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Business Briefing Bank of Canada to ‘reluctantly’ cut rates, CIBC says in breaking from its peers

Briefing highlights

  • Rates to fall: CIBC
  • Baker moves to take HBC private
  • Stocks, loonie, oil at a glance
  • Canadian housing starts slip
  • Salesforce in big deal for Tableau
  • Raytheon, United Tech to merge
  • Required Reading

BoC to cut: CIBC

Canadian Imperial Bank of Commerce now expects the Bank of Canada to cut interest rates next year, albeit “reluctantly.”

CIBC senior economist Royce Mendes and his colleague Ian Pollick, head of North American rates strategy, aren't the first observers to suggest this, but they are the first among their peers at Canada's major banks.

Many market players also have been speculating about a rate cut, in Canada and by the Federal Reserve in the U.S. And Fed chair Jerome Powell has certainly left the door open to this.

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All but one of Canada’s other major banks project the Bank of Canada will hold its key overnight rate at 1.75 per cent at least through the end of 2020. National Bank of Canada, in turn, forecasts two increases, each of one-quarter of a percentage point, in the second half of next year.

Mr. Mendes and Mr. Pollick said in a new report that central bank governor Stephen Poloz, senior deputy governor Carolyn Wilkins and their colleagues probably will trim that benchmark to 1.5 per cent in the second quarter of 2020.

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

Sean Kilpatrick/The Canadian Press

One-quarter of a percentage point obviously isn’t huge. But it would send a signal. And remember, many Canadians are still juggling swollen debt and would take lower interest rates whenever they could get them.

There's also the potential impact on the Canadian dollar, whose gains the central bank would like to cap as it hopes for stronger exports.

The Bank of Canada hopes exports, and the capital spending related to that, will help juice the economy next year, but "standing pat on rates as the Fed trims 50 [basis points] would likely send the Canadian dollar to firmer levels," said CIBC chief economist Avery Shenfeld.

"That, and the downside risks to global growth from trade uncertainties, would be reason enough for the Bank of Canada to offer up a token 25 [basis-point] cut next year to trim the loonie’s sails."

Here's how we get to that rate cut, according to Mr. Mendes and Mr. Pollick: They project the U.S. central bank will cut its 2.5-per-cent target for the Fed funds rate twice, each time by one-quarter of a point, later this year and again early next.

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"While the Bank of Canada isn’t intrinsically tied to Fed policy, soft global growth means there’s even less reason to believe exports and associated business investment will be able to make up for slowdowns in other parts of the economy," they added.

"That’s likely to leave the Bank of Canada reluctantly joining the rate-cutting party in 2020."

Their projections for both central banks are new.

"We’ve long been in the camp that Canadian central bankers were done with rate hikes, but now see it likely that a widening output gap in 2020 will force the bank's hand to stay true to its inflation target," Mr. Mendes and Mr. Pollick said.

Stephen Brown, senior Canada economist at Capital Economics, is in CIBC's camp, though he expects the central bank to cut before this year is out.

Here's the other view, from Toronto-Dominion Bank economist Ksenia Bushmeneva, who, like many of her peers, expects the Bank of Canada to do absolutely nothing as the recent lag in economic growth fades and growth perks up.

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"While the outlook is laden with significant risks, the Bank of Canada believes that 'the degree of accommodation [provided at present] remains appropriate,'" Ms. Bushmeneva said, referring to the central bank's comments.

"Thus, even as the market expectations intensify for the U.S. Federal Reserve to cut the policy rate this year, with similar, if less intense moves seen here as well, we expect the Bank of Canada to stay pat."

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Baker moves to take HBC private

Hudson’s Bay Co.’s executive chair is leading a group bidding to take the iconic company private.

Richard Baker and the group are offering $9.45 a share, all cash.

HBC, which also owns Saks Fifth Avenue, also plans to sell what it owns of its European business to its overseas partner for about $1.5-billion, The Globe and Mail’s Marina Strauss reports.

“While we continue to believe in HBC’s long-term potential, it has become clear that the significant challenges, risks and uncertainties facing HBC in the rapidly evolving retail environment are best addressed in a private market setting,” Mr. Baker said.

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Markets at a glance

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Housing starts slip

Housing starts across Canada fell more than 13 per cent in May to an annual rate of 202,337, Canada Mortgage and Housing Corp. said today, noting that starts on multiple units such as condos tumbled 18.5 per cent.

“The slowdown isn’t surprising, given that April’s outsized print was simply making up for weaker prior months that had been affected by challenging weather conditions,” said CIBC’s Mr. Mendes, referring to April’s reading of 233,410.

“Ontario felt the most pain, down 40 per cent, but that just takes it slightly lower than its prior trend,” he added.

“Looking through all the volatility, the roughly 200,000 pace of starts in Canada is in line with the average of the past couple of quarters, and looks more sustainable than last month’s reading.”

Separately, Statistics Canada said municipalities across the country issued a record $9.3-billion in building permits.

The increase, the agency said, “was almost entirely due to a planned change in development costs in Metro Vancouver.”

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Ticker

Salesforce to buy Tableau

From Reuters: Salesforce.com Inc. said it would buy big data company Tableau Software for US$15.3-billion in an all-stock deal, marking the biggest acquisition in the company’s history.

Chinese oil imports fall

From Reuters: China’s crude oil imports slipped 8 per cent in May from an all-time peak hit the month before as the world’s top importer of the commodity curbed shipments from Iran amid tightening U.S. sanctions on that country.

Auto alliance rift

From Reuters: The two-decade-old partnership of Renault SA and Nissan Motor Co. was plunged into fresh crisis as the French auto maker’s demand for a greater say in Nissan’s new governance system drew rare public censure by the Japanese firm.

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Required Reading

Raytheon, United Technologies to merge

From Reuters: United Technologies Corp. agreed to combine its aerospace business with U.S. defense contractor Raytheon Co. and create a new company worth more than US$120-billion, in what would be the industry’s biggest ever merger.

Pressure mounts

Pressure is mounting on the oil patch as crude prices fall and pipeline capacity problems rise, Jeffrey Jones reports.

Activists plan push

Activist investors shook up Canada’s clubby gold mining industry over the past two years by targeting boards at a dozen companies and winning an impressive number of battles. Now, writes Andrew Willis, more campaigns are in the works, and even the largest mining companies may be vulnerable.

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