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Briefing highlights

  • Morneau’s ‘placeholder’ budget
  • Global markets mixed so far
  • New York set for weaker open
  • Canadian dollar below 79 cents
  • Scotiabank raises dividend
  • BMO profit slips in first quarter
  • Comcast in rival bid for Sky
  • What to expect from Fed’s Powell

What to expect in today's budget

Expect a "placeholder" budget from Finance Minister Bill Morneau today, as CIBC World Markets puts it.

Finance Minister Bill Morneau responds to a question during Question Period in the House of Commons, in Ottawa, on Oct. 19, 2017.

"The Liberals will want to be much closer to 2019 before unveiling new budget measures that will form the backbone of their platform for the election that year," CIBC chief economist Avery Shenfeld said in a lookahead.

"If you're worried about higher taxes on capital gains, hoping for Ottawa to match the U.S. on immediate expensing of capital equipment, or advocating something big on the spending side, wait until next year."

There's no huge pressure from the fiscal and economic side, either, Mr. Shenfeld said, particularly given that the Liberals have already brought in much of what they'd proposed and unemployment is below 6 per cent.

And, for that matter, the only things left are "some overdue details" on small business taxes.

"Having reached full employment, this isn't the time in the cycle for a stimulative boost to government spending," Mr. Shenfeld also noted.

"Unlike the U.S. Congress, the Liberal government seems reasonably well versed with Keynes," he added.

"We still have plenty of infrastructure dollars coming, and potential stimulus from election year budgets in Ontario and Quebec. Better to save some federal spending power for the next recession."

As for the deficit, Capital Economics expects Mr. Morneau to unveil a slimmer-than-expected gap of about $18-billion for fiscal 2017-18.

Gender issues are expected to be much of the focus of the budget.

"From a policy perspective, the recent chatter has surrounded measures to promote gender equality and, from an economic perspective, that could cover issues such as equal pay and labour market participation," said Benjamin Reitzes, Bank of Montreal's Canadian rates and macro strategist, and his colleague, senior economist Robert Kavcic.

Then there's the issue of competitiveness, particularly in the wake of recent U.S. tax reform.

"We did did indeed witness significant erosion in Canadian competitiveness - not just from the U.S. tax changes but also made-in-Canada measures like minimum wage hikes and carbon taxes," said Royal Bank of Canada assistant chief economist Paul Ferley.

"The scope for significant new measures to reverse that erosion is limited with the federal government already running large deficits," he added.

"There are indications the budget will focus on gender and skills, both areas that deserve some policy attention. We think there is also some scope for improving competitiveness without spending too much money, for example via smarter regulation."

This is Mr. Morneau's third budget.

And, noted Laurentian Bank Securities chief economist Sébastien Lavoie, "the economic momentum is stronger now than it was for the previous two: Robust real GDP global growth supports commodity prices and the unemployment rate sits near a four-decade low."

Having said that, Ottawa still needs to tackle some issues, among them the "erosion of competitiveness" and the uncertainty hanging over the economy amid negotiations to redraw the North American free-trade agreement," Mr. Lavoie said.

"One thing to look for in the 2018 federal budget is if it will include a response to Washington's policies," he suggested.

"While a massive and generalized cut to the corporate income tax rate is very unlikely, the odds of a targeted measure such as the immediate expensing on capital investments are relatively higher. In addition, small business owners will find out the federal government's final decision regarding the utilization of passive investment income above the $50,000 tax-free annual threshold announced last October."

Stocks mixed

Global markets are mixed so far, with New York poised for a weaker open and the Canadian dollar just shy of 79 US cents.

Tokyo’s Nikkei gained 1.1 per cent, while Hong Kong’s Hang Seng lost 0.7 per cent, and the Shanghai composite shed 1.1 per cent.

In Europe, London’s FTSE 100 and Germany’s DAX were each up by 0.1 per cent by about 5:30 a.m. ET, with Germany’s DAX down 0.1 per cent.

New York futures were down. The Canadian dollar has traded in a range of 78.8 to 78.9 US cents.

Investors are awaiting committee testimony from Jerome Powell, the new Fed chair, and things are likely to be tame until then.

“Our economists think that, while Powell is likely to strike an upbeat tone on the economic backdrop and confidence that inflation is on its way to hitting the Fed target, he will likely stop short of hinting at a material shift in the expected pace of rate hikes,” said Adam Cole, Royal Bank of Canada’s chief currency strategist in London.

“In other words, he is likely to sound just marginally more hawkish than at his confirmation hearing back in November.”

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Scotiabank raises dividend

Bank of Nova Scotia is raising its dividend by three pennies amid a gain in first-quarter profit.

Scotiabank posted a jump in profit to $2.3-billion, or $1.86 a share, diluted, from $2-billion or $1.57 a year earlier.

Return on equity rose to 16.2 per cent from 14.3 per cent, and the dividend to 82 cents.

Bank of Montreal, meanwhile, posted a 35-per-cent drop in profit because of U.S. tax reforms and a gain a year earlier.

First-quarter profit slipped to $973-million, or $1.43 a share, with adjusted profit down 7 per cent to $1.4-billion.

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Comcast joins Sky drama

The battle for Sky PLC is becoming quite the drama, with Comcast Corp. jumping in today with a US$31-billion bid.

Comcast, owner of NBC and Universal Pictures, is bidding £12.50 a share for Sky, which has already struck a troubled deal with 21st Century Fox.

Walt Disney Co. is involved, too, with an agreement to buy Fox businesses that include Sky.

“[Comcast] has been savvy in its offer by promising to maintain Sky News, something that was less certain under ownship by Disney,” said Jasper Lawler, head of research at London Capital Group.

“Comcast can use the general mistrust of Rupert Murdoch in the British Isles to sweep in and get a bargain,” he added.

“We suspect this offer, which is preferential for shareholders because of the higher price tag, has a much better chance of passing regulatory scrutiny than the Fox deal. A bidding war would make the outcome uncertain, but we think Comcast now looks like the most likely future owner of Sky.”

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What else to watch for today

Besides the federal budget, markets will be digesting House committee testimony from the Fed's Mr. Powell.

Jerome Powell, the new head of the U.S. Federal Reserve, at his confirmation hearing in Washington on Nov. 28, 2017.

Watch for signals of a rate hike at the next meeting of the Federal Open Market Committee, the central bank's policy-setting group, though investors already expect that.

"Recall that last week's minutes indicated that 'most members noted that recent information on inflation along with prospects for a continued solid pace of economic activity provided support for the view that inflation on a 12-month basis would likely move up in 2018 and stabilize around the committee's 2-per-cent objective in the medium term,'" said economists at Deutsche Bank.

"In short, Powell will likely convey the message that with an improving growth and labour market outlook, the Fed continues to gain confidence that the inflation side of its dual mandate will soon be met," said economists at Deutsche Bank.

Markets will also get another U.S. real estate reading via the S&P/Case-Shiller home price index, expected to show a gain of 0.4 per cent in December from a month earlier, and 6.5 per cent from a year earlier.

In Canada, BMO and Bank of Nova Scotia pick up where Canadian Imperial Bank of Commerce and Royal Bank of Canada left off last week, with reports on first-quarter results.

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