Business Briefing

Well, someone still likes Canada: PIMCO on the loonie, housing

The Globe and Mail

These are stories Report on Business is following Thursday, Jan. 30, 2014.

Follow Michael Babad and The Globe's Business Briefing on Twitter.

PIMCO on Canada
Many investors may be down on Canada, but not the world’s biggest bond fund manager.

At least, not exactly.

Here are four points in PIMCO’s latest perspective, from Ed Devlin, the chief of its Canadian portfolio management:

Story continues below ad

1. A softer housing market, coupled with other developments on the home front, will hold economic growth to a “modest” range of 1.75 per cent to 2.25 per cent this year.

2. A “correction” in the housing market is expected this year. There’s a ‘but’ here: “To summarize our view, the combination of modestly higher mortgage rates, tighter mortgage underwriting standards, a continued modest economic recovery and a housing market where valuations are stretched will result in a decline in housing activity and housing prices in 2014, but not a crash.”

3. Given everything, “we think the Canadian dollar should remain attractive, 10-year bonds should offer the potential for gains, and provincial bonds will likely outperform federal government and corporate bonds … At PIMCO, we are still secularly bullish on the Canadian dollar based on the country’s strong economic fundamentals, prudent fiscal situation and long history of the ‘rule of law’ … PIMCO expects to seek opportunities to ‘buy the dips’ in the Canadian dollar in 2014.

4. Disinflation, the focus of the Bank of Canada, should not carry through the year. Among other things, the slump in the loonie should spark higher import prices, while the heightened competition in the retail sector will change. “One of the causes of last year’s disinflation was increased competition in retailing from U.S. companies, such as Wal-Mart and Target, and in our view, adjusting to new retail competitors is a one-off even and unlikely to be a recurring process that would lead to multiple years of disinflation.”

Mr. Devlin’s comments, published on the PIMCO website, come amid ever-declining forecasts for the Canadian dollar and raised eyebrows among some observers over inflated house prices.

Today, for example Bank of Montreal projected the loonie, as Canada's dollar coin is known, forecast an 87-cent dollar, while Toronto-Dominion Bank went one better: 85 cents by mid-2014.

"TD Economics expects that the factors which have taken the Canadian dollar lower are unlikely to shift over the next year or so," said economists Craig Alexander and Leslie Preston.

"Canada's economy is forecast to underperform the United States, interest rate hikes remain quite a ways off and the outlook for commodity prices is pretty flat, on average," they added in the study.

"In the near-term, the loonie is forecast to fall as low as 85 cents U.S. by mid-year. However, it is then expected to appreciate slightly as inflation in Canada starts increasing and the Bank of Canada gets closer to raising interest rates."

They expect to climb back to the 90-cent range in the second half of next year.

Bank of Montreal, in turn, today projected the loonie would sink to 87 cents.

The loonie slipped to a new recent low of 89.3 cents around midnight, pulling back to 89.6 cents by late in the day.

Late-breaking news
Shares of Google Inc. climbed in after-hours action today after the Internet giant posted a 17-per-cent jump in fourth-quarter revenue and a higher profit.

Google revenue came in at $16.9-billion (U.S.) for the quarter while profit climbed to $3.4-billion, or $9.90 a share, from $2.9-billion or $8.62 a year earlier.

Google shares were up 4.2 per cent by 5 p.m. ET.

Shares of Amazon.com Inc., on the other hand, slumped after it posted a 20-per-cent surge in fourth-quarter revenue to $25.6-billion. Profit climbed to $239-million, or 51 cents, from $97-million or 21 cents.

“It’s a good time to be an Amazon customer,” said chief executive officer Jeff Bezos.

A shareholder, not so much. The stock sank by about 8 per cent in after-hours action.

Ontario hikes minimum wage
Ontario is boosting the Canadian province’s minimum wage for the first time in four years amid a global debate over pay levels.

Premier Kathleen Wynne today unveiled the hike to $11 an hour from $10.25, and plans to link future increases to inflation, The Globe and Mail’s Adrian Morrow reports.

Minimum wage hikes are a thorn in the side of small businesses, in particular, which say they kill jobs.

But Ms. Wynne said her government must “balance the needs of small businesses … with the needs of people to have a living wage.

U.S. economy turns in decent quarter
The U.S. economy grew at an annual rate of 3.2 per cent in the fourth quarter, a relatively strong figure that supports the growing view that America is due for a good 2014, our Washington correspondent Kevin Carmichael reports.

Most analysts on Wall Street called the 3.2-per-cent reading, the first of three government estimates that was released by the Commerce Department today. Gross domestic product advanced at an annual rate of 4.1 per cent in the third quarter.

The U.S. now has put together one its strongest periods of growth since the financial crisis. The report reinforces the Federal Reserve’s decision to begin slowly reducing its extraordinary monthly purchases of bonds, and could comfort the Bank of Canada, which is counting on the U.S. economy to pull Canadian exporters out of their doldrums.

Potash sinks
Shares of Potash Corp. of Saskatchewan sank today after a somewhat disappointing fourth-quarter report.

As The Globe and Mail’s Rachelle Younglai reports, the potash giant’s fourth-quarter profit sank by 46 per cent, hit by costs from job cuts and lower prices in the wake of the collapse of a Russian cartel.

Potash Corp.’s profit slipped in the quarter to $230-million (U.S.), or 26 cents a share, from $421-million or 48 cents a year earlier.

“Pricing headwinds - most notably in potash - weighed on our performance, although there were signs as the quarter came to a close that the uncertainty in global markets was beginning to abate,” said chief executive officer Bill Doyle.

The company also forecast first-quarter profit of between 30 cents and 35 cents a share, and $1.40 to $1.80 for the year.

“Even as 2014 begins with a more tempered outlook for crop commodity prices, we believe the fundamental drivers of fertilizer demand remain supportive,” the company said.

“Record crop production in 2013 has led to a significant agronomic need to replenish essential soil nutrients. We expect farmers, especially those in more developed agricultural economies, will strive to increase their soil productivity in order to maximize returns from each planted acre.”

Facebook surges
Facebook Inc. has certainly caught the attention of the markets again, its stock surging today after its earnings late yesterday.

The social network posted a hefty jump in fourth-quarter revenue, particularly where mobile advertising is concerned, and an increase in profit to $523-million (U.S.), or 20 cents a share, from $64-million or 3 cents a year earlier.

Streetwise (for subscribers)

Economy Lab

ROB Insight (for subscribers)

Business ticker

Follow on Twitter: @michaelbabad