These are stories Report on Business is following Wednesday, Sept. 5, 2012.
Carney expected to hold line
As one observer put it, markets can expect the "same broken record" from the Bank of Canada today.
The central bank hasn't changed its benchmark lending rate in two years. It won't do it today, either. The question is whether Governor Mark Carney and his colleagues change their signal that the next move in the overnight rate will be up, rather than down, from its current 1 per cent.
That key signal will come at the end of this morning's statement at 9 a.m. Here's what it said last time out in mid-July: "To the extent that the economic expansion continues and the current excess supply in the economy is gradually absorbed, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the 2-per-cent inflation target over the medium term."
That means the Bank of Canada believes its next move will be a hike in the key rate, though not necessarily at any point soon. Observers are watching to see if that line changes.
Charles St-Arnaud of Nomura Securities in New York, who expects the bank's "same broken record" this morning, expects to see the same language.
"We have one theory as to why the policy rate was maintained so low over the past year and the BoC was reluctant to increase rates in light of continued debt accumulation on the household side," he said.
"By keeping rates low, the BoC wanted to promote business investment by encouraging business to make use of their massive stockpile of cash, as highlighted by recent remarks by Gov. Carney. However, we believe that businesses are not using the cash sitting on their balance sheets because of the high global uncertainty, which reduces the attractiveness of investment. This means that keeping rates lower is unlikely to change this situation."
Here's what some economists expect today:
"Governor Carney has employed enormous flexibility in the statement language by using guidance phrases such as ‘to the extent’ that its forecasts come true, it ‘may’ hike rates by a ‘modest’ amount at some point over the ‘medium term.’ We wouldn’t recommend ship navigation along the same line of reasoning, but the tone, style and aggressiveness of the related communications has been interpreted more harshly as hawkish in nature, thus providing a boost to [the Canadian dollar] that goes beyond just commodity dynamics. It is unlikely that this tone will change next week despite enormous geopolitical risk ahead of the global economy and downsides to the Canadian economy amid very soft inflation readings." Derek Holt, Bank of Nova Scotia
"At Governor Carney’s latest public appearance, he reiterated that 'some modest withdrawal of the present considerable monetary policy stimulus may become appropriate'; expect more of the same. While the phrase references tightening, it’s more of a signal that the BoC has essentially no appetite to cut rates despite likely further easing from the Fed and other global central banks. Indeed, given that the Fed will probably push back its low rate guidance into 2015, Carney is unlikely to pull the trigger on a rate hike any time soon. In fact, we now anticipate the bank will be on hold almost through 2013, with the first rate increase to come late next year - at the earliest." Benjamin Reitzes, BMO Nesbitt Burns
"The Bank of Canada will maintain its hawkish leaning, but without firm evidence that the economy is growing above potential, at this point, it's only words, not action. The bank sees Q3 growth picking up, a view we share, but unlike the bank, we see global risks, fiscal restraint and cautious consumers as barriers to sustaining any acceleration." Avery Shenfeld, CIBC World Markets
"The bulk of today’s statement is likely to highlight more the risks to growth in the quarters ahead – once again focusing on the challenges to the global growth picture, with perhaps an added emphasis on weakness in emerging economies and the potential threat to commodity prices. Markets are currently pricing in about a one-third chance of a 25-basis-point rate hike by March of next year." Mark Chandler, Ian Pollick, RBC Dominion Securities
"If we are correct about the sluggish prospects for global economic growth, commodity prices and Canada's housing market, then Carney will soon need no convincing to quit talking about increasing interest rates. If there is to be any change we suspect more policy support might eventually be needed, a more bearish view than consensus. Accordingly, we expect government bond yields to stay low this year and next year." David Madani, Capital Economics
The Globe and Mail's Kevin Carmichael will report on the decision at 9 a.m.
Global markets are antsy this morning, troubled by economic signals and awaiting a European Central Bank meeting tomorrow, when ECB chief Mario Draghi is expected to unveil some details of his plan to ease borrowing costs in the troubled countries of the euro zone.
"In mid-morning trade the FTSE is once again under pressure, down 30 points as growth worries beset markets," said analyst Chris Beauchamp of IG Index in London.
"Mario Draghi's big day at the ECB might be only 24 hours away, but it is fears about the global economy that are taxing investors this morning," he said in a research note.
"The market in Shanghai continues to plumb new lows, while a three-year low for the price of iron ore underscores the slowdown taking place in the Chinese economy. As with yesterday, miners are suffering in London, as investors exit the sector on the expectation that seemingly-insatiable Chinese demand is not quite as insatiable as previously thought. Delivery firm FedEx is also providing cause for concern, with the company, which is often viewed as a useful indicator of the health of the global economy, saying that earnings for the quarter will be below expectations."
Tokyo's Nikkei slipped 1.1 per cent, and Hong Kong's Hang Seng 1.5 per cent. In Europe, London's FTSE 100 was down by 0.2 per cent by about 8:15 a.m. ET, though Germany's DAX and the Paris CAC 40 were up by between 0.2 per cent and 0.6 per cent.
Dow Jones industrial average and S&P 500 futures were down slightly.
"With the much-anticipated ECB policy meeting just one day away, today the market is left to digest just a few more morsels of data, some of which are causing some mild indigestion," said Carl Campus of BMO Nesbitt Burns.
"Global equities were broadly lower through much of the overnight session, helped in part by yesterday’s weaker-than-expected U.S. manufacturing data, but European equities have since rebounded to show modest gains. Commodities are weaker with energy prices dipping into the red (WTI crude -0.2 per cent, Brent -0.3 per cent) and precious metals losing a little lustre (gold -0.3 per cent, silver -0.7 per cent). The [U.S. dollar] index is stronger amid mildly heightened risk aversion (though gains have been pared), while the [euro] is only slightly weaker after briefing hitting its lowest levels of the week overnight ahead of Thursday’s ECB meeting. With speculation of an ECB bond-buying plan intensifying this week, t10-year government bond yields remain relatively unchanged in Spain (+0.4 basis points) and Italy (-2.9 basis points) this morning."
Business shrugs off PQ win
Canada’s business community is concerned about the long-term implications of a separatist government in Quebec, but executives expect little immediate fallout.
“The business community needs to be reassured right now,” one executive said. “There has been talk in some quarters of – not stopping – but slowing down investments in the event of a PQ win.”
Martine Hebert, the Quebec representative of the Canadian Federation of Independent Business, expressed concern over the fact that a minority government will be formed, Richard Blackwell and Bertrand Marotte report.
“A minority government is not the ideal situation for stability,” she said. “We’re hoping that all the political parties will work together so Quebec can be adequately governed.”
As Canadian industry has shifted much of its focus internationally, provincial politics is less crucial than it was back in the mid 1970s when the PQ first took power in Quebec, said Bruce Catoen, chief technology officer at Mold-Masters Ltd., an Ontario company that builds equipment used by makers of plastic parts.
The election of a minority government had little impact on Canada's currency, which has been affected more by the price of oil. But, said senior currency strategist Camilla Sutton of Bank of Nova Scotia, "the new government brings new risks, which could ultimately prove a small weight on [the Canadian dollar]."