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business briefing

Briefing highlights

  • How oil price drop could hit Canada
  • It’s Happy Hour Day. Just sayin'
  • Markets at a glance
  • What to expect in home sales report
  • Ontario fiscal update on tap
  • What else to watch for this week
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Oil markets are suffering from what you might call mini and maxi shocks that threaten Canada’s economy and loonie, with ramifications also for interest rates.

On the mini side is a bear market for global crude. Where Canadian prices are concerned, it's nothing if not maxi.

First, the global problem: West Texas intermediate, the U.S. benchmark, is now above US$60 a barrel having eased below that mark last week. Brent crude, in turn, is at about US$71, having declined to below US$70.

"Factors behind the sudden slide include: rising inventories amid ongoing powerful gains in U.S. production, OPEC overproduction, and a watering down of the constraints on Iran’s exports," said Bank of Montreal chief economist Douglas Porter, referring to U.S. waivers on sanctions against Iran for several big importing countries.

“On the first point, U.S. output has vaulted 2 million barrels per day in the past year alone to 11.6 million, the swiftest annual rise on record and making the U.S. the largest producer in the world,” he added in a report.

On Sunday, as The Globe and Mail’s Shawn McCarthy reports, Saudi Arabia and other major oil countries raised the prospect of cutting production again, which would buoy prices. Indeed, crude rose today on those comments. We’ll learn Tuesday when OPEC issues a report, followed by a key meeting in early December to discuss plans for next year.

Observers have different forecasts for where crude goes from here. Capital Economics, for example, expects the bear market to last into next year, while JPMorgan Chase projects the Iran sanctions, a slower pace of U.S. production growth and OPEC supply caps “should support oil prices” into the end of this year.

Most importantly for Canada’s energy sector is the price of Western Canada Select, a blend of oil sands bitumen and heavy oil, which has suffered from a massive discount to WTI for some time now and is below US$20 a barrel. Last week’s U.S. court ruling against construction of the Keystone XL pipeline also hurt sentiment.

But “the WCS differential has actually held in remarkably well, all things considered,” amid developments in the market, said Joan Pinto, associate, energy specialist at CIBC World Markets.

“Canadian heavy oil’s spread to WTI will continue to remain challenged into next year,” Ms. Pinto said But, citing several positive developments in the sector, she added she expects WCS to rebound to between US$23 and US$26 next year.

"So even as investment in Canada’s oil sector has slowed compared to global upstream spending, the situation isn’t as bleak as the sub-$20 WCS price would have us imagine."

We’ve all seen the impact of oil prices on Canada’s economy, from Alberta’s anguish to the Bank of Canada’s interest rate cuts during the last shock.

Here's what observers say about the outlook:


“Most of the industry is looking at cutting back on capital spending in Canada in 2019,” said CIBC chief economist Avery Shenfeld.

"More immediately, production is being curtailed in Q4 in an effort to alleviate pressure on the differential from pipeline and rail bottlenecks," he added in a report.

"There will therefore be negative real GDP impacts beginning in the current quarter and extending into next year, as well as hits to the nominal trade and current account balance."

But, said BMO’s Mr. Porter, there are things you have to take into account “before we rush to radically adjust all economic forecasts.”

Remember, he pointed out, the drop in global prices “simply reverses” the hefty rise in advance of the sanctions, so we’re now back to the levels of late last year and far higher than the 2017 average of US$51.

And, for that matter, BMO isn't changing its 2019 forecast for an average US$65.

There will be fallout, though, in particular cooler inflation around the world.

And “among the major economies, Canada stands out as the most obvious potential growth casualty from the pullback,” Mr. Porter said.

“Compounding the pain is the glaring fact that WCS was extraordinarily weak even before the broader setback in global oil prices unfolded, posting ugly record spreads to WTI,” he added.

“In contrast to the bulls looking for a quick turn, WCS prices have cratered further to below US$17, maintaining the grotesque spread and deeply darkening Alberta’s outlook.”

This can affect the revenues of governments, as well, just as they're preparing their fall economic statements.

“Heading into a wave of fall fiscal updates, most notably from Ottawa on Nov. 21, the deep dive in oil is the one new factor that could throw the proverbial cat among the revenue pigeons,” Mr. Porter said.


The Canadian dollar's fortunes are tied to oil prices, given the economy's reliance on the energy patch.

And we've already seen some impact, with the loonie slipping below 76 US cents late last week.

Kit Juckes, global fixed income strategist at Société Générale, called it a “slippery slope” for petro-currencies.

The loonie has also been affected by concerns over trade, but that seems to have been put to bed, for now, at least, with the old North American free-trade pact being replaced by the U.S. Mexico Canada Agreement.

"One barrier to higher investment, and thereby more rate hikes and a stronger C$, was removed by the signing of the USMCA," said Andrew Grantham of CIBC.

“However, another took its place – the large spread between WCS and WTI oil prices and more recently lower global benchmarks,” he added.

"That spread has encouraged a weaker C$ compared to its past relationship with WTI. Oil sector investment was already starting to fall in the first half of the year, in contrast to the trend stateside."

This could “keep USDCAD in the low 1.30s in 2019,” Mr. Grantham said, referring to the U.S. and Canadian dollars by their symbols, with 1.30 meaning a loonie just below 77 US cents.


The Bank of Canada has been raising its key rate and promising further increases.

The benchmark overnight rate now stands at 1.75 per cent as the central bank moves it back toward normal from the extraordinary levels of the financial crisis and the last oil shock.

Markets are speculating the central bank will move again, in January or possibly as early as next month, but oil could disrupt the rate-hiking cycle.

“What’s clear is that the oil sector – responsible for Canada’s largest export product, as well as up to a third of business capital spending in good times – will be reverting to a drag on growth forecasts in upcoming quarters,” CIBC’s Mr. Shenfeld said.

"As much as the Bank of Canada wants to demonstrate it can hike on a rate-decision date that’s not accompanied by [a monetary policy report], December won’t be the time to do so with this story in the spotlight."

His colleague Mr. Grantham agreed.

“That lower oil investment likely outweighs any spending made by the manufacturing sector now that trade uncertainty has eased, which could slow GDP growth [and] prevent the BoC hiking more than twice,” he said.

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Bank of Canada governor Stephen PolozPETER NICHOLLS

Bank of Canada governor Stephen Poloz noted the issue in a speech last week, saying pipeline constraints were helping to push down prices, and that such a big discount on Canadian oil won't be sustained.

And, as Mr. Shenfeld pointed out, the question was "virtually ignored" in the recent monetary policy report.

"But barring a major turnaround in the next four weeks, it will be hard to ignore when Poloz’s team announces its December rate decision," he added.

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Just sayin'

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It’s also the first Happy Hour Day since recreational marijuana became legal in Canada. Just sayin'.

Markets at a glance

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What to watch for this week

Canadian housing markets are stabilizing but there’s still a “pretty stark” east-west divide that will be on display when national numbers are released Thursday.

BMO expects the Canadian Real Estate Association to report national resales fell 6 per cent in October from a year earlier, a better showing from the almost 9-per-cent drop in September.

BMO senior economist Robert Kavcic projects the CREA report to show average prices up 1 per cent and the MLS home price index, which is considered a better measure, up 2.3 per cent.

“The overall picture will continue to look stable/subdued,” Mr. Kavcic said in a lookahead, citing the last report, which confirmed “the relative home-price stability across most of the country.”

This comes amid rising interest rates and in the wake of new mortgage-qualification rules, known as B-20 regulations, brought in by the commercial bank regulator in January.

We’ve already seen October reports from several local real estate boards including a better showing in Toronto but a continuing collapse in Vancouver, which is helping to pull down the national showing.

“There are clear pockets of strength and weakness, as well as a pretty stark east (stronger)-west (weaker) divide,” Mr. Kavcic said.

“On the strong side, Ottawa and Montreal continue to churn out near 7-per-cent year-over-year price gains amid tight conditions,” he added.

“On the weak side, Vancouver sales were down a still-deep 35 per cent, year over year, with prices for both detached homes and condos correcting. Toronto has largely balanced out, with sales up 6 per cent, year over year, and prices steadying.”

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Aside from housing, it's a week packed with goodies, from global economic readings and corporate earnings to Ontario's fiscal update. Here's what to watch for:

Note that the TSX is now looking at the second ‘death cross’ of the year

Robert Kavcic, BMO

This may be the slowest day of the week, given that the U.S. and Canadian bond markets are closed.

But key will be how stocks perform in the wake of the wild ride after the U.S. midterm elections, the Federal Reserve's signal of rising interest rates and the oil market's dip into a bear market last week.

Still, the S&P 500 closed out the week with a gain of about 2 per cent, while the S&P/TSX Composite Index lagged with a 1-per-cent advance.

“Note that the TSX is now looking at the second ‘death cross’ of the year, with the 50-day moving average rolling below the 200-day average,” said BMO’s Mr. Kavcic.


But it could fall apart in a day.

Tuesday marks the deadline for Italy to give the European Commission a revised budget, and observers suggest the government will change little from its first version, opening the door to EC penalties under the ominous-sounding excessive deficit procedure, which sounds like something my bank might have in store for me.

“The coming week will be very telling about the Italian government’s stance and how willing it is to work with the rest of Europe,” said BMO senior economist Jennifer Lee.

“The European Commission has a Nov. 13 deadline for Economy Minister Giovanni Tria to come up with a revised budget, one that is based on less optimistic growth projections,” she added, noting that Italy projects economic growth of 1.5 per cent next year, compared to the EC’s forecast of 1.2 per cent and BMO’s call for something shy of 1 per cent.

“So far, there has been no indication that Italy will bend even a little to the EC’s will,” Ms. Lee said, citing Mr. Tria’s refusal to change.

“Frankly, if the government were to tweak its plans just a little (such as delaying the retirement age changes), to show that it is making an effort, we could see the heat dialled down,” Ms. Lee said. “And, international investors will stop selling Italian debt.”

There have been some soothing words from European partners, but, as Ms. Lee noted, talk is cheap.

“It is very likely that we could see fines imposed on Italy (opening up the excessive deficit procedure), or sanctions sometime in the spring, right before the European Parliamentary elections.”

On the corporate front, Canaccord Genuity Group Inc. reports quarterly results.

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A big day for economic readings, this.

Japan releases third-quarter economic growth numbers, which Capital Economics expects to show a contraction of 0.4 per cent from the second quarter in the wake of natural disasters.

China reports several indicators, which, given market concerns about its economy, could be key.

Also on tap is a look at third-quarter growth in the euro zone and, two days later, an inflation reading.

“The political battle between Rome and Brussels could spark contagion across the euro zone governments' bonds,” said CMC Markets analyst David Madden.

“The region is undergoing an economic cool-down, the higher cost of living is likely to add to the country’s woes.”

What markets will really be watching is the inflation reading in the U.S., which is key to the Fed's rate-hiking timeline.

Economists generally expect to see consumer prices up 0.3 per cent in October from September, and 2.5 to 2.6 per cent from a year earlier, but the kettle's not boiling over.

So-called core inflation, which strips out volatile prices and helps guide central banks, is also believed to have inched up, but still remain “within the realm of price pressures that the Fed is comfortable with, reinforcing their gradual approach to interest rate increases,” said Katharine Judge of CIBC World Markets.

Corporate earnings of note: CAE Inc., Cineplex Inc. and Loblaw Cos.

Watch, too, for results from Canopy Growth Corp., its first quarterly report since pot was legalized in Canada.


It’s fortunate for Ontario’s young Progressive Conservative government that the Tories are now forcing student teachers to pass a math test and reverting to an out-of-date sex-ed curriculum.

Because today's fiscal update will take some advanced arithmetic. And it'll be anything but sexy.

Premier Doug Ford’s Progressive Conservatives promised a lot during the election campaign, and have since been blaming the previous Liberal government for what they say is the mess left behind.

Already, new projections that take accounting and pensions into account call for a fiscal 2018-19 deficit of $15-billion, compared to an earlier forecast of $6.7-billion.

“The upcoming fiscal update will provide a huge opportunity for the government to signal how it plans to slay the deficit monster,” TD’s Mr. Sondhi and his colleague, deputy chief economist Derek Burleton, said in a report.

“From a credibility perspective, the sooner the government gets its fiscal house in order, the better. Unfortunately, rising interest rates and the prospect of slower economic growth makes the job more difficult.”

Mr. Ford's government faces hard choices, TD warned.

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Ontario Premier Doug FordChris Young/The Canadian Press

“If the government plans to honour its campaign promises, program spending will have to be pared significantly,” said Mr. Sondhi and Mr. Burleton.

“In turn, the impact of this needs to be dynamically included in economic growth forecasts,” they added.

“Importantly, revenue assumptions used in [TD’s] analysis assume reasonably healthy economic growth. Should the economy take a turn for the worse, the government’s job becomes exponentially harder. All told, the path to balance will be fraught with hard decisions.”

Also expected today is a U.S. report economists believe will show a decline of 0.6 per cent in October retail sales.

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The week ends on a slower note, with a report in Canadian manufacturing sales and not a lot else.

Economists forecast the report will show anything from a small drop to a rise of up to 0.4 per cent.

“September manufacturing sales are only expected to inch up by 0.1 per cent in the month, though this will represent an improvement from the 0.4-per-cent decline recorded in August,” said economists at Royal Bank of Canada.

“The return to positive growth largely reflects the expectation that the motor vehicle component will rise 2 per cent, reflecting indications of rising auto production as reported by the main car companies.”

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