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Briefing highlights

  • Don’t expect much from trade pact
  • Stocks, Canadian dollar, oil at a glance
  • CN workers on strike
  • Manufacturing sales slump
  • What analysts are saying today
  • Required Reading

Don’t expect much

Exporters are no doubt hailing the latest news on the United States-Mexico-Canada Agreement, but at least one analyst warns the trade pact won’t mean all that much for economic growth.

“We’re not convinced that the passing of the [USMCA] into law will materially lift investment,” said Stephen Brown, senior Canada economist at Capital Economics.

“The changes from NAFTA are, in the grand scheme of things, small,” he added.

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“The potential for U.S. President Donald Trump to unilaterally withdraw from NAFTA was always the biggest threat, but that risk faded over a year ago when Trump and Prime Minister Justin Trudeau reached the preliminary deal.”

Mr. Brown’s report followed comments from U.S. House Speaker Nancy Pelosi, who said the proposed deal, the successor to the North American free trade agreement, may soon be passed with the backing of the Democrats.

“While North American trade has completely fallen off the market’s radar, suffice it to say that the issue has not faded for business decisions on the ground – and it would be very good news indeed if the issue could be safely put to bed at long last,” added Bank of Montreal chief economist Douglas Porter.

While Mr. Brown doesn’t see a big boost to economic growth, don’t take that to mean there won’t be any impact. Canadian businesses have been waiting for this for some time now.

Source: Bank of Canada

“Admittedly, firms’ investment intentions dropped back in the autumn 2017 business outlook survey after NAFTA negotiations got under way,” Mr. Brown said.

“But the press release at the time made no mention of NAFTA and the bank argued that the decline was simply a normalization of investment intentions,” he added.

“Investment intentions actually declined after the Canada and the U.S. agreed to the deal in September last year, and then rebounded this autumn, even as the future of NAFTA still looked uncertain… . So while the conclusion of the NAFTA saga is good news, it is unlikely to have a material effect on GDP growth.”

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Markets at a glance

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CN workers on strike

More than 3,000 Canadian National Railway Co. train operators went on strike just past midnight, shutting down Canada’s largest rail network, The Globe and Mail’s Eric Atkins reports.

The workers, represented by Teamsters Canada Rail Conference, and CN failed to reach an agreement on a new contract after several months of mediated talks, the union said.

CN has been winding down operations ahead of the possible strike, a safety measure taken to avoid leaving loaded trains in storage or on tracks. The railway stopped picking up some hazardous goods and interchange cars from other railways in the past couple of days, according to an internal memo seen by the Globe and Mail.

CN said in the memo it will use qualified managers to operate some trains, focusing on container shipments.

Via Rail, Canada’s passenger train service that operates mainly on CN lines, will not be adversely affected by the strike, the union has said. Similarly, commuter rail operations in Vancouver, Toronto and Montreal will be unaffected.

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Manufacturing sales slump

Canada’s manufacturing sector suffered a setback in September, as sales slipped 0.2 per cent after August’s rise of 0.8 per cent.

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When you strip out price moves, sales fell 0.7 per cent, Statistics Canada said.

There were factors at play, notably maintenance at some refineries and a strike against General Motors Co. in the U.S.

“Sales of motor vehicle parts fell 4.3 per cent to $2.6-billion,” the statistics agency said.

“Some parts plants in Canada were impacted by the United Auto Workers strike in the United States and had to scale back or stop production towards the end of the September.”

Unfilled orders slipped 0.6 per cent, and new orders by 2.7 per cent.

“This decrease was mostly due to lower new orders in the aerospace product and parts industry, as well as in the ship and boat building industry,” Statistics Canada said of the latter.

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TC Energy sees EBITDA topping $10-billion

From Reuters: Canada’s TC Energy said it expects comparable core earnings (EBITDA) to exceed $10-billion in 2022, driven by long-term contracts and assets. The Keystone pipeline operator also said it expects dividends to grow at an average annual rate of 5 to 7 per cent beyond 2021.

Home Depot cuts forecast

From Reuters: Home Depot Inc. said efforts to integrate online and in-store shopping were taking longer than expected to pay off, prompting the retailer to cut its 2019 sales forecast. To keep customers away from rival Lowe’s Cos., Home Depot invested heavily in its online business, primarily by adding automated lockers in stores for shoppers who want to pick up their orders rather than wait for them to be delivered. The largest U.S. home improvement chain has also worked on its supply network to shorten delivery times and the search function of its website to make in-demand products more easily accessible. Home Depot said it expected its fiscal 2019 sales to rise about 1.8 per cent, compared to a prior forecast of a 2.3-per-cent increase. The company also cut its full year same-store sales forecast. Net income fell to US$2.77-billion or US$2.53 a share in the third quarter from US$2.87 billion, or US$2.51.

German manufacturing to decline

From Reuters: Germany’s BDI industry association said it expected manufacturing production in Europe’s largest economy to decline by 4 per cent this year, with overall German exports seen only edging up half a percentage point in 2019 due to weaker foreign demand. “After six consecutive years of growth, Germany’s industrial sector is stuck in recession since the third quarter of 2018,” BDI managing director Joachim Lang said in a statement.

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What analysts are saying today

“Yesterday we heard that Beijing were pessimistic about the possibility of signing phase one of the trade deal, and the story hasn’t moved along. Traders are buying back into the market despite the lack of progress on the trade front. The issue has dominated the headlines in recent weeks and is likely to stay at the forefront of dealers’ minds until mid-December - when the U.S. are due to slap on new tariffs. The rally this morning underlines traders’ expectations of a deal being achieved.” David Madden, analyst CMC Markets

“The steady response in Asian markets to the stand-off at the Polytechnic University could indicate investors are growing accustomed to the protests in Hong Kong. We worry the court ruling overturning the ban on wearing masks could be a tipping point in the response from Beijing. Its an official act of defiance from an H.K. institution against Chief Executive Carrie Lam and her supporters in the Chinese Communist Party. This morning China’s cabinet appointed a new police chief in Hong Kong. We expect more heavy-handed police tactics that could be bad news for investors as well as those on the ground. Hong Kong is still near the top of our list of risk factors that could usher in a blow-off top in U.S. equity indices.” Jasper Lawler, head of research, London Capital Group

“President Trump met with Fed chair Jay Powell yesterday and they discussed monetary policy, the dollar, negative interest rates, low inflation and the dollar. What they actually said we don’t know but they are, at least in public, putting on a comradely face. The result of the meeting was to remind markets that the president would like lower rates and a cheaper dollar.” Kit Juckes, global fixed income strategist, Société Générale

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Required Reading

Nygard sentenced

Fashion retailer Peter Nygard faces jail time in the Bahamas in a dramatic escalation of his long-running feud with a billionaire neighbour over parties and construction at his island vacation property. Andrew Willis reports.

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RBC backs fund

A Canadian venture development firm that specializes in helping large corporations fund and expand innovative tech startups has secured Royal Bank of Canada as the anchor investor of its $20-million fund, Sean Silcoff writes.

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