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Mark Carney now has even more wiggle room to hold rates low

These are stories Report on Business is following Friday, Aug. 17, 2012.

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Inflation declines
Not that he was in any rush to hike interest rates, but Mark Carney has even more wiggle room now given today's latest reading of inflation from Statistics Canada.

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Annual inflation in Canada dipped in July to 1.3 per cent from 1.5 per cent, while the so-called core rate, which strips out volatile items and helps guide the Bank of Canada, fell to a one-year low of 1.7 per cent, from 2 per cent a year earlier.

"With core inflation running below target and external headwinds still blowing, we don't expect the Bank of Canada to resume tightening until well into next year," said economist Robert Kavcic of BMO Nesbitt Burns.

On a monthly basis, seasonally adjusted, consumer prices fell 0.1 per cent, marking the third monthly dip in a row.

The annual rise in consumer costs was driven by higher prices for cars, at restaurants, and at the meat counter. Of all the areas measured by the agency, only clothing and shoe prices slipped on lower costs for women.

Pump prices declined by 1.3 per cent, and natural gas prices by 15.2 per cent.

At its last outing, the Bank of Canada still held the view that the next move in its benchmark overnight rate would be up, from its current 1 per cent, rather than down.

There are several factors at play, however. First, global uncertainties have stayed Governor Carney's hand so far, and they don't appear to be easing. But at the same time, the crippling drought in the United States is expected to drive up food prices over the next several months.

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Still, today's report showed inflation below what was expected, so economists are divided on where the Bank of Canada will stand going forward, in terms of which way it's leaning.

"The headline inflation rate is now tracking 1 per cent in Q3, a bit below the Bank of Canada's latest estimates for Q3 (1.2 per cent)," said senior economist Krishen Rangasamy of National Bank Financial. "The core is tracking 1.2 per cent, well below the BoC's 1.9-per-cent estimate for the quarter. The Bank of Canada's tightening bias is increasingly looking untenable."

Charles St-Arnaud of Nomura Securities in New York, however, has somewhat of a different view.

"Overall, today's report shows that inflation, both total and core, are roughly in line with the BoC views published in the July Monetary Policy Report," he said.

"It also shows that inflation is unlikely to be a major concern for the BoC over the coming quarter. However, we note that the severe drought affecting the United States is likely to lead to a sharp rise in food prices in the next few quarters. We believe that the BoC is likely to keep its tightening bias for some time, as the level of the output gap is consistent with the start of previous tightening cycles. However, we think the outlook for monetary policy is more linked to external events."

In fertilizer sector, the manure hits the fan
Canada's fertilizer industry is going through something of a rough patch.

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First, Agrium Inc. found itself under attack this week as New York hedge fund Jana Partners LP pushed for the agri-business giant to break in two, separating its retail business from its potash and other operations.

Then yesterday, as The Globe and Mail's Richard Blackwell reports, Brazil's Vale SA said it's delaying a $3-billion potash project in Saskatchewan, a move that will ripple through the local economy.

And last night, Potash Corp. of Saskatchewan announced a month-long shutdown of its Lanigan potash mine, east of Saskatoon, to help balance supply with demand.

These three developments aren't connected, of course. At Agrium, Jana is trying to shake things up. At Vale, the company is looking at austerity measures given the global economic climate. And at Potash, officials are simply looking at the market for potash, a primary ingredient in fertilizer.

But all three have ramifications for Saskatchewan and its key potash industry, though the province's minister of the economy told Mr. Blackwell that investment is still flooding in.

Publisher proposes B.C. refinery
British Columbia newspaper magnate David Black wants to build a $13-billion refinery in Kitimat, B.C., to process bitumen from Enbridge Inc.'s proposed Northern Gateway pipeline, The Globe and Mail's Andy Hoffman reports.

At a news conference in Vancouver today, Mr. Black unveiled plans to submit an environmental assessment application to build the oil refinery.

Mr. Black said he would fund the cost of the environmental assessment application. The capital to build the refinery has not been raised and Enbridge has not agreed to invest in the project.

The proposed pipeline has become a divisive political issue in Western Canada. The federal government has expressed support for the pipeline, which would allow production from the oil sands to be shipped to China.

Facebook's fortunes
Shares of Facebook Inc. slipped again today after a rout that drove the social network's stock to a record low of under $20 (U.S.), well below its issue price just a few months ago.

As The Globe and Mail's David Berman writes in today's Report on Business, yesterday's drop of more than 6 per cent highlights the fading optimism for social media stocks.

The tumble was sparked by the end of a so-called lock-up period that had blocked early investors from selling. With the expiry, some 270 million shares hit the market.

While that had a market impact, there are still three more lock-up expiries to go, the key one coming in November when employees are allowed to sell.

Facebook, which went public at a valuation that topped $100-billion, is now down to less than $45-billion after the rapid decline since May's IPO.

For chief executive Mark Zuckerberg, the value of his holdings has been cut to about $1-billion from $19-billion.

Merkel buoys markets
Investors are in a more buoyant mood today, helped partly by Angela Merkel's support for the European Central Bank yesterday. But watch out.

Investors were buoyed by the German chancellor's comments in Canada yesterday, when she threw her support behind ECB chief Mario Draghi to do whatever it takes to to save the euro.

Mr. Draghi wants to intervene in markets and buy up the debt of the troubled euro zone countries whose bond yields have hit intolerable levels. But Germany's Bundesbank is not onside yet, highlighting the divisions in the monetary union and the apparent discrepancies among Ms. Merkel and Bundesbank officials.

Ms. Merkel, the most powerful leader in the 17-member euro zone, also has her own demands.

"Markets certainly are placing an awful lot of their chips on ECB President Mario Draghi being able to pluck a rabbit out of the proverbial hat at the next meeting in September," said senior analyst Michael Hewson of CMC Markets in London.

"Markets certainly seemed reassured by comments from German Chancellor Angela Merkel yesterday in Canada in her first official comments since returning from holiday that she agreed with ECB President Mario Draghi's comments to defend the euro by 'whatever it takes,'" he said in a research note today.

"What markets appear to have overlooked is that she allowed herself some wiggle room by committing to do what she can to maintain the euro. It's not exactly on a par with 'whatever it takes.' What she can do is limited by the German constitution and her European partners. The sticking point for other EU nations is her insistence on EU oversight and intervention on the sovereignty of individual countries fiscal budgets."

Remember, too, that we've been down this road many, many times. Markets react to reassuring comments, only to be disappointed later.

"The slow easing of tension about the euro zone crisis has been the chief hallmark of the past two weeks of trading," said sales trader Will Hedden of IG Index.

"We know the crisis is far from a real solution, and that all we've had so far are fine words, but investors seem content to think that the ECB is readying something fairly impressive with a view to using it sometime in September," he added.

"This narrative has swept all before it so far in August, helped along by the perception that the Federal Reserve is also tiptoeing closer to more stimulus. This has allowed markets to take bad data in their stride."

One other thing worth mentioning here, from Robert Kavcic at BMO Nesbitt Burns: "The S&P 500 starts the day within inches of its closing 52-week high as the index continues to climb the proverbial wall of worry, up more than 10 per cent since bottoming in early June. All sectors are in positive territory since that point, but a number of the top industry standouts share one thing in common: exposure to U.S. housing. Homebuilders, household appliances and construction materials have all recorded gains of more than 20 per cent since early June as signs of stability in the housing market continue to mount. The TSX continues to lag, but did manage to crack above its 200-day moving average yesterday."

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