Global Economic Research July 23, 2010 @ 07:30 EST

Daily Points
CAPITAL MARKETS RESEARCH
Derek Holt (416) 863-7707
derek_holt@scotiacapital.com
Gorica Djeric (416) 862-3080 — Tracking the numbers
gorica_djeric@scotiacapital.com

On Deck for Friday, July 23 BoC Events

Country Date ET Indicator Period BNS Consensus Latest BoC Overnight Lending Rate
Current Rate: 0.50%
CA 07/23 (07:00) CPI, All items (m/m) Jun -0.1 -0.2 0.3
Next Move: September 8 @ 1.0%
CA 07/23 (07:00) CPI, All items (y/y) Jun -- 0.9 1.4 Bias: Neutral
CA 07/23 (07:00) Core X8 CPI (m/m) Jun 0.1 0.1 0.3
CA 07/23 (07:00) Core X8 CPI (y/y) Jun -- 1.9 1.8

KEY POINTS:
 Canadian inflation soft, but up on seasonally adjusted terms
Fed Events
 European stress tests: surprised they'll all pass?
 Trichet: Tighten global fiscal policy now
 UK GDP handily beats expectations Fed Funds Target Rate
Current Rate: 0-0.25%
 German business confidence spikes to highest in 4+ years Next Move: August 10 @ 0-0.25%
 French consumer spending: mon Dieu! Bias: Dovish
 Italian consumers also retrenched
 Taiwanese factory output still rising
 No US releases today

CANADIAN CORE PRICES UP, SEASONALLY ADJUSTED

Seasonally UNnadjusted Headline/ Core (m/m % chg):

Actual: -0.1 / -0.1
Consensus: 0.0 / 0.1
Scotia: -0.1 / 0.1
Prior: 0.3/ 0.3

Seasonally UNadjusted Headline/ Core (y/y % chg):

Actual: 1.0 / 1.7
Consensus: 1.0 / 1.9
Prior: 1.4 / 1.8
Key International Events
 Yet again, your screens are not showing the seasonally adjusted figures
for reasons we’ll never get. Seasonally adjusted core CPI inflation rose ECB
0.1% m/m, reversing the sign on the unadjusted print of -0.1% m/m that Current Rate: 1.00%
is commonly reported. Seasonally adjusted headline inflation fell 0.2% Next Move: August 5 @ 1.00%
m/m, stronger than the unadjusted decline of -0.1%. Bias: Dovish

BoE
 That said, we’re going through a stretch in which the BoC has clearly Current Rate: 0.50%
said it will look through inflation distortions, and so discount any impli- Next Move: August 5 @ 0.50%
cations for monetary policy that has its sights set on a 12-18 month hori- Bias: Dovish
zon. The BoC has said it expects factors like the HST and its refunded BoJ
tax credits to put downward pressure of three-tenths of a percentage point Current Rate: 0.10%
off core and total CPI over 2010H2 before such effects reverse and sus- Next Move: August 10 @ 0.10%
Bias: Dovish

…2

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Global Economic Research July 23, 2010

Daily Points

tainably put inflation back up to its 2% target through the rest of its forecast horizon. The BoC is also signalling worries about
credit growth dynamics.

 Seasonal adjustments had a particularly powerful influence on clothing prices. Unadjusted, they fell 3.2% m/m, but adjusted
they fell by a much more modest 0.7% as discounting on Spring inventory is commonplace at this time of year.

 Within other seasonally adjusted components, 5 of 8 categories were up with only food (-0.1%), clothing and footwear (-0.7%)
and transportation (-0.7%) being down.

 Seven of the eight major components of the CPI recorded price increases in June, led by health and personal care goods (1.8% y/
y) and shelter (1.6% y/y). Clothing & footwear (-1.8% y/y) was the only exception. Within this component, women's and chil-
dren's clothing posted the biggest declines.

 Apart from Manitoba (-0.2% y/y), all provinces recorded price increases in June, but at a slightly slower clip than in the previous
month. This marks the second straight month of broad regional deceleration. Consumer prices advanced at the fastest clip in
Ontario, up 1.6% y/y, on higher price tags for passenger vehicles, vehicle insurance premiums as well as electricity and tele-
phone bills.

INTERNATIONAL
Strong UK GDP growth figures and solid German business confidence trump otherwise disappointing data on European consumers
within an overnight batch of indicators. The U.K. economy grew by almost twice as much as the consensus was forecasting for the
second quarter, and it was the country’s third straight quarter of recovery. Growth of 1.1% q/q, up from 0.3% in the first three
months of the year, marked the fastest expansion in four years, led by the business services, finance and construction sectors.

German (IFO) business confidence unexpectedly surged to 106.2 in July, up from 101.8 in the previous month. July’s result
marked the biggest jump in the index since the records for a reunified Germany began, and the highest reading since mid-2007, prior
to the onset of the recession. The expectations component was the strongest since March 2006 that beat today’s reading only by a
hair. Gains were broadly spread across both the current-situation and the expectation indices. The rebound in the German economy
is being supported by recovering business sentiment and strong export demand as German factories retool the world via capital
goods orders and benefit from Euro depreciation off the peaks.

Stress test results on European banks will be released at noon ET today. 91 banks from 20 countries will be put through the
ringer, but it’s a wide-set one that won’t squeeze out much water. We’ve heard from since before the parameters were set and com-
municated to the banks that they will pass; recall French minister Christine Lagarde’s comments at the start. Two years ago, stress
test results may have been greater cause for attention, in our view. Today, when the implicit understanding is that global central
banks and governments will not let major banks fail regardless of the rhetoric for fear of a replay of Lehman’s effects, stress tests
take a back seat to a blanket of protection.

ECB President Jean-Claude Trichet prescribes global fiscal belt tightening in an op-ed in today’s FT (subscribers go here: http://
www.ft.com/cms/s/0/1b3ae97e-95c6-11df-b5ad-00144feab49a.html). To us, tighten now or later, it doesn’t matter much in a six-
and-one-half-dozen-of-the-other sense. Yes, unbridled fiscal expansion forever will blow up with even nastier ultimate effects. But
the end result will entail lackluster growth and perhaps an outright double dip in the US economy come 2012-13, and long-run struc-
tural headaches stemming from hard-wired deficits no matter what the precise timing of the debate (See Capital Points, “Is the US
Facing a Debt Spiral Like Canada Once Did?”, July 16th 2010). Martin Feldstein may well be right in his view that a double dip on
fiscal consolidation may be worth it in the long-run (see FT: http://www.ft.com/cms/s/0/2447452e-95af-11df-b5ad-
00144feab49a.html), but the history of major debt shocks like the world continues to experience suggests no easy way out regardless
of the timing of fiscal exits.

European consumers unexpectedly retrenched in data released overnight. French consumer spending fell 1.4% m/m in June against
consensus expectations for a rise of 0.3%. The declines were broadly based except for flat auto sales. Italian retail sales also fell by
0.3% m/m in May, against expectations for a rise of 0.2%. Most of the decline was in non-food categories.

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Global Economic Research July 23, 2010

Daily Points

Taiwanese industrial production beat consensus estimates, increasing by 24% y/y in June, a slightly more moderate pace from
May’s 31% y/y advance. The m/m index readings were also up again. This was the tenth straight month of expansion for the manu-
facturing sector, led by higher demand for computers, mobile telephones and television screens. Taiwanese unemployment rate –
which currently sits at 5.2% - is at its lowest since late 2008, as foreign demand is keeping exports strong. The nation’s central bank
continues to keep an eye on the Taiwanese dollar to maintain export competitiveness.

Equities % change:
Fixed Income Government Yield Curves (%): Last Change 1 Day 1-w k 1-mo 1-yr
S&P/TSX 11667.76 154.43 1.3 -0.6 -1.2 9.3
2-YEAR 5-YEAR 10-YEAR 30-YEAR Dow 30 10322.30 201.77 2.0 -0.4 0.2 13.8
S&P 500 1093.67 24.08 2.3 -0.3 0.1 12.0
Last 1-day 1-w k Last 1-day 1-w k Last 1-day 1-w k Last 1-day 1-w k Nasdaq 2245.89 58.56 2.7 -0.1 -0.4 13.8
DAX 5295.68 -18.13 -0.3 2.7 2.3 16.1
U.S. 0.58 0.56 0.59 1.71 1.68 1.67 2.97 2.94 2.92 3.98 3.95 3.94
FTSE 6162.16 20.01 0.3 2.0 -0.7 17.4
CANADA 1.54 1.52 1.66 2.39 2.37 2.50 3.20 3.16 3.23 3.77 3.73 3.77 Nikkei 9430.96 210.08 2.3 -2.6 -5.0 -3.7
Hang Seng 20815.33 225.63 1.1 2.8 -0.2 5.0
GERMANY 0.76 0.70 0.78 1.68 1.61 1.61 2.71 2.67 2.61 3.37 3.35 3.31 CAC 3606.56 5.99 0.2 3.0 -1.0 6.9
Commodities % change:
JAPAN 0.15 0.15 0.15 0.36 0.34 0.35 1.08 1.07 1.09 1.84 1.84 1.86 WTI Crude 79.02 -0.28 -0.4 4.0 3.5 17.7
Natural Gas 4.62 -0.02 -0.4 2.3 -3.7 30.3
U.K. 0.86 0.80 0.75 2.15 2.08 2.04 3.43 3.36 3.33 4.29 4.25 4.16 Gold 1199.50 8.00 0.7 -0.7 -3.0 26.5
Silver 17.82 0.00 0.0 -2.4 -5.8 29.5
Foreign - U.S. Spreads (bps): CRB Index 266.86 5.33 2.0 1.0 2.7 6.2
Currencies % change:
CANADA 96 96 107 68 69 83 23 22 31 -21 -22 -17 USDCAD 1.0390 0.0018 0.2 -1.8 -0.1 -4.6
EURUSD 1.2939 0.0046 0.4 0.1 5.1 -8.5
GERMANY 18 14 19 -3 -6 -6 -26 -27 -32 -61 -60 -63 USDJPY 87.1300 0.1800 0.2 0.7 -3.0 -8.2
AUDUSD 0.8936 0.0001 0.0 2.8 2.3 10.0
JAPAN -43 -41 -44 -135 -134 -131 -189 -187 -183 -214 -211 -208
GBPUSD 1.5418 0.0159 1.0 0.8 3.1 -6.4
USDCHF 1.0430 0.0001 0.0 -0.7 -5.6 -3.0
U.K. 28 23 16 44 41 37 46 42 41 31 30 22

Source: Bloomberg. All quotes reflect Bloomberg data as at the time of publishing.
While this source is believed to be reliable, Scotia Capital cannot guarantee its accuracy.