Briefing highlights
- Bank of America boosts Canada forecast
- Global stock markets mixed so far
- New York poised for stronger open
- Canadian dollar just above 78.5 cents
- RBC posts flat profit, raises dividend
- Inflation eases but …
- … consumers may be paying for wage hike
- China seizes control of Anbang
- U.S. tells India to cut tariffs
'Sugar rush'
Bank of America Merrill Lynch is suddenly more upbeat about Canada's economy, expecting a "sugar rush" from America's fiscal stimulus.
And what its forecast could mean is a bump in interest rates that's greater than we might be expecting.
The new projection isn't a huge difference, but every basis point counts. And its call for Canadian economic growth this year is better than some others expect.
Carlos Capistran, the bank's Canada and Mexico economist, said in a report this week that he now expects Canada's economy to expand by 2.5 per cent this year, up from an earlier forecast of just 2.2 per cent, though still shy of what is believed to have been growth of 3 per cent in 2017.
He also revised his projection for annual inflation to 2 per cent, from his earlier 1.9 per cent, his forecast for unemployment to just 4.9 per cent, from his previous 5 per cent, and his expectation for Bank of Canada rate hikes to four from three.
That would bring the central bank's benchmark overnight rate to 2 per cent.
"The U.S. economy is getting pumped with stimulus this year," Mr. Capistran said in his report, titled "Sugar rush from U.S. fiscal candy".
"First came a reduction and now an increase in expenditure."
Bank of America economists have revised their projection for U.S. economic growth this year to 2.9 per cent, compared to an earlier 2.4 per cent, and they expect the Federal Reserve to bump up its key rate three times, and possibly four.
"Stronger economic growth in the U.S. will increase the demand for Canadian goods and services, providing a boost to GDP growth," Mr. Capistran said.
"An increase in U.S. corporate investment, U.S. household consumption, and U.S. government expenditure will reduce savings in the U.S., which in turn will increase the U.S. current account deficit," he added.
"This ultimately means that Americans are likely to choose to spend at least part of the stimulus on imported goods and services. The U.S. imports most of its goods and services from China, Mexico and Canada, so these three countries stand to benefit from strong U.S. growth, moreso Mexico and Canada, as their exports to the U.S. represent more than 25 per cent and 15 per cent of their GDP, respectively."
Given all this, Mr. Capistran said, the Bank of Canada will have to react more forecefully, and thus three more rate hikes this year to bring the total to four.
"One reason for the BoC to increase the pace at which it is withdrawing stimulus is because stronger U.S. growth will increase growth and inflation in Canada," Mr. Capistran said. "So we believe the BoC needs to recalibrate its monetary policy."
Central bank governor Stephen Poloz and his colleagues risk "being behind the curve" if they don't march to the drum of new data. And because "the Fed may do so."
Compare this to the recent forecast from Bank of Montreal, which expects economic growth of 2.2 per cent this year, and just two more rate hikes.
"While financial conditions remain supportive and resource prices could rise moderately further, higher interest rates and tougher mortgage rules will apply a brake on consumer spending and home sales," said BMO senior economist Sal Guatieri.
"Meantime, the ongoing threat of trade protectionism will impede investment," he added.
"Although stronger U.S. demand is helpful, the fact that Canada's non-resource export volumes are little changed in the past decade is a testament to a loss of competitiveness for many companies as they deal with new regulations, rising mandated labour costs and new environmental protections."
Mr. Capistran's forecast, like others, comes with the caveat surrounding talks to overhaul the North American free-trade agreement.
Most observers believe Canada, the United States and Mexico will strike a new deal, though the form it takes is, of course, a matter of speculation.
"Uncertainty regarding NAFTA is already having a negative impact on investment, but we believe benefits from the U.S. fiscal stimulus will top NAFTA negatives in the short run," Mr. Capistran said.
- David Parkinson: Economy firing ‘on all cylinders’ as Canada sees best growth in six months
- David Parkinson: Inflation slows to 1.9% as consumers get a holiday season price break
- Barrie McKenna: Bank of Canada hikes rates again, but warns of NAFTA fallout
- Outlook 2018: Loonie (lame), interest rates (pain)
Stocks mixed
Global markets are mixed so far, but New York is pointing higher.
And forget saying anything nice about the Canadian dollar.
Tokyo's Nikkei gained 0.7 per cent, Hong Kong's Hang Seng 1 per cent, and the Shanghai composite 0.6 per cent.
In Europe, London's FTSE 100 was down 0.2 per cent by about 7:40 a.m. ET, Germany's DAX was up 0.3 per cent, and the Paris CAC 40 was little changed.
New York futures were up, and the Canadian dollar was just above 78.5 US cents.
Read more
RBC profit flat
Royal Bank of Canada posted relatively flat first-quarter results, but with some noise in the background.
RBC also raised its quarterly dividend by 3 cents, to 94 cents.
The second of Canada's major banks to report, following Canadian Imperial Bank of Commerce on Thursday, RBC said profit was little changed at $3-billion, or $2.01 a share diluted, up 2 per cent.
The latest quarter included a writedown related to the U.S. tax reform, of $178-million or 12 cents a share.
And when you strip out last year's gain on the sale of certain U.S. operations, profit rose 7 per cent, and earnings per share 10 per cent, the bank said.
Return on equity was 17.4 per cent, up 70 basis points.
Read more
- James Bradshaw: RBC boosts dividend as earnings beat market expectations
- James Bradshaw: CIBC kicks off Big Six results by topping expectations
Inflation eases but …
There's some evidence today of Ontario's minimum wage increase being passed on to consumers.
Restaurant prices rose 3.7 per cent in January from a year earlier, a far faster pace than December's 2.9 per cent. The overall move higher in food prices, of 2.3 per cent, was the fastest pace since April, 2016.
In Ontario alone, Statistics Canada said, restaurant meals climbed 4.9 per cent, and child care and housekeeping services almost 10 per cent. That, the agency said, coincided with "a legislated minimum wage increase."
Annual inflation in general eased to 1.7 per cent, down from December's 1.9 per cent, while rising by a stronger-than-expected 0.7 per cent on a monthly basis.
If you ignore food and energy prices, consumer prices rose 1.5 per cent over the year and 0.2 per cent from December, so all in all "a material acceleration over the past few months," said Royce Mendes of CIBC World Markets.
"Part of the strength could be attributed to a minimum wage in Ontario, with that province leading the way in terms of monthly gains," he added.
"But looking across categories it's difficult to conclude that sectors that should be most affected showed signs of upward pressure."
More news
- China seizes control of Anbang Insurance as chairman prosecuted
- U.S. tells India to cut tariffs as trade friction heats up