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Lose-lose: Bloodied in World Cup, Brazil now left with its high prices

These are stories Report on Business is following Wednesday, July 9, 2014.

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Not only did Brazil go down to the Germans in a stunning soccer defeat, it's now left with the high prices from hosting the World Cup.

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While they were glued to Wednesday's match, crying and groaning as the German score moved up to 7-1, Brazilians could be forgiven for paying little notice to another key number: 6.52 per cent.

According to the Instituto Brasileiro de Geografia e Estatistica Wednesday, consumer prices rose 0.4 per cent in June from May, slower than the rate a month earlier, with the annual pace of inflation target at at 6.52 per cent.

According to Bloomberg, the World Cup played a role by driving up hotel and airline rates.

"The bogeyman this time was transport and personal expenses, in which case the central bank will cite World Cup effects and say there's no need to tighten rates any further," analyst Daniel Snowden of Informa Global Markets told the news agency. "In general, the bank will be quite happy with the report."

The World Cup effects may be temporary, but inflation remains a problem for the government and the central bank, which have been trying to hold prices down.

"In Brazil, the structural nature of inflation will create the need for further monetary tightening, but more importantly for fiscal and other reforms," Dev Ashish of Société Générale said in a report earlier this week.

Brazil's central bank, whose benchmark interest rate stands at 11 per cent, projects inflation will run at about 6.5 per cent for the rest of the year.

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(Brazil's cattle slaughter, by the way, hit a record last year. Today, they're talking about a different kind of slaughter.)

Fed to end bond-buying in October
The Federal Reserve said explicitly today for the first time that it intends to end its extraordinary bond-buying program in October, enhanced clarity that represents a first step toward a lengthy and careful unwinding of years of unprecedented stimulus measures, our Washington correspondent Kevin Carmichael reports.

Most on Wall Street already had satisfied themselves that the Fed's asset purchases would end at the conclusion of the Oct. 28-29 meeting of the central bank's policy committee. The Fed steadily has been reducing its monthly purchases of Treasury debt and mortgage-backed securities by $10-billion (U.S.) at each meeting since December 2013. At that pace, the Fed will spend $15-billion under its quantitative easing policy in October.

Rather than allow any questions to linger, Fed officials decided at their June 18-19 the best thing to do would be end the program there, rather than buy $5-billion of bonds in November. Under quantitative easing, the Fed creates money to purchases the assets, which in turns puts downward pressure on interest rates. The value of the Fed's portfolio now exceeds $4-trillion, compared with less than $1-trillion before the financial crisis.

Oliver pushes for regulator
Canada's Finance Minister is hailing the addition of two provinces as "a major step" toward the long-running push for a national securities regulator.

Joe Oliver in a written statement today described the addition of Saskatchewan and New Brunswick as a sign of momentum, despite the relatively small scale in each province, The Globe and Mail's Josh Wingrove reports.

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Those provinces joining, he said, is "a major step towards a single regulator, national in scope, that will enhance Canada's capital markets."

Saskatchewan and New Brunswick joined the fold after the government agreed to add two senior officials ‎to "accommodate" smaller provinces and territories by amending an agreement in principle signed 10 months ago. The federal government also offered to match funding for five years for provinces that currently draw revenue from their regulatory regime – a key carrot in wooing Saskatchewan and New Brunswick, though the regulators in Ontario and B.C.‎ were self-funded.

Housing starts climb
Canada's housing construction industry refuses to cry uncle.

Housing starts across the country climbed in June to an annual pace of 198,185, surprising economists who had expected the number to fall to something closer in line with the rate of household formation in Canada.

The June number released today by Canada Mortgage and Housing Corp. was a pick-up from May's 196,993, The Globe and Mail's Tara Perkins reports.

"June marks the third consecutive month of starts of close to 200,000," said Nick Exarhos of CIBC World Markets.

"That goes against the conventional reasoning that 2014 would bring with it the expected slowdown in the Canadian housing boom," he added.

"Today's report also gives us more confidence that the weakness seen in April GDP due to a drop in construction was indeed transitory, and that for the second quarter as a whole, the building sector - along with other economic activity - will show signs of heating up."

On a six-month moving average, that annual pace is now up to 185,939.

"The trend in housing starts has been stable since March 2014, down from the range of 191,000 to 196,000 seen between September 2013 and February 2014," said CMHC chief economist Bob Dugan.

"This is in line with CMHC's analysis indicating that the new home construction market in Canada is headed for a soft landing in 2014," he added in a statement.

"Builders are expected to continue to manage their building activity to ensure that demand from buyers seeking a new unit is channeled toward unsold units, whether these are under construction or completed."

The 'curious' relationship
The Canadian dollar is often seen as a petrocurrency, but, Bank of Montreal finds, the "tightest correlation" is with copper.

And that may suggest a modest pick-up in the global economy, chief economist Douglas Porter believes.

"As we oft-noted in the past, the commodity that has the tightest correlation with the Canadian dollar in recent years is copper – not oil (which accounts for about half the value of all commodity production in the country), not gas, not lumber and not gold," Mr. Porter said.

"That still-curious relationship has held up again in 2014 – as copper dipped precariously early this year, so too did the C$," he added in a research note.

"But since the early spring, both have made a Lazarus-like comeback, with copper bouncing back to its best level in more than four months and the C$ close to where it started the year (and nearly where it stood a year ago.)"

Both the commodity and the currency "ebb and flow" with the performance of the global economy and risk appetite among investors, he said in the research note titled "The curious case of copper and the Canadian dollar."

"So, the recent rebound in both prices is at least a mild thumbs-up for the global outlook."

Mr. Porter's report came amid a mixed outlook for copper. Morgan Stanley projects copper prices will see an average $7,055 (U.S.) a ton in the next few months, Bloomberg reports, while Goldman Sachs Group Inc. predicts a drop to $6,200 by the end of the year.

The Canadian dollar, meanwhile, perked up noticeably in the second quarter of this year, and is just shy of 94 cents today.

(For Mr. Porter's research, see the accompanying infographic or click here.)

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