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business briefing

Briefing highlights

  • What to expect from the Bank of Canada
  • What to expect from the Federal Reserve
  • Stocks, Canadian dollar, oil at a glance
  • Fiat Chrysler eyes deal with PSA
  • U.S. economy expands 1.9 per cent
  • Molson to cut jobs, expand products
  • Deutsche Bank posts loss
  • Torstar suspends dividend, posts loss
  • VW lowers outlook
  • Required Reading



We haven’t heard much from the Bank of Canada lately, but we will today, when the central bank is expected to hold its key rate steady and release a monetary policy report and tweaks to its forecasts.

Its U.S. counterpart, though, the Federal Reserve, is widely expected to trim its rate target by one-quarter of a percentage point, marking its third cut in 2019 as the Bank of Canada stands pat.

“The October meeting will mark the end of the recent months of silence from the BoC during inter-meeting periods,” Veronica Clark, associate, U.S. economics at Citigroup, said in a lookahead to this morning’s decision, noting that central bank officials are on tap to follow today’s outing with public appearances.

Like other observers, Ms. Clark said she does not believe Governor Stephen Poloz, senior deputy governor Carolyn Wilkins and their colleagues will change their stance today.

But they “could use upcoming appearances to shift the stance of policy by the December meeting or later if it sees fit,” she said in a report titled Ghosting by the BoC Coming to an End by Halloween.

"Ultimately, however, we continue to expect the data to reinforce a still-solid outlook, and that rate cuts will not be necessary.”

Many observers believe the Bank of Canada, however, will trim its key rate from its current 1.75 per cent in time. Ms. Clark also sees a scenario where that could happen.

“With the Fed very likely to lower rates by another 25 basis points on the same day as the BoC meeting, we will also now enter a period when there has been a total of 75 basis points of cuts from the Fed in 2019, with none from the BoC,” Ms. Clark said.

“We have believed that more than 75 basis points of Fed cuts could no longer be classified as ‘insurance,’ with further cuts pursued only if a more material worsening in the outlook occurs,” she added.

“In this case, a weaker U.S. outlook would also increase downside risks for Canada, and it would be much less likely that the BoC would remain on hold.”

Investors, of course, will be watching for language and signals, which could determine the fate of the markets.

“The question is, is it three cuts, they’re out?” Toronto-Dominion Bank senior economist Leslie Preston said of the Fed.

“Or will the Fed need to continue to ease?” she added.

“The fact that the inversion in the yield curve has subsided over the past couple of weeks … is a positive sign that markets are no longer pricing in a recession, and now believe the Fed may have eased enough to offset the slowdown in global growth that has taken hold in 2019.”

Here’s what other observers are saying about the Bank of Canada:

“If, as we expect, the fourth quarter shows a further widening in the output gap, the Bank of Canada will need to recognize that more stimulus is needed, and a rate cut in January still looks likely. Stagnating global trade volumes magnify the recent appreciation of the Canadian dollar and what it means for the Bank of Canada’s long-awaited rotation in demand towards exports and associated business investment. A token rate cut could, therefore, be at least as important for what it means for borrowing costs as it does for keeping the currency at competitive levels.” Ian Pollick, head of North American rates strategy, and Royce Mendes, senior economist, CIBC World Markets

“All told, there are few reasons for the BoC to turn more dovish and follow the Fed’s lead on easing. Unless the economy takes a turn for the worse, the U.S./China trade deal falls apart and/or the Canadian dollar rapidly appreciates, look for the BoC to remain comfortably on the sidelines.” Benjamin Reitzes, Canadian rates and macro strategist, Bank of Montreal

“The central bank can reasonably argue that developments since the July [monetary policy report] and September progress report have been very much in line with their July projection. In particular, after acknowledging the better-than-anticipated Q2 GDP reading (3.7 per cent) with softer details in September, their July Q3 projection is right in line with our revised monitoring at 1.5 per cent.” Simon Deeley, rates strategist, and Mark Chandler, head of Canadian rates strategy, RBC Dominion Securities

“Fiscal stimulus is unlikely to be a substitute for monetary stimulus, and the BoC probably wouldn’t incorporate any such effects until they became more highly anticipated. A post-election budget could implement the Liberal platform and introduce stimulus, but by the time a new budget is passed and impacts the economy it might be next spring/summer. Further, the amount of stimulus is likely to be small and in the low tenths of percentage points of GDP, while the effects on growth (not levels) are likely to prove transitory.” Derek Holt, head of capital markets economics, Bank of Nova Scotia

“Despite increased global uncertainty, Canada has so far managed to eke out continued trend-like growth. Some of these trends (like retail spending) are soft, but that isn’t anything new. Given no ‘bends at the end of the trends’ yet, Governor Poloz will be happy to leave the policy rate unchanged on Wednesday, if not through the remainder of the year.” Brian DePratto, senior economist, TD

“We agree with the market assessment that the probability of a change in policy is slim. But with market pricing implying that there is almost zero probability of a rate cut in December either, we think investors are underestimating the chance that the bank will present a dovish message [today].” Stephen Brown, senior Canada economist, Capital Economics

“In our view there is no pressure for the BoC to cut rates … but we expect the global economy, the U.S. in particular, to decelerate next year. Consumption and retail sales in Canada are already decelerating, which anticipates a deceleration of the economy, in our view. The domestic deceleration per se may not be enough to trigger a cut by the BoC in the following months. But if the U.S. Federal reserve continues cutting, the BoC would likely have to cut to prevent an unwanted tightening of its monetary policy that could turn into a drag on the economy.” Carlos Capistran, Canada and Mexico economist, Ben Randol, foreign exchange strategist, and Olivia Lima, rates strategist, Bank of America Merrill Lynch

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Markets at a glance

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Fiat Chrysler eyes deal

Fiat Chrysler Automobiles confirmed today it is holding talks aimed at a deal with PSA Group, the parent of Peugeot and Citroën autos.

“Following recent reports on a possible business combination between Groupe PSA and FCA Group, Fiat Chrysler Automobiles … confirms there are ongoing discussions aimed at creating one of the world‘s leading mobility Groups,” the auto maker said, releasing no details of what the discussions could entail.

This is occurring against the backdrop of the industry fighting “a global slowdown and the challenges of migrating to electric vehicles,” said CMC Markets chief analyst Michael Hewson, noting that Fiat Chrysler had been talking with Renault a few months ago when a deal fell through amid “interference” from France.

“Given that the French government also holds a major stake in Peugeot, of 14 per cent, it is hard not to see that this attempt by Fiat might well go the same way as the failed Renault attempt earlier this year,” he added.

“Business and government always make uncomfortable bedfellows, and despite the synergies a Fiat Chrysler and PSA merger would bring, it is important not to underestimate the political obstacles to a deal.”

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U.S. GDP expands 1.9 per cent

U.S. GDP expands 1.9 per cent

The U.S. economy expanded in the third quarter at an annual pace of 1.9 per cent, a tiny bit slower than the second quarter’s 2 per cent and a faster pace than economists had forecast.

“It may have slowed, but the U.S. economy is still right where it was supposed to be, with the third quarter's pace running close to what is thought to be its non-inflationary potential, and core [personal consumption expenditure] prices picking up to a bit about the Fed's target on a quarter over quarter basis,” said CIBC chief economist Avery Shenfeld.

“Consumer spending slowed but was still brisk at just under a 3-per-cent pace, and housing picked up,” he added.

“The weak spots in the economy remained two areas impacted by global growth softness (exports barely grew) and trade uncertainties (business capital spending is still falling).”

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Molson Coors to cut jobs, expand products

From Reuters: Molson Coors Brewing Co. said it plans to cut hundreds of jobs, streamline its operations and expand its product line beyond beers as it restructures its business. The brewer, which is looking to save about US$150-million in costs, expects to cut 400-500 jobs in its U.S., Canadian and international segments. The company had about 17,750 employees at the end of 2018. It said it would invest heavily in new non-beer products, after launching a canned wine and a hard coffee in 2019, as it looks to cushion the impact from waning beer demand across the globe. The company also reported its third-quarter revenue and profit below Wall Street estimates.

Deutsche Bank posts loss

From Reuters: Deutsche Bank posted an €832-million loss in the third quarter due to costs for a major restructuring and as income from its key bond trading division fell sharply. Germany’s largest lender had flagged it would lose money this year when it announced in July it would axe vast swathes of its trading desks, cutting 18,000 jobs and costing €7.4-billion. It marks the second consecutive quarterly loss as the bank faces costs to reshape its business.

Torstar suspends dividend

From The Canadian Press: Torstar Corp. suspended its quarterly dividend as it reported a $40.9-million loss attributable to shareholders in its latest quarter. The publisher of the Toronto Star newspaper said it suspended the regular payment to shareholders of 2.5 cents a share as part of its plan to preserve its cash and strengthen its financial position. The decision came as Torstar reported a loss of 50 cents a share for the quarter ended Sept. 30, compared with a loss attributable to shareholders of $18.8-million or 23 cents a year earlier. On an adjusted basis, Torstar says it lost 21 cents a share in its most recent quarter compared with an adjusted loss of 22 cents a share in the same quarter last year.

VW lowers outlook

From Reuters: Volkswagen lowered its full-year sales outlook on Wednesday, warning of slowing demand even as nine-month adjusted operating profit jumped 11.2 per cent on increased demand for SUVs as well as Skoda and Porsche cars. The German carmaker said a slowdown in global demand would result in 2019 vehicle deliveries being in line with last year’s figures, adjusting its previous forecast for a slight rise. Revenue for its passenger cars division is still expected to rise 5 per cent this year and the company reiterated that it expects an operating profit margin for the passenger cars division and the group to be in the range of 6.5 to 7.5 per cent for the full year.

Hitachi, Honda suppliers to merge parts units

From Reuters: Hitachi Ltd. will merge its vehicle components unit with Honda’s three suppliers in a bid to cut development costs and better respond to a rapid industry shift to electric vehicles and self-driving. The deal to create Japan’s third-biggest auto-parts supplier by sales also marks intensifying consolidation in the country’s auto industry, as it struggles to adapt to technological change.

Sony sees record Q2 profit

From Reuters: Sony Corp. said operating profit jumped 16 per cent in its strongest-ever result for a second quarter, as robust sales of image sensors offset a tumble in earnings from its gaming division. Sony’s operating income came in at ¥279-billion for the July-September quarter, 19 per cent higher than an analyst consensus estimate. It lifted its annual profit forecast to ¥840-billion from an earlier estimate of ¥810-billion.

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Privatize ATB

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