These are stories Report on Business is following Wednesday, July 16, 2014.
'A loonie and a dove'
Watch the Canadian dollar this morning as the Bank of Canada releases its rate statement and monetary policy report, and Governor Stephen Poloz speaks to reporters.
He has a knack for knocking the currency lower.
“I suspect we’ll see some Canadian dollar weakness,” said chief currency strategist Camilla Sutton of Bank of Nova Scotia.
She expects the combination of the statement, report and news conference will “highlight the risk to the economic backdrop” of a stronger loonie, as Canada’s dollar coin is known.
Economist David Rosenberg agreed.
In a report titled “Bird watching: A loonie and a dove,” the chief economist at Gluskin Sheff + Associates noted that the “risks are tilted increasingly toward a very dovish press statement that could well underpin a softer tone to the loonie.”
The Canadian dollar has been sinking since Mr. Poloz took the helm of the central bank. It eroded in the first quarter of the year, and rebounded in the second, most recently trading in a range of about 93 cents U.S. to 94 cents.
That's a level that is no doubt causing some squirming in the seats at the Bank of Canada.
The central bank now holds what is known as a neutral bias, which means it’s sending no signal to the markets of whether the next move in its benchmark rate could be up or down.
Mr. Poloz, however, has left the door open to a rate cut, which had helped hold the currency down. And the weak jobs report from Statistics Canada last week helped feed into that.
The ups and downs of the loonie, which is just below 93 cents this morning, make for a huge issue in Canada, as the central banks holds out hope for an export rebound and manufacturing jobs disappear.
“While there’s no disputing the Canadian manufacturing sector has been in secular decline for more than 30 years, the loonie has been a pivotal factor in driving activity,” senior economist Benjamin Reitzes of BMO Nesbitt Burns said in a research note this week.
“Clearly the run to parity had a devastating impact on the sector,” he added, referring to his research - in chart form here - that shows how the movement in the currency has affected factory jobs, with a lagging impact.
“The only good news here is that the chart suggests we may be nearing a bottom on manufacturing employment. Indeed, if the loonie weakens as we expect, that could mean some improvement in a year or two.”
Here’s what some economists are saying:
“Even though most forward-looking indicators remain positive, we suspect that the overall tone will be cautious with the emphasis shifting a little away from current inflation trends towards the recent shortfalls in growth, the resultant increase in slack - both at home and abroad - and the increased importance that it places on the rotation towards exports and capital spending.” Mark Chandler, Ian Pollick, RBC Dominion Securities
“We don’t expect a notable shift in the BoC’s policy tone. The BoC will likely revise up its inflation forecast, but maintain that strong inflation is driven by transitory factors. They may slightly tweak the language on downside inflation risks, but point to weak near-term growth.” Emanuella Enenajor, Bank of America Merrill Lynch
“In our view, with a pickup in exports not yet entrenched, elevated slack, weak job creation, and ongoing corporate caution on investment, the bank would be justified in maintaining a decidedly cautious tone, and looking through the recent rise in inflation,” David Watt, HSBC Bank Canada
“Although financial markets are still leaning towards [Bank of Canada] rate increases late next year, we still think that the next move is more likely to be a cut. Rates will have to remain low for longer than consensus to support a weak economy hindered by sluggish exports and a housing downturn.” David Madani, Capital Economics
“Despite the significant acceleration in inflation, the Bank of Canada will likely focus on downside economic risks, with the weak U.S. Q1 providing an excellent piece of evidence. That will enable Governor Poloz to continue sounding dovish while reiterating the bank's neutral policy stance and ensuring the loonie doesn't strengthen further.” Mr. Reitzes, BMO
- David Parkinson: Inflation surge to test BoC's resolve on low rates
- Bank of Canada's shifting tone 'undercut' Canadian dollar in five ways: BMO
- Infographic: The loonie and factory jobs
- Video: Why the Canadian dollar will ultimately tumble again
- Infographic: Copper and loonie: A 'curious' connection
- David Parkinson in ROB Insight (for subscribers): This dollar bull rally has no horns
- Brian Milner: Poloz faces dilemma as loonie strengthens
Time Warner surges on rejected bid
Shares of Time Warner Inc. are surging in the premarket hours after news that Rupert Murdoch offered recently, though unsuccessfully, to buy the media giant for $80-billion (U.S.).
"21st Century Fox can confirm that we made a formal proposal to Time warner last month to combine the two companies," the Murdoch enterprise said in a statement today after reports in The New York Times were followed by other news organizations.
"The Time Warner board of directors declined to pursue our proposal. We are not currently in any discussions with Time Warner."
Time Warner also confirmed the bid today, saying the Murdoch Group’s offer was $32.42 in cash for 1.531 of a Twenty-First Century Fox share.
It rejected the advance, it said, because it believes its own planned course will deliver results, and that there’s “significant risk and uncertainty” surrounding Twenty-First Century Fox non-voting shares, as well as its “ability to govern and manage” a combined company of that heft.
“The board is confident that continuing to execute its strategic plan will create significantly more value for the company and its stockholders and is superior to any proposal that Twenty-First Century Fox is in a position to offer,” it said.
Still, the Times said, last month's “bold approach” could well put Time Warner into play.
Investors certainly seem to think so. Time Warner shares were up 15.5 per cent with about 15 minutes to go before the New York open.
Investors have apparently decided not to put too much stock in Janet Yellen’s warnings, and focus instead on China’s economy and U.S. corporate news.
Global markets are largely pushing ahead this morning despite the Federal Reserve’s suggestion yesterday that certain social media and biotech stocks are overvalued.
“The rally looked under threat yesterday, but more good news from China has engendered a strong bounce with miners leading the way,” said chief market strategist Brenda Kelly of IG, referring to the London market.
“Chinese news always acts as an ideal way to liven up the market, reassuring investors that growth is not entirely missing from the global economy.”
Tokyo’s Nikkei lost 0.1 per cent, while Hong Kong’s Hang Seng gained 0.3 per cent.
In Europe, London’s FTSE 100, Germany’s DAX and the Paris CAC 40 were up by between 1.2 per cent and 1.5 per cent by about 9 a.m. ET.
Dow Jones industrial average and S&P 500 futures also rose.
Ms. Yellen speaks again today, but is expected to deliver much the same statement.
“After Janet Yellen’s carefully managed testimony yesterday, we will have to go through it all again today, but her views aren’t about to change in the space of 24 hours,” said Ms. Kelly.
“Intel’s results were enthusiastically received, and should help to cancel out the gloomy figures from Yahoo, whose only ambition seems to be holding on to as much of Alibaba as possible. How the mighty have fallen.”
- Follow our Inside the Market blog (for subscribers)
- David Berman: Yellen's jibe at stock sectors echoes Greenspan's warning in 1996
- Kevin Carmichael: Yellen signals Fed won't be fooled again on economy
Factory sales rise
Canada’s factories scored their fourth gain in five months in May as sales climbed 1.6 per cent.
That increase, Statistics Canada said, was largely on the back of the oil, coal and auto sectors.
Over all, sales in May increased in 11 of 21 industries measures, or about 61 per cent of all manufacturing.
Notably, Ontario chalked up hefty increases, with sales climbing 2.3 per cent.
That’s important given that last week’s employment report showed factory jobs in Canada’s most populous province at the lowest on records dating back to the mid-1970s.
Manufacturing sales in the province, however, are now at their highest since the summer of 2008, before the recession. That’s largely thanks to the auto industry.
Inventories across Canada, meanwhile, slipped 0.6 per cent, for the first drop in five months.
The inventory-to-sales ratio, or the time it would take to exhaust inventories amid constant sales, fell to its lowest since late last year.
Unfilled orders dipped 0.5 per cent, and new orders 0.1 per cent.
- Canada's May factory sales jump to near record high
- Unemployment rate climbs to 7.1% as Ontario hit hard
Apple-IBM deal takes toll on BlackBerry
The surprising partnership between Apple Inc. and International Business Machines Corp. late yesterday is boosting the stocks of the two companies, while taking its toll on BlackBerry Ltd.
Apple shares were up by 2.1 per cent within about 15 minutes of the Nasdaq open, and IBM stock was up 2 per cent.
BlackBerry shares, in turn, were down 4.4 per cent.
As The Globe and Mail’s Iain Marlow reports, the Apple-IBM alliance strikes at the heart of BlackBerry’s business.
The two one-time U.S. rivals announced after markets closed yesterday that they’re teaming up to make business-related apps. IBM will also help sell Apple iPhones and iPads to its business customers.
“We believe this partnership will leverage Apple’s industry-leading device hardware and consumer software expertise and IBM’s big data analytics capabilities as well as domain expertise across several industries and strong enterprise customer base and should result in stronger iPhone and iPad adoption in the enterprise space,” said analyst T. Michael Walkley of Canaccord Genuity.
“While Apple’s iPhone and iPad devices have grown share of the enterprise mobility market the past several years, particularly in developed markets, we believe this partnership could further accelerate iOS penetration in and share of the global enterprise market,” he added in a research note, referring to Apple’s operating system.
Beijing should feel ‘vindicated’
There are always questions about Beijing’s official numbers, but today’s reading of second-quarter economic growth is still a strong sign.
China’s economy expanded in the three-month period by 7.5 per cent, according to the official data, a slightly faster pace than the first quarter’s 7.4 per cent.
“This should assuage hard landing fears and leave policy makers feeling vindicated in their decision not
to pursue more forceful stimulus,” said Julian Evans-Pritchard of Capital Economics.
“Looking ahead, we still expect growth to slow slightly during the second half of the year and are keeping
our forecast for 2014 unchanged at 7.3 per cent,” he added in a research note.
“Today's data demonstrate that policy makers have plenty of room to ease policy and shore up growth if necessary. We expect that further targeted measures may be rolled out to offset continued weakness in the property sector."
Streetwise (for subscribers)
ROB Insight (for subscribers)
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