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morning business briefing

Briefing highlights

  • Ontario under scrunity
  • Stocks, Canadian dollar, oil at a glance
  • A big week for central banks ...
  • ... and British voters

Ontario under scrutiny

Ontario Premier Doug FordGeoff Robins/The Canadian Press

A challenged Ontario sticks out like a very sore thumb in the latest study of Canada's provinces by Moody's Investors Service.

That's my language, not that of Moody's. But it's obvious

What's obvious about it is that the only other provinces in that league are Alberta and Newfoundland and Labrador, whose troubles are tied to oil prices. Ontario's woes are not, and thus it stands out in the report from the big U.S. credit rating agency.

“Only three provinces will face material challenges in 2020 – Alberta, Ontario, and Newfoundland and Labrador – driven by varying idiosyncratic risks,” Moody’s said in its recent study, which was favourable to the provinces as a whole.

"Our 2020 outlook for Canadian regional governments is stable based on modest economic growth, affordable debt and low exposure to [environmental, social and governance, or ESG] risks," the agency said.

"Canadian provinces are well positioned to meet the challenges of trade tensions, recession risks and ESG-related effects in 2020, which are Moody’s global credit themes for 2020," it a added.

"While challenges may arise, their impact will remain credit-neutral for Canadian provinces in 2020. Economic growth will continue to slow (relative to recent levels), but will remain positive with robust fundamentals, supporting revenues for provinces."

Hold that thought.

Four provinces have issues, including Alberta and Newfoundland and Labrador, as noted, but also Saskatchewan to a lesser extent, for the same reason.

Note, too, that Moody's downgraded some Alberta ratings earlier this month.

"We highlight the three provinces that face material deficits," Michael Yake, senior credit officer and manager in the sub-sovereign group at Moody's Canada, said later.

"Alberta and Newfoundland and Labrador are related to the ongoing impacts from the oil prices," he added.

"For Ontario the deficits are due to broad pressures. Given their relatively weak fiscal position they have less capacity should some of the risks we identify appear (increase in trade tensions, weaker economic growth)."

Ontario is staring at a budget deficit of $9-billion for fiscal year 2019-20.

Ontario Finance Minister Rod Phillips prepares to deliver the fall economic statement, at the Ontario Legislature, in Toronto on Wednesday, November 6, 2019Chris Young/The Canadian Press

“The pressures Ontario faces are those that are contributing to the ongoing deficits – finding the balance between weaker revenue growth and continued pressure on spending,” Mr. Yake said.

"Economic growth in Ontario is expected to remain modest in 2020 and 2021, which will limit revenue growth potential compared to past years, while spending pressures (including those for social programs such as health, as well as infrastructure) will remain."

Ontario also came in for special mention in a speech last week by Bank of Canada deputy governor Timothy Lane, who described government spending as a "mixed picture."

"While it has been supporting growth recently, this support is expected to wane in 2020 as consolidation in Ontario and Alberta takes hold and the recent strength in Quebec and British Columbia normalizes," Mr. Lane said.

Indeed, Bank of Montreal's latest look at the provinces noted that "Ontario's economy has moderated after a powerful run," with economic growth projected at 1.8 per cent this year and "a steady" 1.9 per cent next.

"The province of Ontario is projecting a $9-billion deficit for FY19/20 (1 per cent of GDP), improved from the $10.3-billion estimated in the 2019 budget," said BMO senior economist Robert Kavcic.

"But, that’s still tracking somewhat deeper than the $7.4-billion reported in the FY18/19 public accounts (though there could be some improvement yet before the fiscal year is fully wrapped up)," he added.

"Indeed, a $1-billion reserve allowance still remains in place. The medium-term fiscal outlook was also updated, but remains very little changed, with the deficit pegged at $6.7-billion in FY20/21 and $5.4-billion in FY21/22."

Here's how Mr. Kavcic grades the provinces:

Source: Bank of Montreal

When you put it all together, Ontario “is backing away (slightly) from what was a pretty tough restraint-heavy spending profile laid out in the original 2019 budget plan,” Mr. Kavcic said.

"Still average program spending growth this year and through FY21/22 is running at a subdued 1.6-per-cent pace – still pretty tight-fisted with inflation around 2 per cent and population growth at 1.7 per cent.

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Markets at a glance

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Housing starts edge up

From The Canadian Press: Canada Mortgage and Housing Corp. says the annual pace of housing starts edged higher last month compared with October, although there were declines in five provinces. The national housing agency says the seasonally adjusted annual rate for November was 201,318 units, up 0.3 per cent from 200,674 units.

Euro zone morale up

From Reuters: Morale among investors in the euro zone jumped for the second month in a row amid buoyant Asian economies and growing expectations of fiscal intervention by governments nearer home, a survey showed. The Sentix research group’s index of investor morale climbed to 0.7 points, up from -4.5 last month and its highest since May. Expectations reached their highest since March 2018. For Germany’s export-driven economy, they were at their highest since February 2018.

Volcker dies at 92

From Reuters: Paul Volcker, the towering former Federal Reserve chairman who tamed U.S. inflation in the 1980s and decades later inspired tough Wall Street reforms in the wake of the global financial crisis, died Monday at the age of 92, according to the New York Times, which quoted his daughter. Mr. Volcker, who media reports said had been suffering from prostate cancer, was the first to bring celebrity status to the job of U.S. central banker, serving as chairman of the Federal Reserve from 1979 to 1987. As with the man who succeeded him, Alan Greenspan, Mr. Volcker could soothe or excite financial markets with just a vague murmur.

Also ...

Key for this week

Central bankers and British voters take centre stage.

The Federal Reserve, the European Central Bank and Bank of Canada governor Stephen Poloz are all in the spotlight, the first two with rate decisions and the latter with a speech that will be widely watched. It would be anyway, but now there are Friday’s ugly jobs numbers to work into the monetary policy equation.

The Fed isn't expected to unveil any rate changes, having cut several times already this year, but markets will also be watching for projections from individual central bank officials.

"The incoming data [last] week were, on balance, positive and certainly wouldn’t prompt the sort of 'material reassessment' of the outlook that Fed officials have said would be necessary to cut interest rates again [this week]," said Paul Ashworth, chief U.S. economist at Capital Economics.

"Markets are still pricing in one final 25-basis-point rate cut some time next year, but our guess is that signs of a pick-up in economic growth early next year will take that possibility off the table," he added.

“The bigger point, however, is that even if that pick-up in GDP growth ends up being more pronounced than many expect, we strongly doubt that the Fed would hike rates. Even though they would never admit to it in public, the chances of Fed officials sanctioning a rate hike next year during a politically charged election campaign are close to zero.”

Mr. Poloz speaks Thursday to a business audience in Toronto, followed by a news conference.

"He will likely express a similar message to the policy statement [last] week that rate cuts are not needed in Canada, although could sound more dovish after the weak November employment report," said Veronica Clark, associate, U.S. economics, at Citigroup.

"We will be most curious to see how dismissive (of course, if at all) Poloz will be of the soft jobs numbers."

CIBC World Markets deputy chief economist Benjamin Tal agreed.

“So, until 8:30 [Friday] it was a slam-dunk: the bank was on hold,” Mr. Tal said.

"And then, we got the 71,000 drop in employment, with no amount of lipstick able to make that pig any prettier," he added.

"Now, we all know that the labour force numbers are extremely volatile, but the last time the number of jobs fell by so much in one month was during the recession."

Thus, it's "not an easy decision" for the central bank.

"So, what do you do when you don’t know what to do? At the minimum you don’t take chances. The bank might open the door again to easing in upcoming communications, possibly as early as [this] week, Mr. Tal said of Mr. Poloz's speech.

Mr. Poloz will share the limelight with Christine Lagarde, who oversees her first decision as the new chief of the European Central Bank on the same day.

European Central Bank chief Christine LagardeFrancois Lenoir/Reuters

"And while expectations are low that the governing council will adopt anything new with respect to current policy, markets will be looking for clues as to the style of press conference the new ECB president will host," said CMC Markets chief analyst Michael Hewson.

This is also the day of the British election, so watch markets and the pound.

“As we know from the 2017 experience, this is not the slam dunk some think it might be,” Mr. Hewson said.

“With traditional party allegiances breaking down it wouldn’t take much for the opinion pollsters to end up red-faced and a rapid repricing in the wake of any surprise exit poll,” he added in a look-ahead.

"Thursday’s exit poll will be the first indication that we get as to which direction voters have decided to break. We should also be mindful of the Brexit referendum in 2016, which financial markets got completely wrong. There’s still all to play for."

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