Canadian Inflation Quickens (BCA)

Thursday, June 30th, 2011

The quickening of inflation is serving as a warning that the Bank of Canada has to do something to curb pressure with normal monetary policy measures in the coming months, says BCA Research, in its Daily Insight on Canada. Also prefaced is that this development should translate into a stronger Loonie.

Canada’s CPI experienced a greater-than-forecast month-over-month increase of 0.7% during May. Although this monthly increase was led by by food and energy, the core rate CPI rose by a strong 0.5% month-over-month. The underlying rate of inflation as measured by the Bank of Canada accelerated to 1.8% annualized, and this was far greater than the 1.4% forecast made by BoC in the latest Monetary Policy Report. As a result of worries over U.S. growth, Europe’s debt crisis, and hard landing fears in China, interest rate futures had all but discounted the need for higher policy interest rates for the next year ahead.

Despite those worries, it appears the Canadian economy is indicating that a tightening of monetary policy is required.

Housing is showing signs of bubbling, and there is pressure on the labour front, says BCA.

Yesterday’s CPI report contained warnings that spare capacity within the Canadian economy is nearly used up. Notwithstanding external economic shock, the monetary tightening cycle should be resumed later this year. So long as U.S. Fed policy stands down, spreads between short term interest rates will widen, making conditions favourable for the Canadian dollar and Canadian bonds will underperform its counterpart U.S. treasuries, assuming currency is hedged.

Source: BCA Research

Tags: Bank Of Canada, Boc, Canadian, Canadian Bonds, Canadian Economy, Canadian Inflation, Canadian Market, China Interest, Core Rate, Cpi Report, Debt Crisis, Economic Shock, Fed Policy, Interest Rate Futures, Labour Front, Loonie, Monetary Policy Report, Policy Interest, Policy Measures, Rate Of Inflation, Treasuries, Underlying Rate Of Inflation
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Bank of Canada Raises Rates As Expected (Update)

Tuesday, June 1st, 2010

The following are two comments from TD Economics’ Grant Bishop, and Miller Tabak’s Peter Boockvar (following the TD comment), regarding today’s BoC decision to raise policy rates.

This comment is a guest contribution by Grant Bishop, Economist, TD Economics.

June 1, 2010

Data Release: BANK OF CANADA EMBARKS ON THE UPWARD CLIMB [PDF Download]

• The Bank of Canada commenced tightening of monetary policy with a 25 basis point hike, increasing the overnight target rate to 0.50%. This move was widely expected given the strong Q1/2010 GDP performance and acceleration in core CPI. Having taken the overnight target rate off its lower bound, the Bank also normalized the operating band, reestablishing its deposit rate and lending (the “Bank Rate”) at 25 basis points below and above the target, respectively.
• The text of the announcement highlighted Canada’s strong performance, observing the robust first quarter growth and resumption of employment growth. It pointed to the strength of domestic demand through the housing and consumer spending.
• However, the Bank stressed that household expenditures will necessarily moderate to pace more in-line with income growth, reducing the contribution from consumption and residential construction in the coming quarters. Moreover, the Bank observed that business investment still has yet to take the baton, noting that “the anticipated pick-up in business investment will be important for a more balanced recovery”
• The statement was also keenly attentive to the international setting and its downside risks. Although the volatility from sovereign debt fears has somewhat subsided in the past weeks, the Bank notes that that the Eurozone tensions will likely prompt increased borrowing costs and more rapid fiscal consolidation for some countries. While the Bank observes that spillover to Canada has so far been modest and limited to commodity prices and some heightened financial stress, it observes that the “broad forces of household, bank and sovereign will add to the variability, and temper the pace, of global growth.”
• Looking ahead, anticipating a moderating clip for domestic demand and bearing the recent global volatility in mind, the Bank stressed the “considerable uncertainty surround the outlook” and stated that “any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments.”

Key Implications

• Remembering that monetary policy only impacts with a lag, the exceptional near-term performance of the Canadian economy and stickiness in core inflation point to a necessary tightening to begin to restrain price growth. The Bank of Canada has the sole mandate of achieving its 2% inflation target and conducts its policy through that exclusive prism.
• Although the near-term economic strength will ebb, the uptake of slack and rebound in price growth meant it was due time to take interest rates off their emergency level at the effective lower bound. Nonetheless, today’s 25 basis point increase represents a modest tightening and still leaves rates at very accommodative levels.
• The decision does mean that a rebalancing of monetary policy has commenced and interest rates will be lifted as economic slack is absorbed to restrain price growth. Nonetheless, the wording of the announcement indicates that in undertaking subsequent rate hikes the Bank will remain very attentive to the likely moderation in domestic demand and developments in the global financial system.
• While the Bank took the “elevator down” when cleaving rates, ongoing uncertainties and an easing pace of growth point to a very careful pace of tightening. The Bank may not hike at each meeting and might “pause” on increases if near-term financial conditions warrant. The emphasis on global conditions in today’s communiqué is no accident and, after the rocky last couple of years, policy-makers are keenly aware that Canada is not an island.
• Barring unforeseen shocks in global financial markets, based on our outlook for economic growth and inflation, we anticipate a sequence of 25 basis point increases at subsequent announcements, with the overnight rate at a still-stimulative 1.50% by year’s end.

Grant Bishop, Economist
416-982-8063

DISCLAIMER

This report is provided by TD Economics for customers of TD Bank Financial Group. It is for information purposes only and may not be appropriate for other purposes. The report does not provide material information about the business and affairs of TD Bank Financial Group and the members of TD Economics are not spokespersons for TD Bank Financial Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. The report contains economic analysis and views, including about future economic and fi nancial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affi liates and related entities that comprise TD Bank Financial Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.

This note is a guest contribution by Peter Boockvar, Equity Strategist, Miller Tabak, via The Big Picture.

Following yesterday’s 6.1% annualized Q1 GDP gain (vs expectations of 5.9%), the Bank of Canada raised rates by 25 bps to .50% as expected. While some may say that how can a major G7 country raise rates with all the global economic uncertainty, Canada’s strong banking and commodity focused economy is on much stronger footing and the BoC specifically said that even with the hike, “this decision still leaves considerable monetary stimulus in place.” With respect to future moves, the BoC said “given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments.” In response to this uncertainty over when they may hike again, the Loonie sold off 1.5 (cents) vs the US$.

Source: The Big Picture

Peter Boockvar – Equity Strategist
Peter Boockvar is currently the Equity Strategist at Miller Tabak + Co., LLC., in addition to his role as a salestrader on the equity desk. He is often seen on Bloomberg TV, Fox Business, CNBC, and CNBC Asia and is frequently quoted on Reuters, Dow Jones Newswires, Financial Times, Wall Street Journal, and The Associated Press. He joined Miller Tabak + Co., LLC in 1994 after working in the corporate bond research department at Donaldson, Lufkin and Jenrette. He is on the Board of Directors of Ameritrans Capital Corporation, a publicly traded Business Development Company. He is also president of OCLI, LLC and OCLI2, LLC, farmland real estate investment funds. Mr. Boockvar graduated Magna Cum Laude with a B.B.A. in Finance from George Washington University.

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Canada a step closer to hiking rates from record low?

Tuesday, March 2nd, 2010

By Peter Bookvar, via Big Picture

After Australia raised rates to 4% as expected, the other major commodity country, Canada, decided to leave rates unchanged at their record low of .25%, as expected. They also repeated that policy won’t change before the end of Q2 but they hinted that they could go up soon after as they said “core inflation has been slightly firmer than projected, the result of both transitory factors and the higher level of economic activity.” They also said “the level of economic activity in Canada has been slightly higher than the bank had projected” in its Jan report. Rates have been at record lows because of the BoC’s concern with economic growth in the US, Canada’s biggest trading partner, and due to the strength in the Canadian $ which today is rallying to a 6 week high vs the US$ but the time has passed for record low interest rates in Canada considering their more positive outlook and bubbly housing market.

Tags: 6 Week, Australia, Big Picture, Boc, Canadian Market, Commodity, Core Inflation, Country Canada, Economic Activity, Economic Growth, Hiking, Housing Market, Low Interest Rates, Partner, Positive Outlook, Q2, Record Lows
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A Reversal in CAD in Synch with Reversal in Markets

Thursday, October 29th, 2009

Canadian central banker, Mark Carney’s concerns about the strong Loonie are well known. It threatens Canada’s economic recovery. Some currency analysts believe the Canadian dollar could test its $1.10 highs again. But what is Carney doing about it?

David Rosenberg says we should embrace this period in Canada’s economic history. “For its part, the Bank of Canada has said that “persistent strength in the Canadian dollar” is going to “slow growth and subdue inflation pressures.” So, in return for softer growth, what we get back is lower “inflation pressures.” The winner here is anyone who needs to borrow money – a strong loonie will prevent the Band of Canada from taking the interest-rate punchbowl away any time soon.”

But, last week, the Bank of Canada interrupted the Canadian dollar’s ascent when it left rates at 0.25%, and downgraded economic growth prospects for 2010 and 2011. The dollar lost 2 cents. There is pressure though for the BoC to ease further.

Carney’s wait-and-see stance on quantitative intervention, indicates he may not have to. Instead, he may be talking through this, while waiting for the G20 to sort out the US dollar; in effect, a policy of benign neglect.

At the G-20 meeting in Pittsburgh in late September, leaders made commitments to pursue policies to bring the world into greater economic balance. Following that meeting, the ECB’s Trichet said it is “extremely important” that U.S. authorities pursue policies supporting a strong dollar, and that excessive foreign-exchange volatility is an “enemy.”

There’s another G20 meeting scheduled for Nov. 6-7 in Scotland, and it’s most likely to serve as a forum where all concerns over the dollar’s weakness will be aired. “I think there will be fireworks at the G20,” said Stephen Jen, a well-respected currencies investor at hedge fund BlueGold Capital Management in London.

The US is wallowing in the advantage of a weaker dollar. Neil Mellor, Bank of New York currency analyst, says, “You can’t continue down this road without something giving way, and it’s clear that the U.S. is not going to do anything to put meat on the bones of its strong-dollar policy.”

US$450-billion has been sucked from money market funds (the dollar) into risky assets since March. Zero-percent-interest-rate policy (ZIRP) crowded investors out of the money market and into risky assets. In the simplest of terms, the global equity markets’ slingshot recovery has led to conversely rapid devaluation of the dollar.

Now, a “strong US dollar policy,” for which there is great political will globally, appears to hinge upon a reversal of fortune in markets or concerted monetary intervention via the IMF, or both.

Therefore, the price of relief from the Loonie’s climb could be a synchronized decline in commodity prices and equity markets, in the near term. The repatriation of cash to US money markets means a stronger US dollar, and thus a weaker Canadian dollar, hence the synchronization with the reversal in equity markets and commodities prices. Perhaps Carney is right to let the big players sort out and tighten the US Dollar.

In newer developments earlier this week, the US government, perhaps under some pressure, showed signs that it is willing to withdraw stimulus, thus tightening the Greenback, by closing down the housing tax credit, and calling on Bank of America to repay its bailout by selling shares. The market is reacting poorly.

It begs the question – Is the tail wagging the dog?

If the stimulus and zero interest rate policy is responsible for the markets’ huge recovery, then what effect will indications now, of the US government’s willingness to withdraw stimulus, have?

Either way, it would be prudent, at this point, to take the political pressure from the world’s other large economies to re-establish balance without jeopardizing their own recoveries, seriously.

Tags: Ascent, Bank Of Canada, Bank Of New York, Benign Neglect, Boc, Buybacks, Canadian Dollar, Canadian Market, Capital Management, Commodities, Currency Analysts, David Rosenberg, Dollar Policy, ECB, Economic Balance, Economic History, Economic Recovery, Finance Minister, G20 Meeting, Global Equity Markets, Gold, Growth Prospects, Hedge Fund, Inflation Pressures, Interest Rate Policy, Late September, Loonie, Mark Carney, Money Market Funds, Neil Mellor, Punchbowl, Resumption, Risky Assets, Strong Dollar, Trichet, Volatility
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David Rosenberg: BoC’s Bullish Decision

Wednesday, October 21st, 2009

David Rosenberg shares his thoughts on the Bank of Canada’s decision to leave its policy interest rate at 0.25% possibly until next summer. This seems like a common sense move, considering the detrimental effect that a prolonged strengthening of the Loonie would have on Canada’s export and manufacturing sector.

BoC POLICY ANNOUNCEMENT — BULLISH FOR RATES; TAD BEARISH FOR THE CAD

For a country that is a play on the global economy, what struck me about the Bank of Canada’s latest policy announcement on the global outlook were the words “significant fragilities remain.” Quite a bit different from what Caterpillar (CAT) had to say in its 2010 guidance.

The Bank of Canada took a knife and cut its 2011 real GDP growth forecast, to 3.3% from the earlier view of 4.7% (2010 seen at +3.0%), though it acknowledged what the data has made clear of late is that “a recovery is also under way.” The BoC also pushed out, by a quarter, to 2011 Q3, its expected timing of when the output gap closes. The expected return of inflation to the 2% target was also pushed out one quarter, to 2011 Q3. Note, the Bank reiterated that even with the recession behind us, “the overall risks to its inflation projection are tilted slightly to the downside.” In other words, a BoC rate hike is not coming for a long, long time — the tone of this press statement seemed to deliberately part ways with the Reserve Bank of Australia.

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CAVEAT EMPTOR

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Rebecca Wilder: Canada’s “Normal” Recession Set for “Normal” Recovery

Wednesday, July 15th, 2009

This post is a guest contribution by Rebecca Wilder*, author of the of the News ‘n’ Economics blog, July 15, 2009.

I have been pretty “positive” about Canada. Compared to the U.S., the Canadian economy simply sits on a firmer (financial) foundation: housing fundamentals were stronger going into this mess; unemployment created a migration pattern toward work; saving rates are rising as in the US, but on a smaller wealth effect; and the overall GDP loss in the current cycle is expected to fall short of a recent time-series of Canada’s recession.

But the standard policy response, lowering the policy target to stimulate consumption and investment, has been the same: the Bank of Canada (BoC) lowered its policy rate, the overnight rate, to 0.25%. It did not (correctly) engage in quantitative easing measures – and I believe that it has not officially announced that such measures have been taken off the table – because it is becoming evident that the economy is responding to the massive monetary stimulus already in place.

And Merrill Lynch’s new chief strategist and economist for Canada, Sheryl King, criticized the BoC for being too aggressive. From the Globe and Mail:

In her report, Ms. King actually upgraded Mr. Wolf’s Canadian gross domestic product forecast for 2009 (she’s now calling for a decline of 2 per cent versus 2.7 per cent in the old forecast) and 2010 (growth of 2.7 per cent versus 2.3 per cent). She also suggested that the improved growth prospects over the next 18 months are policy makers’ own doing – the flood of fiscal and monetary stimulus “will produce growth.”

And she warned that the Bank of Canada “overreacted to the downside risks” and may have positioned itself to do the same on the upside. She fears that the short-term growth fuelled by policy-driven economic stimulation could artificially boost inflation and output, fooling the bank into tightening its policy too soon.

“It’s hard to get monetary policy right at the best of times,” she said. “The probability that [the Bank of Canada's current policy] is exactly the right tonic for the economy is so infinitely small, it’s laughable.”

She might be right. Canada doesn’t have the strong productivity growth to offset inflation pressures coming from the demand side. And it is becoming quite clear, especially in the housing market, that low interest rates are stimulating some economic activity.

The Canadian Real Estate Association reported a surge in Q2 existing home sales:

National resale housing market activity bounced back strongly in the second quarter of 2009 above levels reported for the same period last year. Demand continues to rebound sharply in some of the most expensive markets in the country, skewing the national average price upward.

According to statistics released by The Canadian Real Estate Association (CREA), actual (not seasonally adjusted) home sales, via the Multiple Listing Service® (MLS®) of Canadian real estate boards, totaled 147,351 units in the second quarter of 2009 – the fourth strongest quarterly sales figure ever. Up 1.4 per cent from the second quarter of 2008, this marks the first year-over-year increase in quarterly activity since the fourth quarter of 2007.

…

The national average home price also scaled new heights on a monthly basis, climbing 3.6 per cent year-overyear to $326,613 in June 2009. However, only 13 local markets posted new average price records in June, less than a handful of which are among the most active or expensive. The strong rebound in sales activity, not price, in Canada’s most expensive markets is skewing average prices upward nationally and in some provinces, just as a sharp decline in activity in these markets skewed the average lower in late 2008.

Although the re-sale market is really heating up, especially in the high income bracket, new home prices are still falling, -3.1% over the year in May 2009. From Statistics Canada:

Contractors selling prices decreased 0.1% in May following a 0.6% decline in April.

Between April and May, prices declined the most in Saskatoon (-1.2%) followed by Hamilton (-1.1%) and Edmonton (-0.9%). In Saskatoon, a number of builders reported reduced material and labour costs while other builders have lowered their prices to be more competitive and to encourage sales.

And building permits are growing in the single-family home sector, rising for three consecutive months in May. This is usually a leading indicator of new construction in the residential space.

And other types of big-ticket items are likely responding to low financing rates. Auto sales, driven by a surge in truck sales, are stabilizing and actually grew in May. However, preliminary reports indicate a drop in June.

Overall, the economy is stabilizing on the heels of big monetary and fiscal stimulus. And unlike in the US, we are starting to see first-derivative signs of growth. The housing market will (and always) plays a significant role in the early stages of an economic recovery.

When the recovery starts to firm a bit more (Q3 growth is projected to be weak, 0.0% by the Bank of Montreal), we will see if King is right – whether or not the BoC was indeed too aggressive. I wouldn’t be surprised if they were.

* Rebecca Wilder is an economist in the financial industry. She was previously an assistant professor and holds a doctorate in economics.

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