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Briefing highlights

  • Canada, U.S. risk ugly trade war
  • Metro in $4.5-billion deal for Coutu
  • Markets at a glance
  • What to expect from jobs, trade reports
  • What else to watch for this week

Balls may well be appropriate – and necessary – as Canada stares down the United States amid the threat of a brutal trade war.

It's not just the heavy preliminary duty against Canada's Bombardier Inc. and the anti-dumping levy expected this week. The fight over softwood lumber preceded that, followed by U.S. demands to substantially alter the North American free-trade agreement.

And ignore the fact that many analysts believe Boeing Co. can't justify its allegations against Bombardier. Because American trade officials have new rules of engagement under the Trump administration.

As The Globe and Mail's Robert Fife, Steven Chase, Nicolas Van Praet, Adrian Morrow and others have documented, the Bombardier case and NAFTA negotiations have put Canada-U.S. relations in a precarious state.

So much so that trade with the U.S. now ranks among the biggest economic threats to Canada.

"This latest trade dispute, which is the worst so far and comes after other feuds over softwood lumber and dairy supply-management practices, threatens to exacerbate tensions between Canada and the U.S.," said David Madani, senior Canada economist at Capital Economics in Toronto, warning this flash point raises the "spectre" of a trade war.

"It could undermine hopes of a quick agreement on a new NAFTA deal," Mr. Madani added.

"According to U.S. and Canadian trade representatives, some progress was made during the third round of NAFTA meetings held [last] week in the Canadian capital, but they also said that relations had become strained over the aerospace dispute."

Given that the aerospace sector accounts for almost 210,000 jobs, it's no small matter for Canadian negotiators.

To recap, the U.S. Department of Commerce responded to Boeing's allegations that Bombardier is being subsidized with a preliminary countervailing duty of 220 per cent on the Canadian plane maker's crucial C Series models.

A finding on anti-dumping duties will follow this week, as will final determinations and a decision by the U.S. International Trade Commission.

Brazil, whose Embraer is also a Bombardier competitor, is also demanding action.

"Not helping matters, Canadian Prime Minister Justin Trudeau has had harsh words of his own for Boeing, which he accused of trying to eliminate thousands of Canadian aerospace jobs through its attack on Bombardier," Mr. Madani said.

"Complicating the trade outlook even more, Trudeau has threatened to cancel a US$5.2-billion military contract to buy 18 Boeing-built Super Hornet jets."

In their outlooks for Canada, virtually every economist around has cited NAFTA talks as a caveat. Meaning that if the talks fail, all bets are off.

"The NAFTA negotiations are critical to the outlook for trade and investment," Mr. Madani and his colleague at Capital Economics, Paul Ashworth, said in a recent report.

"Progress has been slow and Canada will probably have to make some concessions, or risk the U.S. unilaterally withdrawing. President Donald Trump's threats to withdraw unilaterally can probably be ignored, but the risk can't be dismissed entirely."

Indeed, the U.S. "is taking this very tough stance on NAFTA talks," said David Rosenberg, chief economist at Gluskin Sheff + Associates, adding this bit: "Can you believe that Wilbur Ross is advocating an end to Chapter 19, which deals with how to resolve trade disputes … really?"

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Canada's Metro Inc. has struck a $4.5-billion cash-and-stock deal for The Jean Coutu Group Inc.

Under the deal unveiled today, Jean Coutu shareholders would receive $24.50 a share, 75 per cent of it in cash and the rest in Metro stock.

The marriage of the two would see a $16-billion company, giving Metro Jean Coutu's more than 400 drugstores and distribution centre.

They expect annual savings of $75-million within three years of the marriage of "two highly respected and long-standing Quebec brands."

"The strategic and commercial fit between the two companies and their retail networks represents an opportunity for continued growth; it will consolidate our position as the leading destination for professional services, health, beauty and wellness with a network comprised of more than 675 independent stores," said Jean Coutu chief executive François Coutu.

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Markets at a glance





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What to watch for this week

It's all about jobs, trade and corporate earnings.

On the jobs front, Statistics Canada releases its September employment report Friday morning. And, as always, forecasts are a mixed bag.

Estimates of September job creation among some of the big banks range from about 10,000 to 22,000, with unemployment holding at 6.2 per cent or inching up a notch.

"Employment has cooled a bit, and will slow a bit more into 2018, even if the underlying trend will remain positive," said Nick Exarhos of CIBC World Markets.

"With fewer unemployed people to choose from, slower employment growth will be a reality over the next year, although the bidding up of wages should support household incomes."

We'll get the U.S. jobs report at the same time, and economists generally expect to see employment gains of up to about 90,000 and unemployment holding at 4.4 per cent.

Before the jobs reports, on Thursday, we'll see the latest trade numbers from both sides of the border.

Observers expect Statistics Canada to report that the trade deficit narrowed in August to $2.6-billion, or a bit more, from July's $3-billion.

"July was an absolutely awful month for trade with both exports and imports falling heavily in nominal and volume terms," said Benjamin Reitzes, Bank of Montreal's Canadian rates and macro strategist.

"With the Canadian dollar continuing its torrid run in August, that's likely to weigh on exports and imports once again."

This week also brings a smattering of quarterly corporate results.

"After contracting from late-2014 through mid-2016 alongside the oil price shock, [capital expenditure] retrenchment and U.S. dollar strength, S&P 500 operating earnings have sprung back with double-digit growth as of 2017 Q2," said BMO senior economist Robert Kavcic.

"Meantime, Canadian valuations have improved slightly this year as earnings expectations are still climbing out of the oil-shock pit," he added.

"Going back to early-2016, the TSX forward earnings multiple has shrunk about a point, while that on the S&P 500 is up by roughly the same amount. On a relative basis, that leaves the TSX at the widest 'discount' to the S&P 500 since the financial crisis."

The calendar:

Today

Manufacturing purchasing managers indexes will be pouring in from across the globe.

Tuesday

Boring, but for the meeting of the Reserve Bank of Australia. And even then, it's expected to hold its key rate steady for the 14th time in a row.

"Since the board last met, key domestic data have been on the firmer side of expectations (labour market) with Q2 GDP printing broadly in line with the RBA's forecasts," said economists at Royal Bank of Canada.

"While the housing data and anecdotes have softened, this is unlikely to be of much surprise to the RBA, although we will be watching for any shift in rhetoric."

Wednesday

Federal Reserve chair Janet Yellen speaks in the afternoon at a conference in St. Louis. As always, markets will be looking for hints.

And a couple of corporate earnings report to note: Monsanto Co. and PepsiCo, Inc.

Thursday

Given that the third round of NAFTA talks just ended, it will be interesting to see the latest Canadian and U.S. trade reports.

On the corporate earnings front, investors will get the latest from Aphria Inc., Aritzia Imc., Constellation Brands Inc., Costco Wholesale Corp. and Richelieu Hardware Ltd.

Friday

The Canadian and U.S. jobs reports are about the only thing going, but they'll both be widely watched.

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