These are stories Report on Business is following Monday, July 16, 2012.
Bank of Canada in 'uncomfortable' spot
The Bank of Canada finds itself in an "uncomfortable situation" as it prepares to release its policy statement tomorrow, followed by its monetary policy report a day later.
Canada's central bank is not in the same situation as others, and is rather in something of a juggling act. It won't change its benchmark overnight rate from its current 1 per cent, but markets are watching for any change in language.
For now, Governor Mark Carney and his colleagues on the central bank's rate-setting panel are tilting toward their next move being a rate hike, though the timing is in question. Economists are watching for a change in that stance tomorrow, and Royal Bank of Canada believes it's a "very close call."
"The Bank of Canada faces the same uncomfortable situation it faced last summer - whether to maintain a tightening bias supported by a still-healthy domestic economy or to move back to a neutral setting in appreciation of slowing global growth, the risk of deteriorating financial conditions and the potential spill-over into the domestic economy," said Mark Chandler, chief of fixed income and currency research at RBC Dominion Securities.
This means that Mr. Carney will remain ready to tighten monetary policy and hike their benchmark overnight rate, though not any time soon, and are not leaning toward a cut, as some observers believe. This is seen as a mild bias toward tightening monetary policy.
Exactly when, and by how much, will depend on their forecasts for economic growth, among other factors.
"Global headwinds have pushed them to the sidelines in the near term and we do not anticipate that they will make their first move for another eight months or so," Mr. Chandler said, projecting a hike next March of one-quarter of a percentage point from the current 1 per cent.
"To get to that point, they have to retain faith that growth will be slightly above 2 per cent through 2013, even if only by a modest amount," he added.
"If that is their belief - as it is ours - then it makes sense to retain the 'soft' tightening bias they have in place (i.e. 'some modest withdrawal of the present considerable monetary policy stimulus may become appropriate')," he said, referring to the Bank of Canada statement.
Not everyone agrees Mr. Carney will stick to the current line, which is why Mr. Chandler calls it a close call.
"There is some doubt on whether the Bank of Canada will maintain its (very mild) tightening bias," said deputy chief economist Douglas Porter of BMO Nesbitt Burns, referring to the speculation in the markets.
"It already took a step back in June, with the phrase 'to the extent that the economic expansion continues and the current excess supply in the economy is gradually absorbed,'" Mr. Porter said, citing the central bank's policy statement at the time.
"There is certainly a strong case to shift back to neutral: 1) In recent weeks, almost every major central bank in the world has eased policy amid slower global growth. 2) Canadian GDP likely grew at less than a 2-per-cent pace in [the first half of the year], versus the bank’s forecast of 2.5 per cent. 3) Ottawa’s steps to tighten mortgage insurance rules (and thus dampen the housing market) ease the bank’s biggest domestic concern. The case for keeping the bias is that it is already very mild, and the bank doesn’t want to be seen flip-flopping."
- Interest rate hike unlikely as global recovery sputters
- Central banks 'running out of ammunition' to stimulate growth
- Fed weighs new stimulus spending
Home sales slide
Canada’s housing market is running out of steam, but don’t read that as the prelude to a bust.
Sales slipped 1.3 per cent in June, according to the Canadian Real Estate Association today, but what’s more important is that sales are now down from their year-earlier levels for the first time since April of 2011.
The average home price is down by 0.8 per cent from year-earlier levels.
Of course, there are big regional skews here. Vancouver continues to slow, while price gains are still going strong in Toronto and Calgary. Sales in Toronto did slip month over month. On an annual basis, prices in Toronto are up 6.8 per cent, while those in Calgary are 16.7 per cent higher. Vancouver is down by 13.3 per cent.
According to the real estate group, sales fell in June in just over half of the regional markets.
"Today’s report provides more evidence that the housing market is beginning to come down to earth," said economist Francis Fong of Toronto-Dominion Bank. "The pace of activity in the market over the past few years was simply unsustainable given the economic backdrop and was mainly being fuelled by the record low level of interest rates."
TD expects both sales and prices to fall by 10 per cent to 15 per cent over the next three years.
CREA’s reading of the latest numbers is that home buyers didn’t speed up in advance of the latest mortgage restrictions by the Canadian government ... which went into effect early this month.
That’s a change from the last time this happened.
"It will take some time before the compound effect of previous and recent changes to regulations on Canada’s housing market becomes apparent," said Gregory Klump, CREA’s chief economist.
Deputy chief economist Douglas Porter of BMO Nesbitt Burns raised the question of whether the report signals the "start of the big sleep."
"Suffice it to say, reports of the demise of price increases in Canadian housing have been greatly exaggerated, at least up to this point," he said in a report.
"What hasn’t been exaggerated are softer sales; the June swoon compares with an average 7-per-cent year-over-year rise in the first five months of 2012. The new tighter mortgage insurance rules that kicked in last week will chill a market that had already seen 16 of 26 markets post June sales drops ... Even before the new mortgage rules kicked in, all signs suggest that the Canadian housing market was already cooling - the new rules will simply pull hard on a closing door."
Retail sales slip
American consumers pulled back again in June, another worrying sign for the U.S. economy.
Today's reading from the Commerce Department marks the third consecutive monthly decline. That's the first time that has happened since the depths of the crisis in 2008, troubling given that consumer spending accounts for some 70 per cent of the U.S. economy.
"The soft patch in the U.S. economy looks just a bit softer after today’s news," said chief economist Avery Shenfeld of CIBC World Markets.
Sales fell by 0.5 per cent last month, a worse showing than the jump that had been expected.
When you factor out autos, sales still fell, by 0.4 per cent, though lower prices at the gas pump were a good sign.
"With June's results, real retail spending grew at an annualized pace of around 1.6 per cent in Q2, quite a moderation from Q1’s +4.8-per-cent print," said senior economist Krishen Rangasamy of National Bank Financial.
"That's likely to result in the weakest growth print for real consumption spending in a year ... The flat discretionary spending (as defined above) in Q2 is the weakest performance since 2009 when the U.S. was mired in recession. Going forward, consumers will likely benefit from lower gasoline prices, but whether consumers spend that extra savings is unclear. Much will depend on how the labour market picks up after a disappointing string of employment data."
Citi beats estimates
Citigroup Inc.'s second-quarter profit slipped 12 per cent, though the major U.S. bank still beat analysts' estimates today.
Citigroup earned $2.9-billion (U.S.) or 95 cents a share in the quarter, down from $3.34-billion or $1.09 a share a year earlier.
The hit was attributed to a loss from selling its stake in a Turkish bank, among other factors.
Loan loss reserves release came to $948-million, half the year earlier level, the bank said.
"Our core businesses performed well in a difficult environment and are generating solid returns," said chief executive officer Vikram Pandit.
"We had strong growth in both loans and deposits, showed resilience in our markets-facing businesses, and saw record revenues in transaction services. We reduced Citi Holdings to approximately 10 per cent of our balance sheet while our capital strength and liquidity continue to be among the best in the industry."