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Mark Carney goes from 'hawkish light to hawkish extra light'

These are stories Report on Business followed this week.

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Carney's message
Mark Carney had several notable messages for Canadians this week: He still plans to raise interest rates at some point, he may even do so to stop consumers from borrowing so much, and, no matter what you're feeling, it's not as bad as you might think.

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First, the Bank of Canada Governor and his colleagues in the central bank's policy-setting group surprised some observers Tuesday when they maintained, yet again though not as strongly this time, that they still see the next move in interest rates as an increase. They also warned that they could hike rates to tame the record debt burden among Canadian households.

Mr. Carney followed that up a day later, as he released his monetary policy report in Ottawa, saying that rate increases aren't "immiment," so we're probably looking at somewhere between mid-2013 and the end of next year. Still, the Bank of Canada, whose benchmark overnight rate stands at an emergency low 1 per cent, is an outlier among the world major western central banks in that it's still leaning toward a rate hike. The Federal Reserve, for example, has pledged to hold its key Federal funds rate near zero until at least mid-2015.

Chief economist David Watt of HSBC Bank Canada put it well in a report titled: From hawkish light to hawkish extra light

"With regard to forward guidance, while there wasn't much wiggle room between the bank's watered-down hawkish stance and neutral, they found it," Mr. Watt said.

"As a result, the bank maintained an extra-light hawkish bias, whereas the market, and HSBC, had anticipated a shift to neutral. Even so, we continue to think that the bank will remain on hold through 2013."

While the rest of the world is struggling, and certainly Canada's growth prospects aren't outstanding, Mr. Carney nonetheless pointed out that "we are in an expansion, not a recovery, which is unique in advanced economies."

Where consumer debt is concerned, the central bank said for the first time on Tuesday that it would take "the evolution of imbalances in the household sector" into account on rate changes.

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Mr. Carney has begged Canadians for months to bring down their debt burden – the ratio of household debt to disposable income now tops 160 per cent – and Finance Minister Jim Flaherty has tightened mortgage rules four times to try to cool down the market.

"At points in the past, the central bank has said that direct measures are more effective at controlling the accumulation of household debt," said Mark Chandler, chief of fixed income and currency research at RBC Dominion Securities.

"Credit growth is indeed slowing in response to the latest round of mortgage restrictions from the Department of Finance, though not to the pace of personal disposable income growth or nominal GDP growth," he said in a research note.

"We have been arguing that such considerations should be part of the monetary policy setting – one of the reasons we had expected rates to beginning rising mid-2013 – though truly did not think that the BoC had been prepared to take them on board at this stage."

Death of deal stokes controversy
Much controversy and gnashing of teeth this week over what Société Générale termed Canada's "defensive stance" on foreign takeovers of the country's jewels.

The reaction was swift, and harsh, last weekend and on Monday after the Canadian government announced at midnight last Friday that it would spike the proposed takeover of Progress Energy Resources Corp. by Malaysia's Petronas.

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The government said the deal did not meet the "net benefit" test for Canada, though it did not elaborate.

That, some observers said, sent a bad message to foreign investors that they're not welcome here, notably state-owned companies such as Petronas.

It also raised questions about the takeover of Nexen Inc. by China's CNOOC Ltd., which is also under scrutiny in Ottawa.

Shares of Progress and Nexen fell Monday when markets opened, as did those of other companies that investors believe might carry a takeover premium.

"It is an indication of the growing financial protectionism globally as excessive amounts of low-yielding capital look for foreign opportunities," said currency strategists at Société Générale.

Progress and Petronas said they would meet with Industry Canada officials, and both Nexen and CNOOC said they still expect their deal to go through.

In the markets
As BMO's Robert Kavcic put it, it's an "earnings frankenstorm."

"'Not trying to hype it,' one National Weather Service meteorologist said about Hurricane Sandy, which is barrelling down on Wall Street, but 'we're seeing a storm at an intensity that we have not seen in this part of the country in the past century,'" Mr. Kavcic said in a report.

"To be fair, the earnings results we've seen so far in Q3 are more of a cloudy disturbance compared to that assessment, but it still looks like enough to unsettle investors who have become accustomed to sunny upside surprises. S&P 500 profits are now on pace to fall 1.2 per cent year-over-year in the quarter, the worst showing since the end of the recession, and revenue results have been decidedly negative with almost 60 per cent of companies in the index missing expectations."

The S&P 500 lost 1.5 per cent this week, and Toronto's S&P/TSX composite 0.9 per cent.

All about mobile
We got a new, smaller iPad this week, a miss on profit estimates from Apple Inc. and some good news for Research In Motion Ltd. and Facebook.

As Iain Marlow reported, RIM jumped back into the top ranks of smartphone companies, with the most shipments of gadgets in the third quarter, according to research firm IDC.

Apple unveiled a mini iPad, to compete with the likes of Google Inc. and Samsung, as Omar El Akkad and Susan Krashinsky reported, though later in the week disappointed somewhat as iPad sales trailed what was expected in its quarterly earnings report. Having said that, it still chalked up massive profits.

And Facebook Inc. watched its shares climb with quarterly results that showed a stronger mobile component.

Feeling like you're in a rut?
You're not alone, Josh O'Kane reported.

A new study by Linda Duxbury of Carleton University and Christopher Higgins of the University of Western Ontario showed almost two-thirds of Canadians work more than 45 hours a week, and just 23 per cent are highly satisfied with their lives.

Those 45-hour work weeks represent a 50-per-cent increase from 20 years ago, while satisfaction has fallen by half since 1991.

Nine things
1. The chief of the International Monetary Fund knows what plays in Canada. "As policy makers, we must push through reforms today to create the system we need for the future," Christine Lagarde told an event in Toronto Thursday, according to her prepared text. "To quote your most famous hockey player - Wayne Gretzky: 'A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be.'"

2. Fun with analyst report titles: Analysts had some fun this week with the death of the Petronas-Progress deal, one calling it a "pre-emptive Halloween scare" and another noting that "mating season gets a cold shower."

3. Colour commentary of the week, by Gluskin SHeff + Associates chief economist David Rosenberg on CNBC's Jim Cramer and Friday's report showing U.S. GDP growth of 2 per cent in the third quarter: "After all, Cramer called the GDP report 'good news' in his assessment on CNBC this morning ... Memo to Jim Cramer: As Billy Joel put it, only the 'good' die young. And on this basis, the 'good' at 2% is looking more like 'is that all you get for your money.'"

4. Canada's new ePassport will boast images that the government says "showcase Canada's history and the building of our great nation." And, indeed, they do, from First Nations to the Mounties to Terry Fox to little boys playing ice hockey. There's even an image of Niagara Falls, which the website says "continue to be a popular destination for families, weddings, conferences and honeymoons." The picture is of the actual Falls, rather than red heart-shaped pillows.

5. Smokin' in the boys' room, sort of: Agence France Presse reports that five Japanese teachers who ducked away from the school grounds for a cigarette between classes had their pay docked by the equivalent of up to $6,300 (U.S.) by their education board.

6. Thursday's child may indeed have far to go. A new study of CEOs of Fortune 500 companies shows a significantly lower portion were born in June and July, which means they weren't the youngest kids in their class, according to a study released by UBC's Sauder School of Business and reported by The Globe and Mail's Janet McFarland.

7. Tweet of the week, from @matwilcox: "I stopped fighting my inner demons....we are totally on the same side now."

8. The B.C. Liquor Control and Licensing Branch has blocked a local Victoria theatre from auctioning donated wine. "They gave us all kinds of reasons, none of which made any sense whatsoever," Belfry Theatre general manager Ivan Habel told Metro Vancouver.

9. What top's the list of bad passwords? According to SplashData, it's "password," CNBC reports.

Required reading this week
Kinross Gold Corp. occupies a curious and unusual spot in Russia, not just because its mines, in the country's far east, are closer to Toronto than to Moscow. It is because the Canadian company is the only foreign gold miner in Russia and one of the few foreign companies of any description to operate without local partners, Eric Reguly reports from Moscow.

Shopping centre owners are pouring billions of dollars into their properties in Canada to prepare for the next wave of foreign retailers, betting the investments will woo shoppers and win new business, Marina Strauss reports.

When John Bogle rails about what's wrong with mutual funds, he knows what he's talking about. He practically invented the stuff. Read David Parkinson's interview with the fund pioneer.

The vision to export natural gas from Canada is taking a sharp turn to the east, Bertrand Marotte writes.

The United States is in danger of falling back into recession if its politicians cannot agree on how to avoid a "fiscal cliff" of tax increases and spending cuts, Christine Lagarde, the head of the International Monetary Fund, tells Report on Business editor Derek DeCloet in an interview in Toronto.

What to watch for next week
The highlights come on Friday when governments in both Canada and the United States release their widely watched jobs reports. In the U.S., in particular, this one will fall under more scrutiny, given that it's the last one before the November presidential election.

Economists expect the U.S. report to show that about 120,000 jobs were created in October, with the unemployment rate inching up to 7.9 per cent.

"Released just four days before the Nov. 6 election, October's employment report will command more than its normal already-heightened attention," said senior economist Michael Gregory of BMO Nesbitt Burns.

"The political reaction to the prior report, and its hefty 0.3 percentage-point drop in the jobless rate, ran from rousing rounds of 'Happy Days Are Here Again' to vitriolic accusations of data manipulation," he said in a report Friday.

"That the unemployment rate fell to 7.8 per cent, its lowest level since January, 2009, (when President Obama was inaugurated), was not lost on anyone. What did get lost was that report's main message: U.S. businesses aren't hiring to a great degree."

While jobs were created, the unemployment rate likely ticked up as more people went looking for work.

In Canada, Friday's report isn't expected to be anywhere near as rosy as the one last month, which showed 52,000 jobs created in September. Economists have various projections on this one, from jobs lost to jobs gained.

"A clear indication that the job market is not as hale and hearty as the recent employment gains would suggest is the fact that the unemployment rate has drifted higher in recent months from a cycle low of 7.2 per cent to 7.4 per cent in September," said Mr. Gregory's colleague at BMO, deputy chief economist Douglas Porter.

"In complete contrast to the U.S. experience, the participation rate, at 66.8 per cent, is only 1 percentage point below its all-time high (whereas the U.S. rate of 63.6 per cent is down nearly 3 percentage points from pre-recession levels)."

For investors, quarterly earnings continue to roll out, with several major companies reporting, including Honda Motor Co., BP PLC, Deutsche Bank AG, Fiat SpA, Ford Motor Co., Talisman Energy Inc., Thomson Reuters Corp., TransCanada Corp., UBS AG, General Motors Co., Maple Leaf Foods Inc., MasterCard Inc., Suncor Energy Inc., Visa Inc., Barrick Gold Corp., BCE Inc., Exxon Mobil Corp., Royal Dutch Shell PLC, Husky Energy Inc., Imperial Oil Ltd., Starbucks Corp., Chevron Corp. and SNC-Lavalin Group Inc.

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More


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