Briefing highlights
* Trump just days away from Iran decision
* Sanctions could boost oil prices, loonie
* Markets at a glance
* Nestlé in major deal with Starbucks
* What to watch for in Canadian jobs report
* What else to watch for this week
Trump is reveling in his role of ringmaster ... while he ostensibly deliberates over a choice with massive national security and economic implications
— Suzanne Maloney, Brookings Institution
Tensions over Iran’s nuclear pact appear near the breaking point as President Donald Trump weighs a decision that would ripple across the global economy.
Oil prices have already spiked, topping US$70 a barrel today, as the “three-ring circus” over the agreement draws to a close, with Mr. Trump just days away from choosing whether or not to kill the multination deal and renew sanctions on Tehran.
He has options, and what has happened so far could be brinksmanship, of course. But at this point observers expect him to pull the plug this week and reimpose sanctions, which would drive up crude and gasoline prices, along with the Canadian dollar, while buoying the oil patch.
Canadian households, already juggling higher mortgage rates and swollen debt levels, would be pinched even further, though oil companies could see the flip-side benefits of stronger prices.
European leaders are pushing for renegotiation of the 2015 Comprehensive Plan of Action, or JCPOA, which placed restrictions on Iran’s nuclear program as sanctions were waived. But based on what he has warned, some observers believe Mr. Trump will nonetheless nix it.
French President Emmanuel Macron and German Chancellor Angela Merkel have already met with Mr. Trump, who also spoke over the weekend with British Prime Minister Theresa May. Her foreign minister, Boris Johnson, is in Washington meeting with various officials on the Iran issue, among others.
Israeli Prime Minister Benjamin Netanyahu has also weighed in, broadcasting far and wide how Tehran has “lied.”
Israeli Prime minister Benjamin Netanyahu speaks during a news conference at the Ministry of Defence in Tel Aviv, Israel, April 30, 2018AMIR COHEN/Reuters
Iranian President Hassan Rouhani, in turn, warned Sunday the Trump administration would be “making a mistake” if it pulls out, and that Tehran has drawn up plans to respond. He added today that Tehran could stay in the agreement even if the U.S. withdraws, contingent on EU guarantees.
“Orders” have been given to the nuclear and other economic sectors “to confront America’s plots against our country,” he said, according to reports.
“We will not negotiate with anyone about our weapons and defenses, and we will make and store as many weapons, facilities and missiles as we need.”
As JPMorgan Chase sees it, Mr. Trump has three options: The first, and most likely at this point, is to kill the agreement, the second is to renegotiate it, and the third is to give new National Security Adviser John Bolton and Secretary of State Mike Pompeo time to gauge the situation by extending the waivers.
Weighing the many consequences, Mr. Trump must make his decision by Saturday.
“The debate over the fate of the deal has become a three-ring circus, with Israelis, Europeans and the Iranians themselves all jockeying to shape the outcome in their favour,” said Brookings Institution senior fellow Suzanne Maloney.
“At this point, only two things are clear: President Donald Trump is reveling in his role of ringmaster, entertaining appeals from U.S. allies and holding the world in suspense while he ostensibly deliberates over a choice with massive national security and economic implications.”
Ms. Maloney, the group’s deputy director of foreign policy, suggested Saturday’s deadline could mark just the start of “a new phase of uncertainty” and, perhaps, diplomacy.
“Trump will issue his verdict on the Iran deal [this] week, but the decision will likely usher in an even more intense ambiguity surrounding the status of the nuclear agreement, the state of the trans-Atlantic relationship, the legality of doing business with Iran, and the prospects for military conflict involving Tehran and its proxies across the Middle East,” Ms. Maloney wrote on the Brookings site.
Obviously, more than oil and gas prices are at stake.
“Should Trump repudiate the nuclear deal, there is no reason to believe that Tehran will continue to submit to international monitoring or to sustain the constraints on its nuclear program as required under the accord,” Ms. Maloney said.
But where energy markets are concerned, there would no doubt be a marked impact on oil prices that are already at their highest in about three years, with the U.S. benchmark topping US$70 today for the first time since late 2014.
“The markets are likely to watch out for Iran’s retaliation on the back of such hawkish actions,” said Abhishek Deshpande, JPMorgan’s head of oil market research and strategy.
“In the worst case scenario, Iran’s attempt to restart its nuclear program could push EU to join U.S. in tightening sanctions on Iran.”
JPMorgan estimates that could cut Iranian oil exports by about 500,000 barrels a day to Japan, South Korea, India, Turkey and the EU.
During an earlier round of sanctions, Mr. Deshpande noted, the EU had an embargo and a ban on oil tanker insurance.
“It was the ban on shipping insurance that really choked their oil exports,” Mr. Deshpande said.
“The ban on European insurance cover for Iranian oil exports from 01 July 2012 curtailed shipments and raised costs for major buyers such as Japan and South Korea. European insurers provide cover for the majority of the world’s oil tanker fleet, which includes third party liability insurance, environmental liability insurance and re-insurance,” he added in a report on what to expect.
This would play out in other areas, as well, notably currency markets and notably for the Canadian dollar, whose fortunes are linked to oil prices.
Mark McCormick, for one, North American head of foreign exchange strategy at TD Securities, forecast a 10-per-cent jump in crude, and thus a 1.3-per-cent gain for the loonie, if the U.S. kills the agreement.
While Canadian exporters would rue a stronger loonie, the oil industry would welcome higher oil prices. And, of course, any sanctions against Iran would add to those already in place against Venezuela.
“Other OPEC producers are not expected to increase production in the face of declines in Iran and Venezuela,” said Moody’s Analytics economist Thomas Nichols.
“Saudi Arabia, in particular, supports an oil price of US$80 per barrel to support its budget and the 2019 initial public offering of state oil giant Saudi Aramco.”
Mr. Nichols believes OPEC production will probably be lower than expected this year, given Iran and Venezuela, which is “a plus” for the Canadian industry.
“With the expectation of slower global supply growth along with ongoing strength in demand, Moody’s Analytics has revised up its oil price forecast,” Mr. Nichols said, adding that the rating agency’s sister company now projects that benchmark West Texas intermediate crude will “float” around US$65 a barrel for most of the year.
“The higher prices will support Canadian output,” he added.
“At this price point, even output in many high-cost fields becomes financially feasible. With Saudi Arabia promising to keep some spare capacity sidelined, Canadian producers will not have to compete as aggressively with rising OPEC output.”
Read more
- Rouhani says Iran has plans to ‘resist’ any Trump decision on nuclear deal
- Oil hits highest since November 2014 as Iran tensions mount
- Ian McGugan: The Goldman wake-up call: It’s time to tilt towards commodities in your portfolio
- Israel insists it’s not looking for war with Iran
- Netanyahu says ‘Iran lied’ about not pursuing nuclear weapons
- Pompeo ratches up anti-Iran rhetoric after meeting Netanyahu
- Pompeo starts Mideast tour with call for new Iran sanctions
Markets at a glance
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What to watch for this week
Corporate HR departments, unions and the Bank of Canada will be scouring this week’s jobs report for signs of further wage growth, and what they suggest about the clout of workers at the bargaining table.
Economists expect Statistics Canada’s look at April’s labour market to show net job gains of between 10,000 and 25,000, with unemployment holding at a four-decade low of 5.8 per cent.
But beneath those headline numbers on Friday, it will be important to study the pickup in wages and the split between full- and part-time work.
“Wages will be watched closely for signs that what already look like quite tight labour markets are increasing workers’ bargaining power,” Royal Bank of Canada said in a lookahead to the report, citing the fact that annual pay growth sped up to 3.2 per cent in the first quarter from 2.6 per cent in the fourth.
“A big minimum wage hike in Ontario helped, but wages were also up 3 per cent outside of Ontario, by our math.”
Benjamin Reitzes, Bank of Montreal’s Canadian rates and macro strategist, expects the report to show wages rose 3.6 per cent in April from a year earlier, when they outright declined. Some other observers expect to see a bit less.
Toronto-Dominion Bank economists are at the higher end of the range of forecasts, believing the economy churned out 25,000 new jobs. They also believe the gains skewed toward full-time work.
“While full-time employment has seen significant gains over the last year, its share of total employment remains below pre-crisis levels and has room to rise,” TD said.
“April is also one of the strongest months for full-time job growth, outperforming part-time by nearly 30,000 on average since the crisis.”
Friday’s report will also likely be “more representative of underlying momentum” after total first-quarter job losses driven by a sour January, added Royce Mendes of CIBC World Markets.
“Look for job creation to continue adding to incomes this year, supporting consumer spending growth, albeit slightly less than last year’s torrid pace,” he said.
There’s much more on tap this week, from NAFTA trade ministers meeting again, and the latest measure of China’s trade, to a Bank of England meeting and U.S. President Donald Trump’s decision on Iran’s nuclear deal, which could move oil prices.
Read more
- Rachelle Younglai: Alberta’s unemployment dips to a three-year low, pointing to recovery
- David Parkinson, Rachelle Younglai, Greg Keenan: Growing labour shortages, higher wages a pressing concern for Canadian businesses
- Let’s not forget the marginalized and unemployed as we applaud today’s jobs report
MONDAY: IT AIN’T OVER TILL IT’S OVER
First-quarter earnings season still has a way to go, although we’ve seen the bulk of the biggies already.
Westshore Terminals Investment Corp. and Tyson Food Inc. are among those that kick off the week, followed over the next few days by the likes of George Weston Ltd., Valeant Pharmaceuticals International Inc., Walt Disney Co., WestJet Airlines Ltd., TMX Group Ltd., Brookfield Asset Management Inc., Canadian Tire Corp., Telus Corp., Magna International Inc., Onex Corp. and Thomson Reuters Corp.
TUESDAY: I’M WATCHING YOU
With U.S. and Chinese trade negotiators trying to work out their differences, Mr. Trump will watch closely for China’s April trade numbers.
Chang Liu of Capital Economics expects to see a “sizeable surplus” after a seasonally related deficit in March.
“The March numbers were a big surprise as China posted its first trade deficit with the U.S. in over a year as exports fell back sharply, declining 2.7 per cent, a big variance from the 44.5-per-cent rise seen in February,” CMC Markets chief analyst Michael Hewson said.
“While the timing of Chinese New Year may well cause some variance, these are big swings and do raise a concern that trade war worries or a slowdown in global demand might be behind these swings,” he added.
“The latest Chinese trade numbers will go some way to establishing whether these recent swings are indicative of a wider trade disruption.”
Also worth watching is the April reading on construction starts from Canada Mortgage and Housing Corp., which BMO’s Mr. Reitzes expects to show a 6.8-per-cent drop to an annualized pace of 210,000, “still a very solid level but succumbing to the broader pullback in housing market activity.”
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WEDNESDAY: THE MOUSE THAT ROARED (IN PAIN)
Let’s see how Walt Disney Co. stock opens after its annual meeting and second-quarter results a day earlier, after markets close for the latter.
Disney’s last results were at the “higher end” of estimates primarily because of the U.S. tax overhaul, CMC’s Mr. Hewson noted, so it will be interesting to see its latest report.
“What was more disappointing was a fall in overall revenues, with the greatest drags coming from their ESPN channels and ABC broadcast networks,” Mr. Hewson said.
“Disney, like a lot of other traditional broadcasters, is seeing its traditional businesses being disrupted by new streaming services like Netflix and Amazon Prime, which is driving subscription costs down,” he added.
“Fortunately, its parks and resorts business is taking up the slack, while its bid for 21st Century Fox appears to have stalled in the wake of a new bid by Comcast for the Sky business, which Fox has a 39-per-cent stake in.”
Watch, too, for the week’s second look at real estate, with economists expecting Statistics Canada’s monthly building permits report to show a 1-per-cent rise in March.
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THURSDAY: CARNEY’S KIBOSH
Many observers had expected the Bank of England would raise its benchmark rate by one-quarter of a percentage point when it releases its decision and inflation report, but Governor Mark Carney appears to have put the kibosh on that by talking it down.
“We think the Bank of England will hold off from raising bank rate [Thursday] until it becomes clear that only temporary factors were to blame for the slowdown in Q1,” Liam Peach of Capital Economics said.
“That said, we don’t think this will be enough to silence the most hawkish members of the [monetary policy committee], with the vote likely to be 7-2 in favour of keeping rates unchanged at 0.5 per cent.”
Markets will also watch for the April reading on U.S. inflation for hints about the Federal Reserve’s rate-hiking timeline.
This will also be another chance for Mr. Trump to harangue the Organization of the Petroleum Exporting Countries (OPEC) over high oil and gas prices, given they “were both up strongly on the month,” according to CIBC’s Katherine Judge, who expects annual inflation to show a rise to 2.5 per cent from March’s 2.4 per cent.
“U.S. inflation has gained momentum lately, but some of that strength owes to telecom price declines falling out of the annual calculation,” she said.
“With more of those dropping out this month, inflation should gain a step. That will help counteract a cooling in auto insurance premiums, which are coming off of recent hurricane-induced strength.”
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FRIDAY: ABOUT THAT JOBS REPORT ...
Just a warning on that Statistics Canada jobs report: These are hard to forecast and frequently show wide, and unexpected, swings.
Also up today is Carolyn Wilkins, the Bank of Canada’s senior deputy governor, who’s speaking at a women’s forum in Toronto.