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How Target, cross-border shopping are wreaking havoc on Canada's inflation rate Add to ...

These are stories Report on Business is following Wednesday, May 29, 2013.

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The Target effect
Even the OECD appears to have taken note of the “Target effect” on Canadian prices.

The Organization for Economic Co-operation and Development didn’t name the giant U.S. chain in its global outlook today, but did cite “heightened” competitive pressure in the retail sector.

Target Corp.’s recent entry into Canada has sparked something of a price war among domestic retailers and foreign players operating in the country, notably Wal-Mart Stores Inc.

Coupled with other factors, this has helped hold store prices down, in turn playing a role in the muted pace of inflation in Canada.

There’s more going on here, notably the flood of Canadians crossing into the United States to shop given what had been until recently a very strong currency and new, higher allowances on what those shoppers can bring home.

Inflation now stands at just 0.4 per cent in Canada, while the so-called core rate, which strips out volatile items such as energy, is at 1.1 per cent.

The Bank of Canada targets an inflation rate of 2 per cent in a band of 1 per cent to 3 per cent, but it is guided by core prices.

In its policy statement today, the central bank gave a nod to the slow rise in consumer prices, saying that "both total and core inflation are expected to remain subdued in coming quarters before gradually rising to 2 per cent by mid-2015 as the economy returns to full capacity and inflation expectations remain well-anchored."

But even if that core rate dipped below 1 per cent, said BMO Nesbitt Burns, which isn’t forecasting such a decline, the Bank of Canada would not act.

“We expect even slipping below the 1-per-cent band (around the 2-per-cent target) or record low of 0.9 per cent is unlikely to elicit a BoC response because of the large structural component to current low readings (i.e., narrowing margins owing to indigenous retailers’ response to Target’s entry and increased cross border shopping after duty-free limits were raised,” said BMO senior economist Michael Gregory.

The Bank of Canada, he added, has no policy tool to deal with such a structural issue, as opposed to how it would act on, say, simple slack in the economy.

Mr. Gregory noted the “significant” response by Wal-Mart because, in its fight against Target it is “upping the ante” for domestic retailers, as well.

The Bank of Canada projects a protracted period of inflation below the 2-per-cent mark.

The latest reading of 0.4 per cent, for April, was driven down largely because gasoline prices plunged, but that isn’t taken into account in the core measure. Prices for clothes and shoes fell in April from a year earlier.

Bank of Canada stands pat
The Bank of Canada is sticking to its line that the next move in interest rates will be up, citing the slack in the economy and the “muted outlook” for inflation.

The central bank held its benchmark overnight rate at 1 per cent today, as expected, and repeated that “the considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required.”

That’s the Bank of Canada’s way of saying that rates are going nowhere any time soon, but at some point they’re going to rise.

As The Globe and Mail’s Kevin Carmichael reports, the central bank said it believes the economy expanded at a faster-than-expected pace in the first quarter, but it expects full-year growth in gross domestic product will be pretty much in line with what it has forecast.

“Over the projection horizon, consumer spending is expected to grow at a moderate pace, business investment to grow solidly, and residential investment to decline further from historically high levels,” the central bank said.

“Growth in total household credit is slowing and the bank continues to expect that the household debt-to-income ratio will stabilize near current levels,” it added in today’s statement.

“Exports are projected to continue to recover, but to be restrained by subdued foreign demand and ongoing competitiveness challenges, including the persistent strength of the Canadian dollar.”

Economists expect a report from Statistics Canada Friday to show that GDP expanded at an annual pace of 2.3 per cent to 2.5 per cent in the first three months of the year.

They also don’t expect any change in interest rates until late next year or early 2015.

The Organization for Economic Co-operation and Development today projected that the Canadian economy will pick up steam this year and next, juiced by business investment, commodity prices that remain elevated, and heightened confidence.

In its latest global outlook, the OECD projected Canada’s economy would expand by 1.4 per cent this year and 2.3 per cent this year.

Unemployment is forecast to remain at about the 7-per-cent mark through the end of next year, with annual inflation at just 1.3 per cent this year and 1.7 per cent in 2014.

Why do investors love Tuesdays (and what does that mean for today)?
BMO Nesbitt Burns has noticed what’s “probably the quirkiest stat of 2013,” that being the rise of the Dow Jones industrial average every Tuesday for 20 weeks.

That happened yesterday, too, when the U.S. index gained more than 100 points, or 0.7 per cent.

“Given the latest Tuesday romp, that day alone has seen the Dow rise a massive 1,521 points, accounting for two-thirds of the entire year’s advance,” said BMO chief economist Douglas Porter.

“Historically speaking, Tuesday has been positive, but unexceptional,” he added in a research note.

“Friday has likewise been very kind to equities this year, while Wednesday and Thursday have been decent, but not special. Meantime, as has so often been the case over many years, investors don’t like Mondays … even in a market as strong as this year’s.”

Global markets are largely down today, troubled by the latest outlook for China.

“Market participants today are more focused on the future of the world’s second-biggest economy that is China,” said senior market strategist Brenda Kelly of IG in London.

“Weak global economies and lower exports as a result has seen the International Monetary Fund reduce its 2013 growth forecasts for China to 7.75 per cent from 8 per cent.”

BMO profit dips
Bank of Montreal posted a dip in second-quarter profit today, slipping more than analysts had expected, The Globe and Mail’s Tim Kiladze reports.

That included a restructuring charge of $82-million.

BMO profit fell to $975-million or $1.42 a share, from $1.03-billion or $1.51 a year earlier.

Adjusted profit rose to $997-million or $1.46.

”Looking forward, we have an advantaged business mix and are well-positioned for the current environment given our footprint in an improving U.S. Midwest economy, combined with our strength in commercial banking, capital markets and wealth,” said chief executive officer Bill Downe.

“These are important differentiators. At the same time, we continue to focus on what’s necessary to support future growth, and are confident that the value we create for customers will translate into financial performance for the bank.”

Chinese firm bids for Smithfield
A major Chinese meat company plans to buy Smithfield Foods Inc. in a $4.7-billion (U.S.) deal guaranteed to catch the eye of American regulators.

Shuanghui International Holdings Ltd. has made various pledges in terms of management, workers and union contracts, but this would reportedly mark the biggest takeover of a U.S. company by a Chinese firm.

Shuanghui is bidding $34 a share, and comes amid a push from one activist shareholder to break up Smithfield.

The Wall Street Journal says the deal will probably get a heavy going over by U.S. regulators. Other proposed deals by Chinese companies have been nixed and, the newspaper said, food security matters could also play a role.

Smithfield took steps to address this, saying in a statement today that “we have established Smithfield as the world's leading and most trusted vertically integrated pork processor and hog producer, and are excited that Shuanghui recognizes our best-in-class operations, our outstanding food safety practices and our 46,000 hard-working and dedicated employees.”

Smithfield, the biggest pork company in the United States, would get a big leg up in China.

“Smithfield is a leader in our industry and together we will be able to meet the growing demand in China for pork by importing high-quality meat products from the United States, while continuing to serve markets in the United States and around the world,” said Shaunghui chairman Wan Long.

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