These are stories Report on Business is following Tuesday, Dec. 4, 2012.
Scotiabank sees strong dollar
Currency strategists at Bank of Nova Scotia believe the Canadian dollar will close out this year and next above parity with its U.S. counterpart, not particularly good news for the country’s exporters.
The main driver will be the difference in monetary policy between the U.S. and Canadian central banks.
The Federal Reserve is expected to again expand its asset-buying program, known as quantitative easing, which is a policy that weakens the U.S. dollar.
The Bank of Canada, on the other hand, has a “neutral to hawkish” stand, and repeated today that it still plans to hike interest rates down the road, which helps support the loonie, as the Canadian dollar is known.
At this point, Canada’s economy is in a soft patch, though this should pick up as the U.S. recovery “gains momentum” and China’s growth accelerates, strategists Camilla Sutton and Eric Theoret said in their new forecast today.
Also supporting the loonie is Canada’s fiscal policy and triple-A credit rating.
While this is a solid signal for the country, it spells further trouble for Canadian exporters, whose goods cost more abroad as the currency gains.
Today, as it held the line on interest rates and its outlook, the Bank of Canada noted how exporters are being hurt.
“Canadian exports are expected to pick up gradually but continue to be restrained by weak foreign demand and ongoing competitiveness challenges,” the central bank said.
“These challenges include the persistent strength of the Canadian dollar, which is being influenced by safe haven flows and spillovers from global monetary policy.”
Scotiabank expects the loonie to close at the year at $1.04 U.S.
Bank of Canada holds the line
Mark Carney and his colleagues still see a brighter 2013, and the slowdown in the third quarter that we’ve just been through as partly due to “transitory disruptions in the energy sector.”
The Bank of Canada did the expected today, The Globe and Mail's Kevin Carmichael reports: It was never expected to change its benchmark rate from 1 per cent, but it also left its language unchanged, meaning it’s still an outlier in that it still sees the next rate move as up.
“In Canada, economic activity in the third quarter was weak, owing in part to transitory disruptions in the energy sector,” the central bank said.
“Although underlying momentum appears slightly softer than previously anticipated, the pace of economic growth is expected to pick up through 2013. The expansion is expected to be driven mainly by growth in consumption and business investment, reflecting very stimulative domestic financial conditions.”
Among other things, the Bank of Canada did warn that the U.S. recovery “is progressing at a gradual pace and is being held back by uncertainty related to the fiscal cliff.”
Not everyone agrees with the central bank’s position, notably National Bank of Canada.
“We do not share the central bank's current economic assessment,” said economists Stéfane Marion and Paul-André Pinsonnault.
“Weakness in Q3 was much more broad-based than just energy as reflected in the overall decline in corporate profits,” they said in a research note.
“In non-energy manufacturing, earnings were down for the third consecutive quarter with a sharp erosion in margins. This isn't a harbinger of a strong labour market. Indeed, we are somewhat surprised that the central bank didn't acknowledge that the private sector has actually created no jobs over the past six months. Unless we see a sharp reversal of that concerning trend in the upcoming employment reports, we would expect a major change of assessment in next January's Monetary Policy Report.”
- Bank of Canada looks past economic 'disruptions,' sees gains in 2013
- Falling exports take zip out of Canadian economy's growth
- Kevin Carmichael's Economy Lab: Networking is the ace up Mark Carney's sleeve
BMO cites cooling housing market
Bank of Montreal is the latest to note how the Canadian government has cooled the housing market.
As it posted solid fourth-quarter results today, the Canadian bank also cited the federal government’s latest attempt to tighten the mortgage market, which went into effect in the summer, is helping to cool prices.
As recent numbers have demonstrated, the real estate market is cooling rapidly, with sales down sharply in some cities.
The latest reading by Teranet and National Bank of Canada, which tracks house prices, showed them falling on a national basis, down 0.2 per cent in October from September.
The Bank of Canada today also noted that the housing market "is beginning to decline from historically high levels" and that the rapid pace of growth in consumer debt has slowed down.
"It is too early, however, to determine whether the moderation in housing activity and credit growth will be sustained," the central bank said as it held the line on its rate outlook, meaning it's not certain that's going to hold.
“We continue to see growth in residential mortgage market share, and believe the changes to Canada’s mortgage market announced earlier this year, which are aligned with BMO’s risk practices and ongoing efforts to encourage Canadians to borrow smartly, are having the desired moderating effect on housing prices in most markets,” chief executive officer Bill Downe said in a statement today as the bank posted a profit of $1.1-billion or $1.59 a share.
For the year, BMO earned $4.2-billion or $6.15 a share, The Globe and Mail’s Grant Robertson reports.
The quarterly results compare to profit of $768-million or $1.11 a share a year earlier.
Mr. Downe heralded what he called the transformation of the Canadian bank over the past two, citing the acquisition of Marshall & Ilsley Corp. last summer.
“Over the past two years, with the acquisition of Marshall & Ilsley Corp., we have fundamentally transformed the bank, changed its growth trajectory, and enhanced long-term value for shareholders,” he said in a statement.
- BMO profit soars 41 per cent in fourth quarter
- Vancouver home sales plunge, prices dip
- Drop in home prices spreads to Toronto
- U.S. home prices record biggest jump in 6 years in October
- Calgary weathers housing storm, but demand seen easing
Canadian shoppers pulling back
Canadians are showing signs of being “tapped out,” not a good sign for retailers in the midst of their main season, and certainly not for an economy that stalled in the third quarter.
“With the key shopping season nearing its apex, there are signs that the Canadian consumer just doesn’t have the same oomph as in recent years,” said deputy chief economist Douglas Porter of BMO Nesbitt Burns.
Last Friday’s report on gross domestic product showed consumer spending rising at an annual pace of 3.8 per cent, far eclipsing economic growth of just 0.6 per cent. But the “underlying trend is much less impressive,” Mr. Porter said.
“In the past four quarters, real spending is up a mild 2.2 per cent,” he said in a research note. “And, for all of 2012, real consumption looks to rise just 2 per cent. Aside from the brutal 2009 episode, that would mark the slowest annual rise in real consumer spending since 1993.”
Canadians, of course, are scrambling to cut back on their record debt levels, while unemployment remains high at 7.4 per cent. And with Canadian exporters hurting, struggling with soft global demand and a strong dollar, consumers will play an even greater role than usual.
“With all the focus on Canada’s housing market, business investment and exports, the critical consumer is often overlooked – despite the fact that it accounts for 56 per cent of GDP,” Mr. Porter said.
“And a cooler consumer has played an important role in this year’s broader slowdown.”
Australia cuts rates
Australia’s central bank trimmed its benchmark lending rate today, by one-quarter of a percentage point, citing lower commodity prices, uncertainty in the global economy and the fiscal cliff negotiations in the United States.
The Reserve Bank of Australia noted that key commodity prices are still “significantly lower” than they were earlier this year, and that the Australian dollar “remains higher than might have been expected, given the observed decline in export prices and the weaker global outlook.”
The central bank’s cash rate now stands at 3 per cent.
“Global growth is forecast to be a little below average for a time,” said the central bank’s governor, Glenn Stevens.
“Risks to the outlook are still seen to be on the downside, largely as a result of the situation in Europe, though the uncertainty over the course of U.S. fiscal policy is also weighing on sentiment at present,” he added in a statement.
“Recent data suggest that the U.S. economy is recording moderate growth and that growth in China has stabilized. Around Asia generally, growth has been dampened by the more moderate Chinese expansion and the weakness in Europe.”
The cut takes the key rate back to the levels of the financial crisis, and may not end there.
"This may well not be the last cut, however, as the carry premium remains heavily in favour of the [Australian dollar] versus just about everywhere else including other commodity plays and overnight currency strength only adds to risks facing Australia’s export picture," said Derek Holt and Dov Zigler of Bank of Nova Scotia.
“Merchants at fast food businesses, restaurants and drinking establishments near NHL hockey arenas in Winnipeg, Vancouver, Toronto, Montreal and Calgary have experienced a sharp overall decrease of -11.23 per cent in spending in 2012, compared to a game day in 2011,” credit and debit card processor Moneris Solutions said today.
From Bloomberg: “Meredith Cross, head of the U.S. Securities and Exchange Commission’s division that oversees public company disclosures, is stepping down, two people briefed on the matter said.” Think about it.
Please, Mr. Carney, I want some more. He’s not there yet, but here’s what the Bank of England’s financial policy committee discussed at its Nov. 21 meeting, according to the minutes posted online today: “The committee also discussed the structure of remuneration contracts for bank executives. Inappropriately structured contracts could lead to risks being mismanaged. Steps could be taken to ensure that contracts provided sufficient incentives for executives to consider the full implications for long-term business performance, which would be desirable from the perspective of systemic stability.”