the second half of 2011, disappointing US growth is keeping the US dollar weak for now.

Pound - US cents/unit

215

Euro - US$/unit

1.6

205

1.5

195

1.4

185

1.3

175

1.2

165

1.1 Pound

155

1.0

Euro

145

0.9

135

Daily, last date: June 24, 2011

125 02

DundeeWealth

1.7

0.8 0.7

ECONOMIC MONITOR

MONTHLY REVIEW INTERNATIONAL SHORT-TERM SPREADS

US-UK SHORT-TERM RATE SPREAD

10 8 6 4

US short-term rates are below UK rates.

2 0 -2 -4 -6 -8 -10

Percent

Last month: May 2011

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

US-GERMANY SHORT-TERM RATE SPREAD

8 6 4

US short-term rates are also below German/European rates.

2 0 -2 -4 -6 -8 -10

Percent

Last month: May 2011

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

US-JAPAN SHORT-TERM RATE SPREAD

10 8 6 4

US and Japanese short-term rates are about equal.

2 0 -2 -4 -6 -8 -10

Percent

Last month: May 2011

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

DundeeWealth

MONTHLY REVIEW INTERNATIONAL LONG-TERM RATES

US-UK 10-YEAR BOND YIELD SPREAD 2.0 1.5 1.0

US 10-year yields are below UK yields.

0.5 0.0 -0.5 -1.0 -1.5

Wednesday date Last date: June 22, 2011

7-Jan-98

16-Jun-99 22-No v-00

1-M ay-02

8-Oct-03

16-M ar-05 23-A ug-06

30-Jan-08

8-Jul-09

15-Dec-10

US-GERMANY 10-YEAR BOND YIELD SPREAD 2.0 1.5 1.0

German yields have fallen slightly below US yields.

0.5 0.0 -0.5 -1.0

Wednesday data Last date: June 22, 2011

7-Jan-98

16-Jun-99

22-No v-00

1-M ay-02

8-Oct-03

16-M ar-05

23-A ug-06 30-Jan-08

8-Jul-09

15-Dec-10

US-JAPAN 10-YEAR BOND YIELD SPREAD 6 5

Japanese yields remain the lowest (by far) of all developed country yields, growing debt worries notwithstanding. Deflation is a key reason.

3 2 1 0

Wednesday date Last date: June 22, 2011

7-Jan-98

DundeeWealth

16-Jun-99 22-No v-00

1-M ay-02

8-Oct-03

16-M ar-05 23-A ug-06

30-Jan-08

8-Jul-09

15-Dec-10

ECONOMIC MONITOR

COMMODITY PRICES 1. Bank of Canada commodity price indices

TOTAL COMMODITY

1000

(Weekly data to June 24, 2011)

TOTAL LESS ENERGY

425

2750

400

900

2500

375

800

2250

350

2000

700 600 500

ENERGY

3000

325

1750

300

1500 1250

275

1000

400

250

750

225

300 04

500 04

AGRICULTURE

400

METALS & MINERALS

750

650

350

600 325

550 500

275

450 400

250

350 225

300

200

250 04

2. Other indices

(Weekly data to June 24, 2011)

S&P GSCI COMMODITY

900

475

850

REUTERS/JEFFERIES CRB

ECONOMIST COMMODITY PRICE 250

450

800

225

425

750

400

700 650

375

600

350

550

325

500

300

450

200 175 150

275

400

125

250

350 300

Energy weight: 33%

225

Energy weight: 75%

250

Energy weight: 0% 100

200

175 04

World growth will likely keep commodity prices firm, but we can’t rule out more corrections as monetary policy continues to tighten in Asia and the Fed ends QE2.

300

The rise in commodity prices has stalled, indicative of a world economic “soft patch”.

700

375

DundeeWealth

COMMODITY PRICES 3. Metals (Weekly data to June 24, 2011)

NICKEL

56000 52000 48000 44000 40000 36000 32000 28000 24000 20000 16000 12000 8000 4000

COPPER

500 475 450 425 400 375 350 325 300 275 250 225 200 175 150 125 100 75

US$/tonne

4000 3500 3000 2500 2000 1500 1000 500 04

2800

1600 1500 1300

3000

1200

2750

2400

2500

2200

2250 2000

1400 1200 04

PLATINUM

2400

750 500

400

2000

4000

1800

3500

1600

3000

1400

2500

1200

2000

1000

1500

800

1000

GOLD US$/oz

500 300 04

4500

700

SILVER

5000

US$/oz

800 600

2200

900

1250 1000

1000

1750 1500

1600

1100

1800

1400

3250

2600

2000

US$/tonne

3750 3500

3000

LEAD

4000

US$/tonne

3200

US$/tonne

4500

ALUMINUM

3400

ZINC

5000

US cents/lb

Copper prices have stalled in recent weeks, which is also a warning on the global economy.

US cents/oz

Gold continues to soar however on the back of the debt crisis and other factors.

500

600 04

DundeeWealth

ECONOMIC MONITOR

COMMODITY PRICES 4. Energy (Weekly data to June 24, 2011) SPOT OIL

150 140

NATURAL GAS

US$/bbl

Earlier this year oil prices rose sharply, partly on the back of MENA geopolitical conflicts. More recently, the death of bin Laden and the IEA decision to sell 60 million barrels of oil from strategic reserves contributed to lower oil prices. Slowing global growth has also been a significant factor.

US$/million BTU

130 120

110 10

100 90

80 70

60 4

50 40

NY Crude

30 20

Henry Hub

0 04

EQUITY MARKETS 5. North America (Weekly data to June 24, 2011) TSX COMPOSITE INDEX

16000

S&P 500 INDEX

1600

15000

1500

15000

14000

1400

14000

13000

1300

13000

12000

1200

12000

11000

1100

11000

10000

S&P 500

1000

13 wk ma

TSX composite

10000

DJI

52 wk ma

9000

900

13 wk ma 52 wk ma

9000

800

8000

700

7000

600

DOW JONES INDUSTRIALS

13 wk ma 52 wk ma

6000 05

NASDAQ INDEX

3000

QE2 was very supportive for equities (and commodity prices). The end of QE2 is therefore not a positive development, if only from a psychological viewpoint. (Interest rates remain low, however).

2800 2600 2400

There are a number of factors hanging over the markets just now, as discussed starting on page 4 of this report.

2200 2000 NASDAQ

1800

13 wk ma 52 wk ma

1600 1400 1200 05

DundeeWealth

EQUITY MARKETS 6. Around the world

(Monthly data, last date May 2011)

JAPAN

22000 20000

GERMANY

9000 8000

18000

7000

16000

12000

5000

10000

4000

8000

12000 9000

3000

6000

2000

4000

15000

6000

14000

2000

3000

1000

Nikkei

DAX

Bombay SENSEX

0 00 01 02 03 04 05 06 07 08 09 10 11

00 01 02 03 04 05 06 07 08 09 10 11

CHINA

6500

RUSSIA

2600

00 01 02 03 04 05 06 07 08 09 10 11

2400

39000

5500

2200

36000

5000

2000

33000

4500

1800

4000

1600

3500

1400

3000

1200

2500

1000

2000

800

1500

600

1000

400

6000

500

200

3000

00 01 02 03 04 05 06 07 08 09 10 11

2600

30000 27000

Shanghai Composite

MSCI EAFE INDEX Month-end

2400 2200 2000 1800 1600 1400 1200 1000 800 00 01 02 03 04 05 06 07 08 09 10 11

DundeeWealth

24000 21000 18000 15000 12000

RTS-1

9000

BRAZIL

Mexican IPC 00 01 02 03 04 05 06 07 08 09 10 11

00 01 02 03 04 05 06 07 08 09 10 11

80000 75000 70000 65000 60000 55000 50000 45000 40000 35000 30000 25000 20000 15000 10000 5000 0

MEXICO

42000

6000

INDIA

21000

1800 1700

MSCI WORLD INDEX Month-end

1600 1500 1400 1300 1200 1100 1000 900 800

Bovespa 00 01 02 03 04 05 06 07 08 09 10 11

700 600 00 01 02 03 04 05 06 07 08 09 10 11

2025_A_EN_0408 MOE 9166

Views contained in this report regarding a particular company, security, industry or market sector are the views of the writer and do not necessarily represent the views of DundeeWealth Inc., its affiliates and subsidiaries. Views expressed should not be considered a recommendation to buy or sell nor should they be relied upon as investment advice. Information contained in this report is current as of the date of publication and has been obtained from third party sources believed to be reliable. DundeeWealth Inc., its affiliates and subsidiaries does not warrant or make any representations regarding the use or the results of the information contained herein in terms of its correctness, accuracy, timeliness, reliability, or otherwise, and does nor not accept any responsibility for any loss or damage that results from its use. 速 Registered trademark of its owner, used under license.

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JUNE 28 ECONOMIC MONITOR – A CORRECTION AND EMBELLISHMENT In the Economic Monitor of June 28, under the title “Stock Market Outlook for the Rest of 2011” it was noted there was a “significant probability that equity markets could dip by a further 5% to 15% from their current levels in the second half of 2011”. We rightfully received a number of questions regarding this statement as it neither reflected the equity scenarios in the May 26 Market Monitor nor the model valuation for equity markets at the end of May. Ergo, I would like to clarify our position on equity markets for the rest of 2011. First however let me stress that the four points raised in the article reflect fully our view of the headwinds facing markets since their peaks in April. But the conclusion overstates the degree of downside risk “from current levels”. The downside risk of 5% to 15% was meant to be based off the peaks in April. Given that the TSX had already declined nearly 10% from its peak at the time of writing, the article should have said that there was a further risk of another 5% (which I readily admit might have understated the immediate risk had the Greek parliament not voted to accept the government’s austerity plan, as this would

then have created huge – though not necessarily insurmountable - problems for the EU and its banking sector). To recapitulate, the table below is taken from the May 26 Market Monitor and represents our collective view of likely equity market developments going forward. Scenario A captures the downside scenario reasonably well, we think; the decline from the April peak to the Q4 average is about 13% for the TSX and about 12% for the S&P500. The probability-weighted average for each index is our “official” forecast. The reader can see that this forecast is somewhat neutral with respect to the second half of 2011. However, because on June 24 the TSX and the S&P500, at 11935 and 1268 respectively, were significantly below the probabilityweighted projections, the reader might also conclude markets could rise during the second half of 2011. We apologize for the confusion; I was derelict in my editing duties and the report went out without my final review. Martin Murenbeeld

S&P500 Forecast - quarterly average data 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1

1121 1135 1095 1204 1306

Actual

Reprinted from the May 26, 2011 Market Monitor

Scenario

2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3

1317 1226 1194 1163 1129 1099 1338 1323 1294 1342 1398 1447 1355 1395 1454 1526 1608 1695

A B C

0.15 0.60 0.25

Probability A B C Probability-Weighted Scenario

0.15 0.60 0.25

Forecast

0.15 0.60 0.25

1339 1327 1319 1361 1410 1457

S&P/TSX Composite Forecast - quarterly average data 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1

11587 11756 11999 13024 13935

Actual

Scenario

2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3

A B C

A Probability B C Probability-Weighted Scenario

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13663 12814 12364 12127 11625 11147 13865 13793 13425 13737 14118 14423 13905 14327 14817 15413 16224 17040 0.15 0.60 0.25

0.15 0.60 0.25

13845 13780 13614 13915 14270 14586

Forecast