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Business Briefing Easy but not-so-peaceful feelin’: Dovish central banks and markets test uncharted waters as threats loom

Briefing highlights

  • Where central banks stand
  • Lagarde appointment raises eyebrows
  • But also boosts European stocks
  • Stocks, loonie, oil at a glance
  • Co-CEO Linton out at Canopy Growth
  • Canada posts surprise trade surplus
  • Iacocca dies at 94
  • Required Reading

'Cause I got a peaceful easy feelin'

And I know you won't let me down

'Cause I'm already standin'

On the ground

— Jack Tempchin, recorded by the Eagles, 1972

Don’t be too sure about that second line as central banks head into a second-half marked by uncertainty and threats.

Markets, of course, are trying to divine what the world’s major central banks will do as trade and other issues weigh on the outlook for global economic growth.

One thing is certain: More than 10 years after the financial crisis, we’re now back in uncharted waters.

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Central banks are still toying with mega-low policy interest rates.

The Reserve Bank of Australia cut for a second consecutive time Tuesday, trimming its cash rate to a record low 1 per cent.

The Federal Reserve is also expected to cut its benchmark, though economists believe markets have gone too far in pricing in more than expected.

The European Central Bank, in turn, is sitting out for quite some time yet, and has pledged to stay low.

Then there’s the Bank of Canada, which some economists believe will simply hold its key overnight rate at 1.75 per cent well into the future.

Others expect the Bank of Canada to cut, possibly next year, though there is a school of thought that suggests governor Stephen Poloz, senior deputy governor Carolyn Wilkins and their colleagues will be more aggressive.

“The world is faced with a yearning for stable return, or better yet, growth, but it comes at a cost,” said Sébastien Galy, senior macro strategist at Nordea Asset Management.

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“Wages are relatively weak, and what we are left with is support from central banks,” Mr. Galy added.

“To add to this, manufacturing globally is in a slump as China is most likely three months away from troughing. As [former IMF chief economist] Olivier Blanchard pointed out, rates are set to stay low for a considerable amount of time.”

This comes as the U.S. economic expansion becomes the longest on record, eclipsing the recovery of 1991-2001. It also comes amid a bond yield inversion in Canada.

Elsa Lignos, Royal Bank of Canada’s head of foreign exchange strategy in London, said she’s waiting to see the first measure of second-quarter growth in the U.S., expected late this month, to see how “rate-sensitive” sectors of the economy are faring, as they can be “a good warning signal” of recessions.

“But our base case still a (slow) but ongoing expansion,” Ms. Lignos said.

As for the bond market, Bank of Montreal senior economist Robert Kavcic noted that the 10-year minus 2-year yield curve inverted Tuesday for the first time in this economic cycle.

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This has “historically been a reliable pre-recession indicator,” though not without false positives.

“We don’t think the economy is about to roll over at this point, but it is at least consistent with our view that growth will look softer after the Q2 bounce and through 2020,” Mr. Kavcic said.

Stephen Brown, senior Canada economist at Capital Economics, expects domestic economic growth to slow, but he also expects more from the central bank.

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

Sean Kilpatrick/The Canadian Press

“Investors are right to price in lower interest rates from the Bank of Canada, but the single cut priced into markets for the next 12 months does not go far enough,” Mr. Brown said.

“We expect the bank to cut interest rates three times, starting in October,” he added.

“We see little prospect of the bank raising interest rates again before 2022. Low public debt means that there is ample scope for the federal government to loosen the purse strings if the economy slows as we expect.”

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There are, obviously implications to all this for central banks and governments.

“The uncertainties in the global economy, notably related to the trade tensions, and the sensitivity of financial markets, have induced a pause in the monetary policy normalization process in advanced economies,” The Bank for International Settlements, a group made up of the world’s central banks, said this weekend in its latest economic report.

“Nevertheless, central banks find themselves in a predicament, as the path ahead has narrowed,” it added.

The “policy mix needs to be rebalanced,” the BIS urged.

“Higher sustainable growth can only be achieved by reducing the reliance on debt and reinvigorating productive strength,” the group said.

“In the process, this would relieve some of the burden monetary policy has been bearing since the [Great Financial Crisis] and avoid the expectation that this policy can be the engine for sustainable growth. Its more appropriate role is that of a backstop, given that its main focus is delivering price stability while supporting financial stability.”

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Meet the ECB’s next chief

Into this climate steps International Monetary Fund chief Christine Lagarde, who was nominated to lead the European Central Bank when Mario Dragi leaves in October.

The appointment of Ms. Lagarde, a former French finance minister, helped boost stocks in Europe today given that she’s expected to have a dovish bent, though the fact that she has no experience in central banking and was once a politician is raising eyebrows.

Christine Lagarde

SAUL LOEB/AFP/Getty Images

“The euro has remained under pressure this morning, after slipping back in the wake of the announcement that Christine Lagarde, head of the IMF, was being nominated as president of the European Central Bank,” said CMC Markets chief analyst Michael Hewson.

“This is a controversial choice at a time when central bank independence is increasingly being questioned.”

Ms. Lagarde will probably “lean to the dovish side, but at a time when the central bank is running low on monetary policy levers to pull, have such an inexperienced and underqualified person in such a high-profile role doesn’t inspire confidence in what is likely to be a crucial area in the coming months and years,” Mr. Hewson added.

Make no mistake. Ms. Lagarde may lack central banking experience, but she is accomplished in other areas, and worked in the trenches in the French government during the financial crisis.

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“Christine Lagarde has been a stalwart of stability her entire career,” said Nordea’s Mr. Galy.

“She should be considered a consensus builder, one that adapts to the situation,” he added.

“She is likely to initially favour more easing, as seems evident with the current slowdown and inflation below target, but as the situation reverses so will a position much as a pivot member within the Federal Reserve.”

There’s more than just straight monetary policy, too.

“The market chatter is that the appointment of Jay Powell, rather than a professional economist, to run the Fed has resulted in poor management of the Fed's policy communication,” said Kit Juckes of Société Générale.

“That logic makes some worry about appointing a non-economist to head the ECB. But with the ECB all but out of policy ammunition, I think the next ECB head’s challenges will be to make progress on banking union and to persuade EU finance ministers to join the fight against Japanification of Europe. She seems well-suited for that role.”

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Markets at a glance

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Linton out

Bruce Linton, who helped lead the charge into legal marijuana in Canada, is gone as co-CEO and a board member at Canopy Growth Corp.

“The board decided today, and I agreed, my turn is over,” Mr. Linton said in a statement.

Mark Zekulin will become chief executive officer and “will work with the board to begin a search to identify a new leader to guide the company in its next phase of growth, which will include both internal and external candidates,” the company said.

Rade Kovacevic, becomes president.

Canopy Growth gave no reason for the changes, which took effect immediately.

Mr. Linton’s surprise departure comes less than two weeks after Canopy reported a fourth-quarter loss that was nearly four times what analysts were expecting, The Globe and Mail’s Jameson Berkow writes. And the CEO of Constellation Brands, which invested $5-billion in Canopy last year, expressed dissatisfaction with the results.

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Canada posts trade surplus

Canada posted a surprise trade surplus for May as exports bounced 4.6 per cent.

It’s the second time since late 2016 the country has recorded a gain.

Analysts had expected Statistics Canada would report that April’s $1.1-billion trade deficit would widen to about $1.5-billion.

But, Statistics Canada said, that jump in exports far outpaced a 1-per-cent rise in imports, resulting in a surplus of $762-million.

When you strip out price effects, export volumes rose 4 per cent, and import volumes 1.2 per cent.

Exports of cars and parts, aircraft, other transport-related equipment and energy products fueled the rise.

“The first indicator for May GDP was a positive one, with the trade balance unexpectedly turning to surplus for only the second time since 2016,” said CIBC World Markets senior economist Royce Mendes.

“Over all, even though some of the strength could prove transitory, the trade surplus is positive for tracking and supports our forecast for a GDP increase of 2.5 to 3 per cent in the second quarter,” he added.

Exports to the U.S. hit a record in May, bringing Canada’s surplus with its biggest trading partner to $5.9-billion, its fattest since October, 2008. Exports to other countries also were in record territory.

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Ticker

Iacocca was visionary auto maker

From The New York Times Service: Lee A. Iacocca, the visionary auto maker who ran Ford Motor Co. and then Chrysler Corp. and came to personify Detroit as the dream factory of America’s postwar love affair with the automobile, died Tuesday at his home in Bel Air, California. He was 94.

U.K. services sector lags

From Reuters: Britain’s economy appears to have contracted in the second quarter of 2019 after the dominant services industry barely grew in June against a backdrop of worries about Brexit and the world economy, a closely watched survey showed.

CPPIB in deal with Unite

From Reuters: Student housing provider Unite is to acquire rival Liberty Living Group in a US$1.8-billion cash and stock deal that will see Canada’s Pension Plan Investment Board take a 20-per-cent stake in the enlarged group.

Broadcom said in talks for Symantec

From Reuters: Chip maker Broadcom Inc. is in advanced talks to buy cybersecurity firm Symantec Corp., according to sources familiar with the matter, as Broadcom seeks to diversify beyond semiconductors.

Required Reading

Natural gas producers look for fixes

Energy companies are in talks with Premier Jason Kenney’s government to find fixes for rock-bottom Alberta natural gas prices – including possible production cuts – in an effort to stave off corporate bankruptcies and dwindling public coffers. Jeffrey Jones reports.

Coming clean

We need to come clean with millennials on their big-city home ownership dreams, personal finance columnist Rob Carrick argues.

TC Energy sells assets

TC Energy Corp. is selling U.S. natural gas gathering and processing assets for US$1.275-billion, its latest asset deal aimed at using proceeds to fund a large list of pipeline and other energy projects.

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