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Business Briefing Bank of Canada should dial down its Debbie Downer schtick this week

Briefing highlights

  • Bank of Canada expected to hold rates
  • What to expect in GDP report
  • Fiat proposes merger with Renault
  • Stocks, Canadian dollar at a glance
  • What to watch for this week
  • Canadian Utilities to sell portfolio
  • Required Reading

Bank of Canada on tap

Expect a still-cautious Bank of Canada to hold interest rates steady this week, with no change in its signal to markets.

But, by some accounts, it should at least tweak its Debbie Downer schtick when it releases its decision Wednesday.

Bank of Canada senior deputy governor Carolyn Wilkins and governor Stephen Poloz

Sean Kilpatrick/The Canadian Press

It's a given that governor Stephen Poloz, senior deputy governor Carolyn Wilkins and their colleagues will hold their key overnight rate at 1.75 per cent.

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They’re also expected to stick to their message, outlined in their April decision and monetary policy report, for steady rates for quite some time, with no signal as to whether the next move could be up or down.

"The usual reference to the forecast will likely note that things are evolving as anticipated in the April MPR," said Benjamin Reitzes, Bank of Montreal's Canadian rates and macro strategist.

“Given the market’s persistent dovish lean, don’t be shocked if a neutral statement is viewed as somewhat hawkish.”

Last time out, in April, the central bank released a weak outlook, projecting first-quarter economic growth at an annual pace of just 0.3 per cent.

But economic indicators have turned since then, coming in much stronger.

Thus, the tone of Wednesday's statement "is likely to see a significant rewrite and offer a much more constructive message relative to the one conveyed at the last meeting in late April," Shaun Osborne, Bank of Nova Scotia's chief foreign exchange strategist, and his colleague, strategist Eric Theoret, said in a lookahead to the decision.

"The recent run of stronger-than-expected domestic data releases has been impressive, and North American trade policy uncertainty has moderated following the lifting of steel and aluminum tariffs."

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Having said that, while the trade picture looks better on the home front since Canada and the U.S. settled their tiff and ended those levies, observers expect the central bank to still flag the uncertainty surrounding an escalating battle between Washington and Beijing.

And here's where it gets a bit more interesting: In keeping with the stronger-than-forecast theme, Statistics Canada on Friday releases its measure of gross domestic product in the first quarter. And as noted, the central bank projects that will be lame.

But analysts expect to see something at least a little stronger. Compared to the Bank of Canada's annualized 0.3 per cent, they see anywhere from 0.4 per cent to 0.9 per cent.

"GDP growth is still likely to be quite soft for a second straight quarter in Q1 (to be released Friday, after the policy decision)," Royal Bank of Canada senior economists Nathan Janzen and Josh Nye said in their lookahead.

“But the BoC’s call for a 0.3-per-cent increase looks if anything a touch on the low side, and much of the softness can still be traced to mandated oil production cuts in Alberta and unusually severe winter weather.”

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Fiat proposes merger with Renault

From Reuters:

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Fiat Chrysler has made a “transformative” merger proposal to Renault, the Italian-American carmaker said, in a deal that would create a new third-ranked global manufacturer.

The plan, finalized in overnight talks with Renault, was being discussed at a meeting of the French group’s board early today, and sent shares in both companies sharply higher.

The deal would create a car maker selling 8.7 million vehicles annually with a strong presence across key regions, automotive markets and technologies, FCA said. It would generate 5 billion euros ($5.6-billion) in estimated annual savings.

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Markets at a glance

U.S. and British markets are closed.

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Ticker

Canadian Utilities to sell portfolio

From The Canadian Press: Canadian Utilities Ltd. says it has signed agreements to sell its entire Canadian fossil fuel-based electricity generation portfolio for about $835-million.

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What else to watch for this week

MONDAY

U.S. and British markets are closed so it could be a slow start to the week.

TUESDAY

Bank of Nova Scotia picks up where its peers left off last week, reporting quarterly results. Indigo Books and Music Inc. also reports.

Also on tap is the latest reading of the S&P Case-Shiller home price index, which economists generally expect to show U.S. home prices rose 0.2 per cent in March from February and 2.5 per cent from a year earlier.

WEDNESDAY

Besides the Bank of Canada's morning announcement, watch for quarterly results from Bank of Montreal and Lululemon Athletica Inc.

THURSDAY

The Bank of Canada's Ms. Wilkins follows Wednesday's rate decision with a speech on the economy to a Calgary business group. Among other things, this would be an opportunity for the central bank to clarify anything it thinks the market may have misinterpreted from Wednesday's statement.

Markets will also be watching for a Statistics Canada report expected to show the country's current account deficit widened sharply in the first quarter to between $18-billion and $18.6-billion from the fourth quarter's $15.5-billion.

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"Even if there is somewhat of a rebound in store in the coming quarters, the shortfall looks set to come in around 3 per cent of GDP this year," said CIBC World Markets senior economist Royce Mendes.

"Canada’s persistently large current account deficit likely indicates that the currency is set to weaken further over the medium term to boost the economy’s international competitiveness."

On the corporate front, Laurentian Bank of Canada and National Bank of Canada report quarterly results.

FRIDAY

This is the day of Canada's GDP report, as noted, with CIBC's Mr. Mendes projecting economic growth at an annualized 0.7 per cent.

"The final quarter of 2018 and the first quarter of 2019 will look quite weak, but a strong handoff should leave Q2 growth running back above 2 per cent," he said.

"While the third quarter could see some residual strength, coming off of a low base, growth will likely return back to the 1.5-per-cent range thereafter, the likely trend pace for the ensuing year."

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Investors will also be glued to the latest manufacturing and services sector readings from Beijing, given concerns over global growth.

"Recent data have pointed to a Chinese economy that is struggling to maintain traction against a weak global economic backdrop," said CMC Markets chief analyst Michael Hewson.

"A pick-up in March manufacturing activity proved to be rather short-lived as April activity fell back again," he added.

“Services is proving to be more resilient, however recent retail sales data have shown that consumer demand is at 16-year lows. If this week’s [purchasing managers indexes] are similarly weak, then the calls for more stimulus are only likely to get louder.”

Required Reading

Energy ministers to push for speed

Global energy ministers gathering in Vancouver this week will push for faster adoption of low-carbon technologies, as worldwide investment in energy efficiency and renewable power stalled last year. Global energy writer Shawn McCarthy reports.

CMHC targets banks

Columnist Andrew Willis looks at how Canada Mortgage and Housing Corp. is targeting banks for a “cavalier” approach to mortgage lending.

Investors shouldn’t panic

The U.S. economy is slowing abruptly, with knock-on effects sure to be felt in Canada. How worried should investors be about this decelerating trend? The answer, rather surprisingly, is not very, Ian McGugan writes.

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