TSX tumbles as banks get hit hard
· TSX -306.52pts (Reuters) - The TSE's main index sank more than 2% in a broad decline sparked by losses in financial-services shares -down 4.1% from this past week's strong 6 session rally, as sour data provided a reminder of the dreadful state of the U.S. housing sector and concerns over the U.S. economic outlook, which showed a 2.6% drop in sales in existing U.S. homes. All of the major banks were down, including Canadian Imperial Bank of Commerce, which lost 5.9% after the filing of a multibillion dollar class action law suit.
· Dow -283.10pts also sharply lower amid mixed corporate results, including an $8.7b quarterly loss posted by Ford and a dismal housing report and another selloff of financial stocks.
· Dollar -.22c to $98.73US
· Oil +$1.05to $125.49US per barrel. Americans used 2.4% less fuel over the past 4 weeks than they did last year, the latest figures by the U.S. Energy Department's Administration show. While that may not sound like much, industry experts say it represents a significant shift by the world's largest energy consumer. A bigger-than-expected increase in gasoline supplies only added to concerns that drivers are cutting back. "We've grounded airplanes. People are driving less, they're trading in their SUVs," said James Cordier, president of Liberty Trading Group and OptionSellers.com. "For the foreseeable future - at least for the next 6 to 12 months - we have demand destruction." · Gold +$4.40 to $928.400US per ounce Gold regained strength after an earlier drop to a 2 week low attracted buying from jewellers, the electronics sector and bargain hunters
Some great info in the attached article to assist you when clients question the need for documentation…..
A message to lenders: know your borrowers
By Burton Frierson - Analysis
NEW YORK (Reuters) - The sweltering days of late July may seem an odd time to revisit the Christmas classic "It's a Wonderful Life," but the 1946 movie teaches a timeless lesson in finance: that lenders must always know their borrowers and have a stake in the debts being repaid.
As the United States struggles to cope with the worst housing slump since the Great Depression, some have sought to explain the latest boom and bust in mortgages as innovation gone awry.
But much of it is not new at all. There were six U.S. mortgage meltdowns between 1870 and World War Two and all taught the same lesson -- that some loans should never be made.
"Apparently no single person on Wall Street knew about these six earlier blow-ups. If they had they would have held back," said Robert E. Wright, financial historian at New York University's Stern School of Business.
"They all happened for the same reason and that is the same reason that the seventh one blew up: the originators had incentives to make as many mortgages as quickly as possible and not to really care about the borrowers' long-term ability to pay."
To prevent future housing crashes, analyst suggestions run the gamut from returning to more community-focused banking to market mechanisms to prevent bubbles from developing.
Meanwhile, lawmakers in Washington have crafted a package to rescue the market and shore up Fannie Mae and Freddie Mac, which own or have guaranteed almost half of the $12 trillion in U.S. mortgage debt outstanding.
There are also efforts to tighten standards among the brokers who made the high-risk loans that were repackaged into complex securities and sold on around the world to investors eager for the extra bit of interest on offer.
NOTHING NEW
According to research by Kenneth Snowden, associate professor of economics at the University of North Carolina at Greensboro, mortgage securitization appeared in 6 different forms between 1870 and 1940. Each time the market for mortgage-backed securities grew rapidly for a few years and then collapsed.
The expansions included financing booms for building cities in the American West, settlement of the Great Plains and agricultural expansion during and after World War I. In all of the breakdowns, the willingness of bankers and agents to write loans that never should have been made played a crucial role.
"In securitization what you have are originators who are really very distinct from the ultimate holders of the risk," Snowden told Reuters in a telephone interview.
"How are the incentives maintained through that chain to maintain good credit quality? That's what's key. That's what's proven to be hard to do," says Snowden, adding, though, that he thinks securitization is beneficial when properly done.
Snowden says as housing markets grow increasingly exuberant, maintaining credit standards becomes more difficult, especially as companies fight to maintain market share. He suggests putting in place regulatory mechanisms to cool off markets off when they begin to expand too rapidly.
KNOW WHERE THE MONEY IS
For the Hollywood audience, It's a Wonderful Life leading man James Stewart demonstrated the valuable link between lender and borrower in the film's bank-run scene. Here, protagonist George Bailey convinces small-town depositors to stick with the local building and loan he runs.
Bailey's clinching argument is that they know their money is safe because they have loaned it to other residents of Bedford Falls, whose financial prospects they know intimately.
"Well, your money's in Joe's house. That's right next to yours. And in the Kennedy house, and Mrs. Macklin's house, and a hundred others," Stewart, as Bailey, tells distressed depositors. "Why, you're lending them the money to build, and then, they're going to pay it back to you as best they can."
The community building and loan survives because the investors know who they are underwriting.
"That's the scene where he explains basically the philosophy and rationale of community banking," says Wright, the financial historian at Stern School of Business. "In fact that's the part of the movie where I cry."
Fast-forward to the latest debacle and ask whether investors have the same confidence. The answer is a resounding 'no', expressed in loss of confidence throughout the global financial system.
Wright says the credit crunch shows the virtues of the community banking system, where financial institutions operate locally, originate their own loans and tend to hold onto the debts as investments.
Greater emphasis on this approach may also help lay the foundations for a more stable housing market in the future
They know their borrowers," Wright added.
Some argue that an end to securitization and a return only to community banking would not look nearly as idyllic as it does on film. A "return to the old days of the Bailey Building and Loan," analysts at Merrill Lynch wrote in a July 16 research note, would be "to the detriment of U.S. growth prospects" by making capital and credit more difficult to obtain.
If that's the case then the onus is on regulators and financiers to figure out the conundrum that has been the undoing of so many U.S. mortgage booms.
"Who shouldn't write a bad loan?" asks Snowden. "When you think of incentives, who should say 'no' to a poor quality loan?"
Have a great day! I will be back from vacation Aug 11!
Friday, July 25, 2008
Thursday, July 24, 2008
Financial Update
TSX battered by falling commodities
· TSX -130.53pts a gain by financials cushioned the fall as Canadian banks were lifted by a rally in bank stocks south of the border and by optimism that U.S. lawmakers would approve a rescue plan for mortgage finance giants Fannie Mae and Freddie Mac .
· Dow +29.88pts stocks were buoyed by rising financials, as well as the lower price of oil, which eased inflationary worries
· Dollar -.69c to $99.17US on weaker-than-expected retail sales data for May and a widespread rally in the greenback against major currencies.
· Oil -3.09 to $127.95US per barrel hits a further 6 week low on growing fears that high prices and the weak economy are destroying demand. The Energy Department report showed that gasoline stockpiles jumped by 2.9 million barrels last week, far more than analysts predicted.
· Gold -$25.60to $922.4US per ounce tumbling more than 2%
Bush is nursing the U.S. economy's hangover
BOYD ERMAN From Thurday's Globe and Mail
Now we know what George W. Bush really thinks happened to his country's economy and financial markets: “Wall Street got drunk.”
In public, the U.S. President has been subdued in his statements about who is to blame for the mess on the balance sheets of banks and the country's waning growth – preferring bromides to straight-out criticism. But in private – or at least, when he thought it was private – Mr. Bush laid his real view out in folksy yet harsh terms last week. Wall Street overindulged in the “fancy financial products” that became the flavour of the bull market, and now faces a hangover, he told supporters in Texas.
Mr. Bush wasn't aware he was being recorded when he cracked the joke at a private fundraiser for a congressional candidate. In fact, he wanted cameras banned, but someone in the crowd surreptitiously taped him using a cellular phone. Almost a week later, the clip made its way to a local television station, then onto the Internet and sites such as YouTube.
“Wall Street got drunk – that's one of the reasons I asked you to turn off the TV cameras – it got drunk and now it's got a hangover,” Mr. Bush said on Friday at the fundraiser in Houston. “The question is, how long will it sober up and not try to do all these fancy financial instruments?”
That line got only a few chuckles, but Mr. Bush soldiered on with his comedy revue of the economy.
“And then we've got a housing issue – Not in Houston, and evidently not in Dallas because Laura's there trying to buy a house,” he said to a roar of laughter.
According to the White House, Mr. Bush has always seen the fallout from the housing and banking debacle this way, even if he hasn't always said it in such colourful language.
“President Bush has had similar sentiments before when he's talking about how, over the years, Wall Street was dealing with very complex financial instruments, and it's clear now to everybody that those markets didn't fully understand the risk that all of those instruments posed to the overall health of the economy and the instability in the market,” White House spokeswoman Dana Perino told reporters Wednesday.
She added later, “I don't think the criticism is any different, it's just said with a little bit more candour and more bluntly.”
But not everybody who has studied what has happened with the market for such things as collateralized debt obligations (CDOs) and other complex securitization products created by Wall Street believes, as Mr. Bush does, that it was the bankers who went too far.
In fact, some argue, investors were the ones drinking too much without regard to the consequences. Wall Street was merely the bartender serving up whatever investors ordered.
“My view is not so much that Wall Street got drunk,” said Joshua Coval, a professor at Harvard Business School. “We set up an apparatus that was fairly flawed and over time investors came to rely on it excessively – that is, using ratings to measure risk and outsourcing due diligence in terms of the nature of investments that were being made and risks that were being borne. As far as I can tell, that's what's fuelled the spectacular growth in securitization. Wall Street just responded to this behaviour.”
Mr. Coval, who studies behavioural finance, the idea that investors don't always behave rationally as economists expect, says Wall Street “maybe kept the party going longer than it should have, and it looks somewhat spectacular now that a bunch of the big financial firms have these writedowns and losses. But the party was started and led by the institutions that have been buying these products for the last five years or so.”
Now that the hangover is setting in, the Bush administration finds itself playing the role of a parent who has come home from a weekend away to find the kids have thrown a big, messy party.
The President is using stern words but finding himself unable to resist helping out by providing pain relievers.
Mr. Bush had threatened to veto a bill aimed at rescuing the two biggest housing lenders, Fannie Mae and Freddie Mac, because of a provision that he felt would bail out banks rather than homeowners.
However, on Wednesday he dropped his opposition after his Treasury Secretary, Henry Paulson, stressed the importance of getting a fix for the housing market under way with as little delay as possible.
When one reporter asked whether the new measures would keep Wall Street sober, Ms. Perino took a cue from her boss, cracking a joke of her own. That, she declared, would be “a great new slogan.”
· TSX -130.53pts a gain by financials cushioned the fall as Canadian banks were lifted by a rally in bank stocks south of the border and by optimism that U.S. lawmakers would approve a rescue plan for mortgage finance giants Fannie Mae and Freddie Mac .
· Dow +29.88pts stocks were buoyed by rising financials, as well as the lower price of oil, which eased inflationary worries
· Dollar -.69c to $99.17US on weaker-than-expected retail sales data for May and a widespread rally in the greenback against major currencies.
· Oil -3.09 to $127.95US per barrel hits a further 6 week low on growing fears that high prices and the weak economy are destroying demand. The Energy Department report showed that gasoline stockpiles jumped by 2.9 million barrels last week, far more than analysts predicted.
· Gold -$25.60to $922.4US per ounce tumbling more than 2%
Bush is nursing the U.S. economy's hangover
BOYD ERMAN From Thurday's Globe and Mail
Now we know what George W. Bush really thinks happened to his country's economy and financial markets: “Wall Street got drunk.”
In public, the U.S. President has been subdued in his statements about who is to blame for the mess on the balance sheets of banks and the country's waning growth – preferring bromides to straight-out criticism. But in private – or at least, when he thought it was private – Mr. Bush laid his real view out in folksy yet harsh terms last week. Wall Street overindulged in the “fancy financial products” that became the flavour of the bull market, and now faces a hangover, he told supporters in Texas.
Mr. Bush wasn't aware he was being recorded when he cracked the joke at a private fundraiser for a congressional candidate. In fact, he wanted cameras banned, but someone in the crowd surreptitiously taped him using a cellular phone. Almost a week later, the clip made its way to a local television station, then onto the Internet and sites such as YouTube.
“Wall Street got drunk – that's one of the reasons I asked you to turn off the TV cameras – it got drunk and now it's got a hangover,” Mr. Bush said on Friday at the fundraiser in Houston. “The question is, how long will it sober up and not try to do all these fancy financial instruments?”
That line got only a few chuckles, but Mr. Bush soldiered on with his comedy revue of the economy.
“And then we've got a housing issue – Not in Houston, and evidently not in Dallas because Laura's there trying to buy a house,” he said to a roar of laughter.
According to the White House, Mr. Bush has always seen the fallout from the housing and banking debacle this way, even if he hasn't always said it in such colourful language.
“President Bush has had similar sentiments before when he's talking about how, over the years, Wall Street was dealing with very complex financial instruments, and it's clear now to everybody that those markets didn't fully understand the risk that all of those instruments posed to the overall health of the economy and the instability in the market,” White House spokeswoman Dana Perino told reporters Wednesday.
She added later, “I don't think the criticism is any different, it's just said with a little bit more candour and more bluntly.”
But not everybody who has studied what has happened with the market for such things as collateralized debt obligations (CDOs) and other complex securitization products created by Wall Street believes, as Mr. Bush does, that it was the bankers who went too far.
In fact, some argue, investors were the ones drinking too much without regard to the consequences. Wall Street was merely the bartender serving up whatever investors ordered.
“My view is not so much that Wall Street got drunk,” said Joshua Coval, a professor at Harvard Business School. “We set up an apparatus that was fairly flawed and over time investors came to rely on it excessively – that is, using ratings to measure risk and outsourcing due diligence in terms of the nature of investments that were being made and risks that were being borne. As far as I can tell, that's what's fuelled the spectacular growth in securitization. Wall Street just responded to this behaviour.”
Mr. Coval, who studies behavioural finance, the idea that investors don't always behave rationally as economists expect, says Wall Street “maybe kept the party going longer than it should have, and it looks somewhat spectacular now that a bunch of the big financial firms have these writedowns and losses. But the party was started and led by the institutions that have been buying these products for the last five years or so.”
Now that the hangover is setting in, the Bush administration finds itself playing the role of a parent who has come home from a weekend away to find the kids have thrown a big, messy party.
The President is using stern words but finding himself unable to resist helping out by providing pain relievers.
Mr. Bush had threatened to veto a bill aimed at rescuing the two biggest housing lenders, Fannie Mae and Freddie Mac, because of a provision that he felt would bail out banks rather than homeowners.
However, on Wednesday he dropped his opposition after his Treasury Secretary, Henry Paulson, stressed the importance of getting a fix for the housing market under way with as little delay as possible.
When one reporter asked whether the new measures would keep Wall Street sober, Ms. Perino took a cue from her boss, cracking a joke of her own. That, she declared, would be “a great new slogan.”
Wednesday, July 23, 2008
Financial Update
High gas prices drive Canadians off the road
Financial Post -Canadians have begun to cut back their gas consumption in the face of record prices at the pump, new figures indicate….. the volume of gas sales actually fell about 5.9% in May
· TSX -46.00pts
· Dow +135.16pts Weak but better-than-expected earnings, a lack of capital raises and only modest signs that credit issues are spreading have helped U.S. bank stocks rally in the past week.
· Dollar -.69c to $99.17US on weaker-than-expected retail sales data for May and a widespread rally in the greenback against major currencies.
· Oil -3.09 to $127.95US per barrel hits a 6 week low as tropical storm Dolly grew increasingly unlikely to threaten supply, knocking out one more reason traders had to prop up prices.
· Gold -15.19to $948.00US per ounce
Fuelled by higher gasoline prices, consumer prices rose 3.1% in the 12-months ending June 2008, reports Statistics Canada. That compares with a 2.2% gain recorded in May. It's also the largest increase since September 2005. Consumer prices excluding gasoline rose 1.8% in the 12 months to June.
Financial Post -Canadians have begun to cut back their gas consumption in the face of record prices at the pump, new figures indicate….. the volume of gas sales actually fell about 5.9% in May
· TSX -46.00pts
· Dow +135.16pts Weak but better-than-expected earnings, a lack of capital raises and only modest signs that credit issues are spreading have helped U.S. bank stocks rally in the past week.
· Dollar -.69c to $99.17US on weaker-than-expected retail sales data for May and a widespread rally in the greenback against major currencies.
· Oil -3.09 to $127.95US per barrel hits a 6 week low as tropical storm Dolly grew increasingly unlikely to threaten supply, knocking out one more reason traders had to prop up prices.
· Gold -15.19to $948.00US per ounce
Fuelled by higher gasoline prices, consumer prices rose 3.1% in the 12-months ending June 2008, reports Statistics Canada. That compares with a 2.2% gain recorded in May. It's also the largest increase since September 2005. Consumer prices excluding gasoline rose 1.8% in the 12 months to June.
Tuesday, July 22, 2008
Financial Update
· TSX +173.23 The Toronto stock market racked up a solid gain with leadership from the energy sector after oil prices rebounded from 6 week lows.
· Dow -29.23
· Dollar +.43c to $99.86US boosted by news of proposed foreign takeover offers for Canadian companies
· Oil +$2.16 to $131.04US per barrel. on a threat of new sanctions against Iran and as Tropical Storm Dolly headed into the Gulf of Mexico, prompting a hurricane watch for parts of Texas and Mexico.· Gold +5.80to $963.10US per ounce
· Dow -29.23
· Dollar +.43c to $99.86US boosted by news of proposed foreign takeover offers for Canadian companies
· Oil +$2.16 to $131.04US per barrel. on a threat of new sanctions against Iran and as Tropical Storm Dolly headed into the Gulf of Mexico, prompting a hurricane watch for parts of Texas and Mexico.· Gold +5.80to $963.10US per ounce
Monday, July 21, 2008
Financial Update
· TSX +55.71 2 new indicators released Fri appeared to wash away some of the doom and gloom about the economy that rocked equity markets earlier in the week. Canadian wholesale sales tripled economist’s projections in May, registering the 3rd consecutive monthly increase with all 7 sectors except auto registering gains. Junes composite leading index was unchanged after advances the 2 previous months, while showing 2 key pillars of the economy-consumer spending and average hourly earnings-continued to grow strongly.
· Dow +49.91
· Dollar +.11c to $99.43US
· Oil dropped for a 4th session-$.41 to $128.88US per barrel.
· Gold slid 12.70to $12.70US per ounce
Associated Press US President Bush calls for action on Fannie Mae, Freddie Mac - In his weekly radio address, U.S. President Bush is stepping up pressure on Congress to help restore confidence in the American housing finance industry. The president calls this "a challenging time" for American families worried about rising prices at the pump and declining home values.
He's urging lawmakers to approve a plan allowing the government to extend unlimited lines of credit to Fannie Mae and Freddie Mac and to otherwise help bolster their reserves against losses.
He's also calling for "urgent" action from lawmakers to open up offshore oil exploration. Bush recently lifted an executive ban on offshore oil drilling. He said it's Congress' turn to act. In his words, "the only thing now standing between the American people and the vast oil resources of the Outer Continental Shelf is action from the United States Congress."
The following article has some interesting info on The Canada Mortgage Bond Program…
CMHC not likely to see Fannie, Freddie fate
Paul Vieira, Financial Post -+
OTTAWA -- The pressure Washington is under to save U.S. mortgage finance providers Fannie Mae and Freddie Mac from collapse rekindles thoughts for those with long memories in Ottawa of less-than-prosperous times for Crown-owned Canada Mortgage and Housing Corp.
About three decades ago, thanks to double-digit interest rates, depressed property values and a plan aimed at boosting home ownership that ran amok, claims at the mortgage insurer skyrocketed. It forced CMHC to borrow heavily, more than $200-million, to stem the cash drain.
The controller acknowledged at the time the Crown corporation was in technical bankruptcy.
That was then. In the years following, federal governments tried to right the CMHC ship by, among other things, getting the agency out of the business of building housing units.
What a difference 30 years makes. For the each of the past three fiscal years, CMHC has posted net profit of more than $1-billion, largely the result of an incredible bull market in the housing market that saw more Canadians take out mortgages -- and the required mortgage insurance CMHC sells. And the percentage of Canadian mortgages in arrears for three months or more continues to be at lows not seen since 1990.
Even though CMHC is a different beast compared with the struggling Fannie Mae and Freddie Mac and, for the time being, not under the same financial pressure, questions are nevertheless being asked about the role of the Crown corporation in light of the U.S. housing crisis. Some cite its part in driving people who otherwise couldn't afford a home to buying real estate by offering insurance on mortgages with 40-year amortizations or zero down.
Others wonder whether the government should be in the business of selling mortgage insurance or securitizing mortgages when it could be done, perhaps more efficiently, by the private sector.
"It did a lot of good things, and got into things it shouldn't have," says says Larry Smith, professor emeritus of economics at the University of Toronto.
He was a deputy chairman of a 1979 federal task force that examined future roles for CMHC, and recommended, among other things, that it cease its insurance operations. He believes some of the CMHC's responsibilities should be shifted to the private sector.
"[But] it was very instrumental in removing a lot of the imperfections that existed in the mortgage and credit markets," he said. "So it played a major role."
For instance, he said, there was a time when chartered banks did not issue mortgage loans. But that changed with the arrival of CMHC and its government-backed insurance.
Established in 1946, CMHC is responsible for housing and is the top provider of mortgage loan insurance, which is required under Canadian law if the down payment is 20% or less in an effort to protect lenders from default. It is also the major player in mortgage securitization, through mortgage-backed securities and mortgage bonds, which analysts say has improved the availability of low-cost mortgage funds that the banks can access for prospective clients.
Unlike the CMHC, Fannie Mae and Freddie Mac hold mortgages that they trade in an effort to maximize profit, says Tsur Somerville, a business professor at UBC's Sauder School of Business in Vancouver and an expert in real estate finance.
CMHC, he says, does not undertake such trading activity and, instead, should be compared with Ginnie Mae, the U.S. agency under the Department of Housing and Urban Development, which securitizes mortgages that are insured by the U.S. Federal Housing Administration.
"Freddie and Fannie are private companies with government support. That's the worst possible scenario because you have institutions who have every incentive to maximize profit with guarantees from moral hazard," Mr. Somerville says, referring to the U.S. government's backing.
"The reason you won't find CMHC running into the same problems is because CMHC does not have the structure to go into portfolio trading, and doesn't have the private-sector incentive for profit maximization."
The insurance business is the main profit driver at CMHC, and the corporation is estimated to hold two-thirds of the Canadian market, with $333-billion of policies outstanding. According to its 2007 annual report, it recorded $1.42-billion in revenue from premiums and fees (the premium varies from 0.65% to 2.75%). It paid out $315-million in net claims -- more than the $238-million it expected but less than the $552-million it set aside on its balance sheet as a provision for claims.
In CMHC's forecast looking at the 2008-2012 period, profit from insurance is to grow 28% by the end of that period, to $1.33-billion; the number of approved policies to drop, from 578,000 to a low of 571,000; and claims expenses to increase to a high of $314-million, just below what it paid out last year.
The money CMHC and its long-time private-sector competitor, Genworth Financial Corp., are drawing from mortgage insurance has attracted new players, and over the years competition has been fierce. In reaction to new entrants, CMHC and Genworth introduced insurance for mortgages with amortizations of up to 40 years, and that covered 100% of the home prices, or 0% down.
At the time, the CMHC's move into such products drew the ire of then-Bank of Canada governor, David Dodge, who said the Crown corporation risked stoking inflation and perhaps stoking a housing bubble. Last week, two years after Mr. Dodge's comments, the Department of Finance reacted. It introduced rules that would see Ottawa backstop insurance on mortgages with amortizations of no more than 35 years and a minimum 5% downpayment. Jim Flaherty, the Minister of Finance, said the moves were meant to avoid a U.S.-style housing meltdown, although the department acknowledges the low level of mortgage defaults in Canada.
"They shouldn't be out there competing or discouraging private-sector participation, because when you have a mixture of public sector and private-sector functions intermixed, you will inevitably end up with what the Americans have in Freddie Mac and Fannie Mae," said Mr. Smith, the former member of the CMHC task force.
Moreover, he added, "they are again enticing people into mortgages without a theoretical perspective as to why they should be artificially stimulating housing demand."
Mr. Somerville also questions whether CMHC needs to remain in the mortgage insurance business, and whether that element could be spun off to the private sector at a handsome profit for Ottawa.
Nevertheless, Mr. Somerville said CMHC may be needed because of its role in mortgage securitization. Under its Canadian Mortgage Bond Program, established in 2001, financial institutions originate mortgages, pool them and sell them as packages in the form of mortgage-backed securities to an entity called Canadian Housing Trust. The trust, which is advised by CMHC, issues bonds that pay interest similar to Government of Canada bonds, using the cash flow from the mortgage-backed securities to make the payments. A 2005 Bank of Canada analysis suggested the CMHC-led securitization had "improved the supply of low-cost mortgage funds in Canada" from which lenders can access.
"If you did get rid of CMHC, who would securitize the mortgages?," Mr. Somerville asks. "Would you trust one of the investment arms of the big banks to securitizing the mortgages they hold?"
It's an interesting question, given the state Fannie Mae and Freddie Mac are in.
· Dow +49.91
· Dollar +.11c to $99.43US
· Oil dropped for a 4th session-$.41 to $128.88US per barrel.
· Gold slid 12.70to $12.70US per ounce
Associated Press US President Bush calls for action on Fannie Mae, Freddie Mac - In his weekly radio address, U.S. President Bush is stepping up pressure on Congress to help restore confidence in the American housing finance industry. The president calls this "a challenging time" for American families worried about rising prices at the pump and declining home values.
He's urging lawmakers to approve a plan allowing the government to extend unlimited lines of credit to Fannie Mae and Freddie Mac and to otherwise help bolster their reserves against losses.
He's also calling for "urgent" action from lawmakers to open up offshore oil exploration. Bush recently lifted an executive ban on offshore oil drilling. He said it's Congress' turn to act. In his words, "the only thing now standing between the American people and the vast oil resources of the Outer Continental Shelf is action from the United States Congress."
The following article has some interesting info on The Canada Mortgage Bond Program…
CMHC not likely to see Fannie, Freddie fate
Paul Vieira, Financial Post -+
OTTAWA -- The pressure Washington is under to save U.S. mortgage finance providers Fannie Mae and Freddie Mac from collapse rekindles thoughts for those with long memories in Ottawa of less-than-prosperous times for Crown-owned Canada Mortgage and Housing Corp.
About three decades ago, thanks to double-digit interest rates, depressed property values and a plan aimed at boosting home ownership that ran amok, claims at the mortgage insurer skyrocketed. It forced CMHC to borrow heavily, more than $200-million, to stem the cash drain.
The controller acknowledged at the time the Crown corporation was in technical bankruptcy.
That was then. In the years following, federal governments tried to right the CMHC ship by, among other things, getting the agency out of the business of building housing units.
What a difference 30 years makes. For the each of the past three fiscal years, CMHC has posted net profit of more than $1-billion, largely the result of an incredible bull market in the housing market that saw more Canadians take out mortgages -- and the required mortgage insurance CMHC sells. And the percentage of Canadian mortgages in arrears for three months or more continues to be at lows not seen since 1990.
Even though CMHC is a different beast compared with the struggling Fannie Mae and Freddie Mac and, for the time being, not under the same financial pressure, questions are nevertheless being asked about the role of the Crown corporation in light of the U.S. housing crisis. Some cite its part in driving people who otherwise couldn't afford a home to buying real estate by offering insurance on mortgages with 40-year amortizations or zero down.
Others wonder whether the government should be in the business of selling mortgage insurance or securitizing mortgages when it could be done, perhaps more efficiently, by the private sector.
"It did a lot of good things, and got into things it shouldn't have," says says Larry Smith, professor emeritus of economics at the University of Toronto.
He was a deputy chairman of a 1979 federal task force that examined future roles for CMHC, and recommended, among other things, that it cease its insurance operations. He believes some of the CMHC's responsibilities should be shifted to the private sector.
"[But] it was very instrumental in removing a lot of the imperfections that existed in the mortgage and credit markets," he said. "So it played a major role."
For instance, he said, there was a time when chartered banks did not issue mortgage loans. But that changed with the arrival of CMHC and its government-backed insurance.
Established in 1946, CMHC is responsible for housing and is the top provider of mortgage loan insurance, which is required under Canadian law if the down payment is 20% or less in an effort to protect lenders from default. It is also the major player in mortgage securitization, through mortgage-backed securities and mortgage bonds, which analysts say has improved the availability of low-cost mortgage funds that the banks can access for prospective clients.
Unlike the CMHC, Fannie Mae and Freddie Mac hold mortgages that they trade in an effort to maximize profit, says Tsur Somerville, a business professor at UBC's Sauder School of Business in Vancouver and an expert in real estate finance.
CMHC, he says, does not undertake such trading activity and, instead, should be compared with Ginnie Mae, the U.S. agency under the Department of Housing and Urban Development, which securitizes mortgages that are insured by the U.S. Federal Housing Administration.
"Freddie and Fannie are private companies with government support. That's the worst possible scenario because you have institutions who have every incentive to maximize profit with guarantees from moral hazard," Mr. Somerville says, referring to the U.S. government's backing.
"The reason you won't find CMHC running into the same problems is because CMHC does not have the structure to go into portfolio trading, and doesn't have the private-sector incentive for profit maximization."
The insurance business is the main profit driver at CMHC, and the corporation is estimated to hold two-thirds of the Canadian market, with $333-billion of policies outstanding. According to its 2007 annual report, it recorded $1.42-billion in revenue from premiums and fees (the premium varies from 0.65% to 2.75%). It paid out $315-million in net claims -- more than the $238-million it expected but less than the $552-million it set aside on its balance sheet as a provision for claims.
In CMHC's forecast looking at the 2008-2012 period, profit from insurance is to grow 28% by the end of that period, to $1.33-billion; the number of approved policies to drop, from 578,000 to a low of 571,000; and claims expenses to increase to a high of $314-million, just below what it paid out last year.
The money CMHC and its long-time private-sector competitor, Genworth Financial Corp., are drawing from mortgage insurance has attracted new players, and over the years competition has been fierce. In reaction to new entrants, CMHC and Genworth introduced insurance for mortgages with amortizations of up to 40 years, and that covered 100% of the home prices, or 0% down.
At the time, the CMHC's move into such products drew the ire of then-Bank of Canada governor, David Dodge, who said the Crown corporation risked stoking inflation and perhaps stoking a housing bubble. Last week, two years after Mr. Dodge's comments, the Department of Finance reacted. It introduced rules that would see Ottawa backstop insurance on mortgages with amortizations of no more than 35 years and a minimum 5% downpayment. Jim Flaherty, the Minister of Finance, said the moves were meant to avoid a U.S.-style housing meltdown, although the department acknowledges the low level of mortgage defaults in Canada.
"They shouldn't be out there competing or discouraging private-sector participation, because when you have a mixture of public sector and private-sector functions intermixed, you will inevitably end up with what the Americans have in Freddie Mac and Fannie Mae," said Mr. Smith, the former member of the CMHC task force.
Moreover, he added, "they are again enticing people into mortgages without a theoretical perspective as to why they should be artificially stimulating housing demand."
Mr. Somerville also questions whether CMHC needs to remain in the mortgage insurance business, and whether that element could be spun off to the private sector at a handsome profit for Ottawa.
Nevertheless, Mr. Somerville said CMHC may be needed because of its role in mortgage securitization. Under its Canadian Mortgage Bond Program, established in 2001, financial institutions originate mortgages, pool them and sell them as packages in the form of mortgage-backed securities to an entity called Canadian Housing Trust. The trust, which is advised by CMHC, issues bonds that pay interest similar to Government of Canada bonds, using the cash flow from the mortgage-backed securities to make the payments. A 2005 Bank of Canada analysis suggested the CMHC-led securitization had "improved the supply of low-cost mortgage funds in Canada" from which lenders can access.
"If you did get rid of CMHC, who would securitize the mortgages?," Mr. Somerville asks. "Would you trust one of the investment arms of the big banks to securitizing the mortgages they hold?"
It's an interesting question, given the state Fannie Mae and Freddie Mac are in.
Friday, July 18, 2008
Financial Update
'Economy remains robust,' Bank of Canada governor Carney says
· TSX -43.55 as a strong showing from financials was offset by resource shares that were hit by another sharp drop in oil prices
· Dow +207.38 swinging in the opposite direction as the drop in oil prices eased worries over inflation, while optimism was helped by unexpectedly strong earnings.
· Dollar -.46c to $99.32US
· Oil dropped sharply for a 3rd day in a row-$5.31 to $129.29US per barrel. One week ago crude hit an intraday record high of US$147.27 a barrel· Gold recovering 8.20to $970US per ounce
NY(Reuters) - Merrill Lynch & Co posted a much larger-than-expected $4.89 billion quarterly loss on Thursday after writing down soured debt, and unveiled plans to sell billions of dollars of assets -- including a part of its lucrative brokerage business -- to shore up capital. The loss was the 4th straight for Wall Street's 3rd largest investment bank, and was more than twice as big as analysts expected.
Carney …By Julian Beltrame, The Canadian Press
OTTAWA - Canadians all over the country are profiting from the ongoing commodities boom and helping to rescue the economy from recession, the Bank of Canada says.
"The Canadian economy remains robust," governor Mark Carney told a news conference after releasing the bank's quarterly monetary policy report update Thursday.
In surprisingly upbeat analysis given its warning two days earlier about spiking inflation, the central bank said "available evidence" indicates the economy has bounced back from a first-quarter dip and grew at an annualized rate of 0.8 per cent in the April-June quarter.
And it says the economy will recover further, growing at a rate of 1.3 per cent in the current July-September third quarter, 1.8 per cent in the fourth and 2.8 per cent in the first half of next year.
Unlike most industrialized countries, Canada benefits from rising oil and natural gas prices, Carney said - and this effect is not confined to Alberta and other producing provinces.
"There are variety of industries that feed into the energy industry, including manufacturing industries in Ontario and other areas of Central Canada; there are wealth effects in portfolios; there are wage effects for secondary and tertiary industries spread across the country," he said.
This money adds strength to other sectors, including construction and services in Central Canada, he added.
"And that puts us, in the industrialized countries, in very rare company."
Carney also said Canada's banking system is the envy of the world, as financial institutions in the United States and Europe remain enmeshed in an ongoing debt crunch.
"The Canadian system is very strong," he emphasized. "The banks are well capitalized, they are quite frankly at the leading edge of disclosure."
"In a world of de-leveraging of the financial system, many global financial institutions are trying to get where our financial institutions are, and they are quite a ways away."
The Bank of Canada's report says domestic borrowing is about three-quarters of a percentage point less expensive now than it was last summer at the beginning of the credit crisis.
The bank's latest assessment came as Ontario's manufacturing sector got more bad news with the announcement that Sterling Trucks is eliminating one of its two remaining shifts and laying off 720 workers this fall in St. Thomas.
The truck maker joins the growing ranks of Canadian manufacturers squeezed by an economic slowdown in the U.S. that has cut demand for everything from vehicles to lumber and cement.
And Jayson Myers of the Canadian Manufacturers and Exporters sharply questioned Carney's contention that oil wealth is being widely spread.
"If anybody should know it, the Bank of Canada should know it, the damage this is causing to the value-adding, the manufacturing sector and the high-value services sector," he said. "We are in very serious danger of losing a very large part of the value-adding sector of the economy."
Global Insight economist Dale Orr also questioned the central bank's contention that oil revenues are lifting most boats, saying provinces without oil and gas resources are net losers, particularly manufacturing-heavy Ontario.
The central bank, however, sees the economy as a glass half full and filling up quickly, more quickly than several economists said was likely.
"Our primary concern is that event risk will remain extraordinarily high and the financial infrastructure of the economy will remain strained for a long time yet," said Scotiabank economist Derek Holt.
The Bank of Canada's key concern remains inflation. But even here, it stressed that outsized price increases will be a passing phase and concentrated mostly on gas and fuel prices.
It says the consumer price index will rise sharply from the current annual rate of 2.2 per cent to 4.3 per cent in early 2009, then tumble down just as quickly to the two per cent target by the end of next year.
The overall thrust of the eight-page monetary policy report is positive, however, despite recent shaky economic data.
Even during the first quarter's 0.3 per cent pullback in gross domestic product - which it attributes to shoppers going on a winter holiday and businesses clearing inventories - incomes rose 2.4 per cent on an annualized basis thanks to an 8.1 per cent improvement in Canada's terms of trade - the price of exports relative to the cost of imports.
With more cash in their pockets, Canadians have returned to the stores and will continue to drive economic activity, the bank says.
Its analysis coincided with a report by the C.D. Howe Institute, a private-sector economic think-tank, and a warning from Export Development Corp., a federal Crown corporation.
Colin Busby, a policy analyst with C.D. Howe, said global demand for oil and gas has sent prices for Canadian energy exports to historic highs while the cost of imported machinery and other manufactured goods has fallen.
This, Busby said, mitigates the need for expansionist fiscal policy by Canadian governments and loose monetary policy by the central bank.
However, the EDC said the confidence of Canadian exporters has hit its lowest level since it began tracking their sentiment in 2000.
"Canadian exporters are clearly hurting right now thanks to a major slowdown in the U.S., a slowing global economy and a persistently high Canadian dollar," said EDC economist Peter Hall.
However, the Bank of Canada predicts the plight of exporters will ease as the impact of the past rapid appreciation of the Canadian dollar dissipates and the U.S. economy recovers.
While the bank downgraded its economic forecast for the year to one per cent growth, from the 1.4 per cent it predicted three months ago, its forecasts for 2009 and 2010 remain largely unchanged.
Although business borrowing has slowed, "growth in household credit remains robust," the bank said. "This likely reflects high employment and increases in wealth and real income."
The bank's forecast is based on the assumption that oil prices will remain near current levels but non-energy commodity prices will decline 15 per cent over the next two years, while the Canadian dollar will average 98 cents US.
It predicts U.S. growth of 1.6 per cent this year, slowing to 1.5 per cent next year, and global growth of 4.1 per cent this year and 3.4 per cent in 2009, pulled back by U.S. weakness.
· TSX -43.55 as a strong showing from financials was offset by resource shares that were hit by another sharp drop in oil prices
· Dow +207.38 swinging in the opposite direction as the drop in oil prices eased worries over inflation, while optimism was helped by unexpectedly strong earnings.
· Dollar -.46c to $99.32US
· Oil dropped sharply for a 3rd day in a row-$5.31 to $129.29US per barrel. One week ago crude hit an intraday record high of US$147.27 a barrel· Gold recovering 8.20to $970US per ounce
NY(Reuters) - Merrill Lynch & Co posted a much larger-than-expected $4.89 billion quarterly loss on Thursday after writing down soured debt, and unveiled plans to sell billions of dollars of assets -- including a part of its lucrative brokerage business -- to shore up capital. The loss was the 4th straight for Wall Street's 3rd largest investment bank, and was more than twice as big as analysts expected.
Carney …By Julian Beltrame, The Canadian Press
OTTAWA - Canadians all over the country are profiting from the ongoing commodities boom and helping to rescue the economy from recession, the Bank of Canada says.
"The Canadian economy remains robust," governor Mark Carney told a news conference after releasing the bank's quarterly monetary policy report update Thursday.
In surprisingly upbeat analysis given its warning two days earlier about spiking inflation, the central bank said "available evidence" indicates the economy has bounced back from a first-quarter dip and grew at an annualized rate of 0.8 per cent in the April-June quarter.
And it says the economy will recover further, growing at a rate of 1.3 per cent in the current July-September third quarter, 1.8 per cent in the fourth and 2.8 per cent in the first half of next year.
Unlike most industrialized countries, Canada benefits from rising oil and natural gas prices, Carney said - and this effect is not confined to Alberta and other producing provinces.
"There are variety of industries that feed into the energy industry, including manufacturing industries in Ontario and other areas of Central Canada; there are wealth effects in portfolios; there are wage effects for secondary and tertiary industries spread across the country," he said.
This money adds strength to other sectors, including construction and services in Central Canada, he added.
"And that puts us, in the industrialized countries, in very rare company."
Carney also said Canada's banking system is the envy of the world, as financial institutions in the United States and Europe remain enmeshed in an ongoing debt crunch.
"The Canadian system is very strong," he emphasized. "The banks are well capitalized, they are quite frankly at the leading edge of disclosure."
"In a world of de-leveraging of the financial system, many global financial institutions are trying to get where our financial institutions are, and they are quite a ways away."
The Bank of Canada's report says domestic borrowing is about three-quarters of a percentage point less expensive now than it was last summer at the beginning of the credit crisis.
The bank's latest assessment came as Ontario's manufacturing sector got more bad news with the announcement that Sterling Trucks is eliminating one of its two remaining shifts and laying off 720 workers this fall in St. Thomas.
The truck maker joins the growing ranks of Canadian manufacturers squeezed by an economic slowdown in the U.S. that has cut demand for everything from vehicles to lumber and cement.
And Jayson Myers of the Canadian Manufacturers and Exporters sharply questioned Carney's contention that oil wealth is being widely spread.
"If anybody should know it, the Bank of Canada should know it, the damage this is causing to the value-adding, the manufacturing sector and the high-value services sector," he said. "We are in very serious danger of losing a very large part of the value-adding sector of the economy."
Global Insight economist Dale Orr also questioned the central bank's contention that oil revenues are lifting most boats, saying provinces without oil and gas resources are net losers, particularly manufacturing-heavy Ontario.
The central bank, however, sees the economy as a glass half full and filling up quickly, more quickly than several economists said was likely.
"Our primary concern is that event risk will remain extraordinarily high and the financial infrastructure of the economy will remain strained for a long time yet," said Scotiabank economist Derek Holt.
The Bank of Canada's key concern remains inflation. But even here, it stressed that outsized price increases will be a passing phase and concentrated mostly on gas and fuel prices.
It says the consumer price index will rise sharply from the current annual rate of 2.2 per cent to 4.3 per cent in early 2009, then tumble down just as quickly to the two per cent target by the end of next year.
The overall thrust of the eight-page monetary policy report is positive, however, despite recent shaky economic data.
Even during the first quarter's 0.3 per cent pullback in gross domestic product - which it attributes to shoppers going on a winter holiday and businesses clearing inventories - incomes rose 2.4 per cent on an annualized basis thanks to an 8.1 per cent improvement in Canada's terms of trade - the price of exports relative to the cost of imports.
With more cash in their pockets, Canadians have returned to the stores and will continue to drive economic activity, the bank says.
Its analysis coincided with a report by the C.D. Howe Institute, a private-sector economic think-tank, and a warning from Export Development Corp., a federal Crown corporation.
Colin Busby, a policy analyst with C.D. Howe, said global demand for oil and gas has sent prices for Canadian energy exports to historic highs while the cost of imported machinery and other manufactured goods has fallen.
This, Busby said, mitigates the need for expansionist fiscal policy by Canadian governments and loose monetary policy by the central bank.
However, the EDC said the confidence of Canadian exporters has hit its lowest level since it began tracking their sentiment in 2000.
"Canadian exporters are clearly hurting right now thanks to a major slowdown in the U.S., a slowing global economy and a persistently high Canadian dollar," said EDC economist Peter Hall.
However, the Bank of Canada predicts the plight of exporters will ease as the impact of the past rapid appreciation of the Canadian dollar dissipates and the U.S. economy recovers.
While the bank downgraded its economic forecast for the year to one per cent growth, from the 1.4 per cent it predicted three months ago, its forecasts for 2009 and 2010 remain largely unchanged.
Although business borrowing has slowed, "growth in household credit remains robust," the bank said. "This likely reflects high employment and increases in wealth and real income."
The bank's forecast is based on the assumption that oil prices will remain near current levels but non-energy commodity prices will decline 15 per cent over the next two years, while the Canadian dollar will average 98 cents US.
It predicts U.S. growth of 1.6 per cent this year, slowing to 1.5 per cent next year, and global growth of 4.1 per cent this year and 3.4 per cent in 2009, pulled back by U.S. weakness.
Thursday, July 17, 2008
Financial Update
Has Canada slipped into recession without anyone noticing? (CP below)
· TSX Big gains in the financial sector helped recover half of yesterdays plunge.+146.24
· Dow +276.74 (Reuters)lower oil prices helped New York indexes close sharply higher as investors also took in some rare good news from the financial sector as the Banks had their best day in 16 years. Wells Fargo, the 5th biggest bank in the US, beat market expectations, despite a 22% decline in 2nd-quarter profit as more customers failed to pay back their loans. But the bank raised its dividend at a time when many other financial institutions are slashing their payouts, and its shares jumped by $6.72
· Dollar flat +.01c to $99.78US
· Oil dropped sharply for a 2nd day in a row-$4.144 to $134.60US per barrel. after a U.S. government report showed a surprise increase in inventories and continued weak demand in the world's top consumer nation. Oil's 6-year rally has also been driven partly by ballooning demand from developing economies such as China and India.· Gold down sharply–$15.90 to $961.80US per ounce as speculators booked profits after the metal hit a 4-month high near $1,000 an ounce the previous day
No housing bubble in Canada: Flaherty
Carrie Tait, Financial Post
CALGARY - Federal Finance Minister Jim Flaherty shrugged off housing worries in Canada Wednesday, saying there is no bubble and that the subprime-mortgage woes crippling financial institutions in the United States are not threatening banks north of the border.
"There is no bubble in the Canadian housing sector," he told reporters after speaking to roughly 400 people at a Calgary Chamber of Commerce event. "That's not been our concern. Our concern has been a tendency for longer amortization periods, like 40 years, and for purchasers putting very little money down. We've seen nothing in Canada like the U.S. subprime situation."
The comments came a day after the Canadian Real Estate Association said the average June resale price for homes was down 0.4% from a year earlier, the first decline in almost 10 years.
Mr. Flaherty reminded the audience that the government last week introduced plans to ditch government-backed mortgages with amortization periods longer than 35 years, and require that down payments total at least five per cent of the purchase price on these types of mortgages.
Despite tightening the rules on mortgage lending, Mr. Flaherty said he is not fretting about the health of Canada's banks, even as subprime mortgage woes hammer financial institutions in the United States.
Canadian analysts, however, continue to speculate on what may happen if the crisis continues to pinch banks -- particularly Canadian Imperial Bank of Commerce -- in this country.
"Our banks are well capitalized in Canada," Mr. Flaherty said. "I'm satisfied they are well capitalized in accordance with the requirements."
He said he has been in contact with bank CEOs and regulators since the subprime problems began to sweep the market last August.
This comes as California-based IndyMac Bancorp Inc. customers have been lining up to yank their money out of the bank, prompting U.S. regulators to take it over last week. And Fannie Mae and Freddie Mac, two major U.S. mortgage institutions, are now being backstopped by the government there.
John Aiken, an analyst at Dundee Capital Markets, speculated this week on what may happen to CIBC should its slide, fuelled by credit exposure, continue to inflict pain.
"Should the regulator become concerned with its capital position and the bank is unwilling or unable to tap the market for incremental equity, CIBC could be forced into the hands of another financial institution as the best solvency alternative," he wrote in a note to clients.
"We believe that the possibility of financial services consolidation is closer than most investors would allow and significantly closer than it was even three months ago."
Mr. Flaherty, however, reiterated the Conservatives' stance on reopening the bank merger debate. "Bank mergers have not been a priority for our government and that remains the case," he said. Further, while he acknowledged that the economy is going through "turbulent times," it remains healthy. "Our economy is strong," he told the audience.
Has Canada slipped into recession without anyone noticing?
By Julian Beltrame, The Canadian Press
OTTAWA - Canada is within a hair's breadth of slipping into a technical recession, economists said Wednesday, a day after the outlook for the North American economy soured sharply.
But they add that it won't seem like recessions of the past. In fact, says University of Toronto economist Peter Dungan, Canadians may already have lived through a technical recession - two quarters in a row of a shrinking economy - and not noticed.
"Our forecast is there's a recession now," Dungan said. "There may be a slight revision to the first quarter, but the second (which ended June 30) is almost certainly negative. "This is nothing like the recessions we had in the early '90s and early '80s, however, when we had serious recessions and serious unemployment," he added.
The early '80s recession came after two major oil price shocks in the 1970s that battered the North American economy and led to a restructuring of heavy industry, especially steel and autos, with the loss of millions of jobs. The early 1990s recession produced widespread bankruptcies in real estate and retail before growth resumed a few years earlier.
Speaking in Calgary, Finance Minister Jim Flaherty expressed confidence that the economy would stay on the positive side of the ledger and insisted Ottawa won't fall into a deficit as a result of the slowdown.
"We are on track in terms of our budget in Canada, that we will continue to run a surplus," he said, adding that the country's "strong fundamentals" and status as an emerging energy superpower will keep it in better shape than the United States, although not immune to a global economic slowdown.
"Canada is not an island," Flaherty said earlier in a speech to a Calgary Chamber of Commerce luncheon. "We are going through turbulent times. I want to assure you that Canada's economic future is bright and I say that based on the economic fundamentals of this country, which are solid."
Following a first quarter contraction that saw gross domestic product fall 0.3% and continuing signs of stress, economists and policy makers have been routinely revising their growth projections for the year, all trending downward.
In the last week, Canadians have been hit by a series of bad news announcements. Employment fell in June for the first time this year and full-time employment tumbled for the second straight month. Average home sale prices edged down during the month, the first year-over year price decline in nearly a decade. And General Motors Corp. announced plans to lay off 20% of its white collar staff in North America, a further cut of thousands of jobs.
Meanwhile, the Bank of Canada warned of rising inflation Tuesday while lowering its 2008 growth forecast from 1.4 per cent in April to one per cent. On Wednesday, the Conference Board of Canada downgraded its projection from 2.2% this spring to 1.7%. For both, it was the second downward revision so far this year.
Both are overly optimistic, says David Wolf, chief economist with Merrill Lynch Canada, who says gross domestic product increase will likely come in at a tepid 0.5 per cent this year, a statistical blip from recessionary times.
"Absolutely, by the informal definition of recession we could be in recession," agrees Global Insight economist Dale Orr, noting that nobody will know for sure until late in August, when Statistics Canada releases the second quarter growth tally. But Orr also points out that the Canadian economy still has some legs, particularly in the resource and oil and sector, consumer spending, and employment and housing that while slowing, are coming off record-setting years.
Even manufacturing showed signs of life in May. Statistics Canada reported Wednesday that manufacturing sales rose 2.7 per cent from April, the fourth increase in five months. The details behind the aggregate number were weaker as sales remain below last year's levels and most of the gain was due to higher prices, not increased production.
The strongest pillar remains high-priced commodities, particularly Alberta oil, which is bringing tremendous wealth into the country and helping grease the general economy through corporate profits, job creation, and higher government revenues that get passed along in lower taxes and higher spending.
"Perhaps the volume of what we produce is going down, but the wealth effect (from commodity exports) is very much there," said Pedro Antunes of the Conference Board.
"We often think that's beneficial for some regions and sectors, but there have been redistributive effects. The federal government has collected dividends that's been fanned out to all Canadians in the form of tax cuts, and the effect on stock prices, wages, employment have been distributed all over the country."
That has kept nominal gross domestic product growth - which measures the actual worth of what Canadians produce - above four per cent, as opposed to the flat performance in real growth, which measures the amount produced.
"The hurt in Canada is narrowly focused in the trade sector," Orr says. "If you are in Windsor, Ont., where unemployment is near 10 per cent and the value of your home is falling, or in the auto sector, or if you are in a forestry one-industry town in northern Ontario or Quebec or B.C., then you are really hurting."
But for most Canadians the slump has yet to register and likely won't if forecasts of a second-half improvement prove accurate. And for those who live off the resource sector, this is boom times, says Orr.
Dungan says another difference between today and recessions of the previous two decades is that inflation, while rising, remains relatively tame, and governments now have the wherewithal to stimulate the economy or at least not inflict further harm.
"The Bank of Canada is trying to keep inflation from rising, not reduce it, and generally speaking prevention is not as costly and not as unpleasant as cure," he explained.
"And our government balances are basically OK. It's not like 1991 when we had huge deficits and therefore you couldn't do anything, if anything you were trying to raise taxes to make those better, which only makes the downturn worse."
· TSX Big gains in the financial sector helped recover half of yesterdays plunge.+146.24
· Dow +276.74 (Reuters)lower oil prices helped New York indexes close sharply higher as investors also took in some rare good news from the financial sector as the Banks had their best day in 16 years. Wells Fargo, the 5th biggest bank in the US, beat market expectations, despite a 22% decline in 2nd-quarter profit as more customers failed to pay back their loans. But the bank raised its dividend at a time when many other financial institutions are slashing their payouts, and its shares jumped by $6.72
· Dollar flat +.01c to $99.78US
· Oil dropped sharply for a 2nd day in a row-$4.144 to $134.60US per barrel. after a U.S. government report showed a surprise increase in inventories and continued weak demand in the world's top consumer nation. Oil's 6-year rally has also been driven partly by ballooning demand from developing economies such as China and India.· Gold down sharply–$15.90 to $961.80US per ounce as speculators booked profits after the metal hit a 4-month high near $1,000 an ounce the previous day
No housing bubble in Canada: Flaherty
Carrie Tait, Financial Post
CALGARY - Federal Finance Minister Jim Flaherty shrugged off housing worries in Canada Wednesday, saying there is no bubble and that the subprime-mortgage woes crippling financial institutions in the United States are not threatening banks north of the border.
"There is no bubble in the Canadian housing sector," he told reporters after speaking to roughly 400 people at a Calgary Chamber of Commerce event. "That's not been our concern. Our concern has been a tendency for longer amortization periods, like 40 years, and for purchasers putting very little money down. We've seen nothing in Canada like the U.S. subprime situation."
The comments came a day after the Canadian Real Estate Association said the average June resale price for homes was down 0.4% from a year earlier, the first decline in almost 10 years.
Mr. Flaherty reminded the audience that the government last week introduced plans to ditch government-backed mortgages with amortization periods longer than 35 years, and require that down payments total at least five per cent of the purchase price on these types of mortgages.
Despite tightening the rules on mortgage lending, Mr. Flaherty said he is not fretting about the health of Canada's banks, even as subprime mortgage woes hammer financial institutions in the United States.
Canadian analysts, however, continue to speculate on what may happen if the crisis continues to pinch banks -- particularly Canadian Imperial Bank of Commerce -- in this country.
"Our banks are well capitalized in Canada," Mr. Flaherty said. "I'm satisfied they are well capitalized in accordance with the requirements."
He said he has been in contact with bank CEOs and regulators since the subprime problems began to sweep the market last August.
This comes as California-based IndyMac Bancorp Inc. customers have been lining up to yank their money out of the bank, prompting U.S. regulators to take it over last week. And Fannie Mae and Freddie Mac, two major U.S. mortgage institutions, are now being backstopped by the government there.
John Aiken, an analyst at Dundee Capital Markets, speculated this week on what may happen to CIBC should its slide, fuelled by credit exposure, continue to inflict pain.
"Should the regulator become concerned with its capital position and the bank is unwilling or unable to tap the market for incremental equity, CIBC could be forced into the hands of another financial institution as the best solvency alternative," he wrote in a note to clients.
"We believe that the possibility of financial services consolidation is closer than most investors would allow and significantly closer than it was even three months ago."
Mr. Flaherty, however, reiterated the Conservatives' stance on reopening the bank merger debate. "Bank mergers have not been a priority for our government and that remains the case," he said. Further, while he acknowledged that the economy is going through "turbulent times," it remains healthy. "Our economy is strong," he told the audience.
Has Canada slipped into recession without anyone noticing?
By Julian Beltrame, The Canadian Press
OTTAWA - Canada is within a hair's breadth of slipping into a technical recession, economists said Wednesday, a day after the outlook for the North American economy soured sharply.
But they add that it won't seem like recessions of the past. In fact, says University of Toronto economist Peter Dungan, Canadians may already have lived through a technical recession - two quarters in a row of a shrinking economy - and not noticed.
"Our forecast is there's a recession now," Dungan said. "There may be a slight revision to the first quarter, but the second (which ended June 30) is almost certainly negative. "This is nothing like the recessions we had in the early '90s and early '80s, however, when we had serious recessions and serious unemployment," he added.
The early '80s recession came after two major oil price shocks in the 1970s that battered the North American economy and led to a restructuring of heavy industry, especially steel and autos, with the loss of millions of jobs. The early 1990s recession produced widespread bankruptcies in real estate and retail before growth resumed a few years earlier.
Speaking in Calgary, Finance Minister Jim Flaherty expressed confidence that the economy would stay on the positive side of the ledger and insisted Ottawa won't fall into a deficit as a result of the slowdown.
"We are on track in terms of our budget in Canada, that we will continue to run a surplus," he said, adding that the country's "strong fundamentals" and status as an emerging energy superpower will keep it in better shape than the United States, although not immune to a global economic slowdown.
"Canada is not an island," Flaherty said earlier in a speech to a Calgary Chamber of Commerce luncheon. "We are going through turbulent times. I want to assure you that Canada's economic future is bright and I say that based on the economic fundamentals of this country, which are solid."
Following a first quarter contraction that saw gross domestic product fall 0.3% and continuing signs of stress, economists and policy makers have been routinely revising their growth projections for the year, all trending downward.
In the last week, Canadians have been hit by a series of bad news announcements. Employment fell in June for the first time this year and full-time employment tumbled for the second straight month. Average home sale prices edged down during the month, the first year-over year price decline in nearly a decade. And General Motors Corp. announced plans to lay off 20% of its white collar staff in North America, a further cut of thousands of jobs.
Meanwhile, the Bank of Canada warned of rising inflation Tuesday while lowering its 2008 growth forecast from 1.4 per cent in April to one per cent. On Wednesday, the Conference Board of Canada downgraded its projection from 2.2% this spring to 1.7%. For both, it was the second downward revision so far this year.
Both are overly optimistic, says David Wolf, chief economist with Merrill Lynch Canada, who says gross domestic product increase will likely come in at a tepid 0.5 per cent this year, a statistical blip from recessionary times.
"Absolutely, by the informal definition of recession we could be in recession," agrees Global Insight economist Dale Orr, noting that nobody will know for sure until late in August, when Statistics Canada releases the second quarter growth tally. But Orr also points out that the Canadian economy still has some legs, particularly in the resource and oil and sector, consumer spending, and employment and housing that while slowing, are coming off record-setting years.
Even manufacturing showed signs of life in May. Statistics Canada reported Wednesday that manufacturing sales rose 2.7 per cent from April, the fourth increase in five months. The details behind the aggregate number were weaker as sales remain below last year's levels and most of the gain was due to higher prices, not increased production.
The strongest pillar remains high-priced commodities, particularly Alberta oil, which is bringing tremendous wealth into the country and helping grease the general economy through corporate profits, job creation, and higher government revenues that get passed along in lower taxes and higher spending.
"Perhaps the volume of what we produce is going down, but the wealth effect (from commodity exports) is very much there," said Pedro Antunes of the Conference Board.
"We often think that's beneficial for some regions and sectors, but there have been redistributive effects. The federal government has collected dividends that's been fanned out to all Canadians in the form of tax cuts, and the effect on stock prices, wages, employment have been distributed all over the country."
That has kept nominal gross domestic product growth - which measures the actual worth of what Canadians produce - above four per cent, as opposed to the flat performance in real growth, which measures the amount produced.
"The hurt in Canada is narrowly focused in the trade sector," Orr says. "If you are in Windsor, Ont., where unemployment is near 10 per cent and the value of your home is falling, or in the auto sector, or if you are in a forestry one-industry town in northern Ontario or Quebec or B.C., then you are really hurting."
But for most Canadians the slump has yet to register and likely won't if forecasts of a second-half improvement prove accurate. And for those who live off the resource sector, this is boom times, says Orr.
Dungan says another difference between today and recessions of the previous two decades is that inflation, while rising, remains relatively tame, and governments now have the wherewithal to stimulate the economy or at least not inflict further harm.
"The Bank of Canada is trying to keep inflation from rising, not reduce it, and generally speaking prevention is not as costly and not as unpleasant as cure," he explained.
"And our government balances are basically OK. It's not like 1991 when we had huge deficits and therefore you couldn't do anything, if anything you were trying to raise taxes to make those better, which only makes the downturn worse."
Wednesday, July 16, 2008
Financial Update
Bank of Canada warns of inflation, slow growth, keeps interest rates at 3%
Home prices slip for first time in 9 years
· TSX fell drastically Tues -387.73 to 13,357.56 after a volatile session, squeezed by financial stocks with investors wary of more turmoil in the US and oil stocks which retreated on a drop in crude prices. "The tone of the market is very negative," said John Stephenson, portfolio manager at First Asset Funds Inc. "Financials have been a great trade to be in for most of the last 10 years, maybe 20. And it's hard for us to get our minds around the fact that that just isn't the case anymore."
· Dow -92.69 following downbeat congressional testimony by U.S. Federal Reserve chairman Ben Bernanke who said the U.S. economy confronts "numerous difficulties" including strains in financial markets, rising joblessness and housing problems. Rising prices for energy and food are elevating inflation risks - and lowering expectations for interest-rate relief.
· Dollar +.29c to $99.77US The closest its been to par in 6 weeks
· Oil, after hitting a record high Friday of $147.27 plummeted -$6.44 to $138.74US per barrel. The largest one day drop in over 17 years, as fears that record fuel prices are spreading broad economic pain led to the 3rd big sell-off in just over a week.· Gold –has been rising over the past week and hit $987.75,its highest level since March 19, before a drop in oil erased some of the gains to$978.80US per ounce
Ø DETROIT - Tom Krisher And Dee-Ann Durbin, The Associated Press General Motors Corp., struggling to survive, will slash jobs, cut production, sell assets and suspend its dividend for the first time in 86 years as it tries to ride out an unprecedented collapse of its core U.S. market.
Tuesday's actions, which the company said will save US$15 billion through 2009, carry a more urgent tone than past roadmaps to recovery. This time, GM is facing one of the most serious threats in its nearly 100-year history, with one analyst speculating that the world's largest automaker by sales could wind up seeking bankruptcy protection.
Globe and Mail -Canadian home prices fell in June for the first time since January, 1999, as the number of houses for sale remained at record levels. The average price of an existing home fell 0.4 per cent in June to $341,096, compared with $342,615 the year before, according to statistics released Tuesday by the Canadian Real Estate Assoc
Markets with the greatest year-over-year decrease in unit sales in June
-Greater Vancouver - down 42.9 per cent
-Regina - down 33.8 per cent
-Saskatoon - down 32.7 per cent
-Victoria - down 24.4 per cent
Markets with the highest year-over-year increase in unit sales in June
-Trois-Rivieres - up 29.8 per cent
-Saguenay - up 11 per cent
-Saint John - up 4.2 per cent
-Ottawa - up 2.6 per cent
Markets with the greatest year-over-year price increases in June
-Regina - up 43.2 per cent
-Saskatoon - up 23 per cent
-Sudbury - up 20.6 per cent
-Saguenay - up 18.1 per cent
Markets with greatest year-over-year price declines in June
-Edmonton - down 2.6 per cent
-Calgary - down 2 per cent
-Victoria - down 1.1 per cent
-Windsor-Essex - down 0.5 per cent
Markets with the greatest year-over-year increase in listings in June
-Saskatoon - up 48.8 per cent
-Sudbury - up 45.1 per cent
-Regina - up 40.5 per cent
-St. Catharines & District - up 20.4 per cent
Markets with the greatest year-over-year decline in listings in June
-Edmonton - down 19.1 per cent
-Calgary - down 8.4 per cent
-Thunder Bay - down 7.1 per cent
-Windsor-Essex - down 7.1 per cent
OTTAWA – Assoc Press-The Bank of Canada expects inflation will rise above its target range early next year and peak at 4% but kept its key interest rate unchanged Tuesday over concerns the economy is slumping deeper than previously thought.
Predicting inflation will rise past its 1-3% range, while growth will slow to 1% this year - both sharp revisions from its last Monetary Policy Report in April - the central bank kept the benchmark overnight interest rate at 3%.
And bank governor Mark Carney gave no hints that he would move off that position in the foreseeable future, saying the risks to the Canadian economy, while "significant," were balanced equally on the downside and upside. The combination of slow growth and high inflation is a difficult puzzle for policy makers because battling one ailment exacerbates the other.
"That's the dilemma that rapidly rising high oil prices create for central banks everywhere. It boxes them in," said Douglas Porter, deputy chief economist with BMO Capital Markets. "It has the nasty side-effects of crimping growth and driving up inflation. This is like a mini-version of what central banks faced in the 1970s when oil prices spiked."
That era was marked by what's been called stagflation - a persistent period of economic stagnation and high inflation.
Porter called the bank's doubling of its inflation forecast to 4% since April "staggering," adding that he believes Carney is anxious to tackle prices, but cannot without risking sending the economy tumbling further.
Another factor is that the central bank is calling Canada's inflation spike "temporary," predicting price hikes will cool to the official target of two per cent by the end of 2009.
The bank is holding out some good news on growth as well, although recovering from the current slump will take longer. It said the economy would edge back up to 2.3 per cent growth next year, and fully rebound in 2010 to 3.3 per cent growth.
"The message from the bank is hold tight for a year and we'll come out of this," said Dale Orr, managing director of Global Insight Canada.
"But I don't want to underplay this. We're going through a difficult situation and there's nothing the bank is going to do about it. Inflation is getting in the way of the bank doing what they normally would do if they look at that kind of growth forecast." Orr said he agrees with the bank that inflation will not be a long-term problem. The slowing economy is building excess capacity, which will drive prices down, he explained. As well, a significant part of Canadian inflation peaking in early 2009 is based the dollar and the GST-cut effects, both of which will have run their course next year.
The Bank of Canada highlighted 3 major factors rocking Canada's economy - protracted weakness in the United States, ongoing financial markets turmoil and sharp increases in commodity prices, particularly oil.
"This has led to further increases in Canada's terms of trade and real national income, and has altered the outlook for global and domestic inflation."
The bank's new assessment of the economy is considerably more pessimistic than it was at the beginning of the year, when it was expecting 2008 growth to average 1.8 per cent - almost twice the current expectation.
The United Steelworkers, one of several labour groups that have urged Carney to stimulate the economy by reducing borrowing costs, said Tuesday the bank was exaggerating inflation fears. It notes that May's inflation was still only 2.2 per cent and that while it may rise, even the bank says the spike will be temporary.
Meanwhile, Canadian interests rates remain higher than those in the United States, keeping the Canadian dollar strong and harming the country's export-based manufacturing sector, said Steelworkers economist Erin Weir. Noting the economy shed 39,000 full-time jobs in June, "the Bank of Canada ... should have lowered interest rates to stimulate the business investment and consumer spending needed to mitigate this economic downturn," Weir said.
While many economists have predicted the bank's next move will be to raise interest rates, Carney did not tip off any bias in Tuesday's announcement.
Tuesday's neutral statement suggests the bank could stay on the sidelines for some time. The bank's next scheduled announcement on interest rates will be Sept. 3.
Sombre President George W. Bush sees 'difficult time' ahead for Americans
By Terence Hunt, The Associated Press
WASHINGTON - This is hardly the way he wanted to go out.
President George W. Bush found few encouraging things to say Tuesday as he assessed a grinding list of problems for his final six months in the White House. It runs from soaring gas prices, falling home values and anxieties about bank safety to un-won wars in Iraq and Afghanistan, genocide in Sudan and friction with Moscow and Beijing.
He bounded onstage for a news conference in the White House press briefing room with a smile and a quick good morning, but the next words out of his mouth were a recognition of pocketbook anxieties.
"Its been a difficult time for many American families who are coping with declining housing values and high gasoline prices," the president said.
Over the next 42 minutes Bush repeatedly found fault with the country's direction and the government's failure to solve problems in the 7.5 years that he has been in office.
He said Americans were "rightly concerned" about gas and home prices, that "there's a lot of nervousness" about the stability of banks, that the economy is "not as good as we'd like" and there is "no short-term solution" to the energy problem.
He blamed the Democratic Congress for failing to deal with the issues.
On the bright side, Bush said the banking system is "basically is sound" and the administration has taken steps to help stabilize housing and financial markets and increase confidence in mortgage giants Fannie Mae and Freddie Mac.
He urged Congress to quickly pass legislation to prop up both institutions.
The president tried to reassure people who are alarmed by pictures of anxious depositors lined up outside troubled banks.
"Take a deep breath," he said, because deposits are insured by the government up to $100,000.
As of Tuesday, Bush had 189 days before he walks out of the Oval Office for the last time. His term is ending with Americans on edge, the mood of the country sour.
Just 16 per cent said the U.S. is moving in the right direction in an Associated Press-Ipsos poll released Tuesday.
That's the lowest reading of public sentiment since the poll started in December 2003. Bush's approval was at 28 per cent, which ties the all-time low he hit in AP-Ipsos polling in April.
When a reporter reminded him of an embarrassing moment in February, when he said he hadn't heard forecasts of $4-a-gallon gasoline, Bush interrupted to say: "Aware of it now."
He called on Congress to follow his example and lift a ban on offshore drilling to help increase domestic oil production.
"I readily concede ... it's not going to produce a barrel of oil tomorrow, but it is going to change the psychology that demand will constantly outstrip supply," the president said.
Sensitive to his portrayal as a lame duck, Bush said: "People say, 'Aw, man, you're running out of time, nothing is going to happen.' I'll remind people what did happen."
He pointed to recent congressional approval of a bill to broaden the government's eavesdropping power and a war-funding bill that increases college aid for military service members and veterans who served after Sept. 11, 2001.
He said Congress should pass legislation dealing with housing, energy and trade.
It was Bush's first White House news conference since April 29, and it was announced about 90 minutes before it began.
The timing clashed with a major speech on Iraq by Democratic presidential candidate Barack Obama, who delayed his remarks a half hour for Bush's news conference.
Obama said overall U.S. interests have been hurt rather than helped by Bush's decision to increase troop strength in Iraq 18 months ago, and he vowed to stick to his plan to withdraw combat troops within 16 months of becoming president.
The global stage offers little relief for Bush.
He said he was "displeased" that China and Russia blocked new UN sanctions against the government of President Robert Mugabe of Zimbabwe, who was has retained power in an election the U.S. and many other countries call a sham.
Bush said the growing strength of extremists flowing from Pakistan into Afghanistan and the deteriorating security situation was troubling.
"Obviously it's still a tough fight there," said Bush, who will meet at the White House this month with Pakistan's prime minister, Yousuf Raza Gilani.
Bush said both Iraq and Afghanistan are important fronts in the war on terror.
"The question really facing the country is, will we have the patience and the determination to succeed in these very difficult theatres."
He ended the news conference with a wave and a smile.
"OK, I've enjoyed it. Thank you very much for your time. Appreciate it."
Home prices slip for first time in 9 years
· TSX fell drastically Tues -387.73 to 13,357.56 after a volatile session, squeezed by financial stocks with investors wary of more turmoil in the US and oil stocks which retreated on a drop in crude prices. "The tone of the market is very negative," said John Stephenson, portfolio manager at First Asset Funds Inc. "Financials have been a great trade to be in for most of the last 10 years, maybe 20. And it's hard for us to get our minds around the fact that that just isn't the case anymore."
· Dow -92.69 following downbeat congressional testimony by U.S. Federal Reserve chairman Ben Bernanke who said the U.S. economy confronts "numerous difficulties" including strains in financial markets, rising joblessness and housing problems. Rising prices for energy and food are elevating inflation risks - and lowering expectations for interest-rate relief.
· Dollar +.29c to $99.77US The closest its been to par in 6 weeks
· Oil, after hitting a record high Friday of $147.27 plummeted -$6.44 to $138.74US per barrel. The largest one day drop in over 17 years, as fears that record fuel prices are spreading broad economic pain led to the 3rd big sell-off in just over a week.· Gold –has been rising over the past week and hit $987.75,its highest level since March 19, before a drop in oil erased some of the gains to$978.80US per ounce
Ø DETROIT - Tom Krisher And Dee-Ann Durbin, The Associated Press General Motors Corp., struggling to survive, will slash jobs, cut production, sell assets and suspend its dividend for the first time in 86 years as it tries to ride out an unprecedented collapse of its core U.S. market.
Tuesday's actions, which the company said will save US$15 billion through 2009, carry a more urgent tone than past roadmaps to recovery. This time, GM is facing one of the most serious threats in its nearly 100-year history, with one analyst speculating that the world's largest automaker by sales could wind up seeking bankruptcy protection.
Globe and Mail -Canadian home prices fell in June for the first time since January, 1999, as the number of houses for sale remained at record levels. The average price of an existing home fell 0.4 per cent in June to $341,096, compared with $342,615 the year before, according to statistics released Tuesday by the Canadian Real Estate Assoc
Markets with the greatest year-over-year decrease in unit sales in June
-Greater Vancouver - down 42.9 per cent
-Regina - down 33.8 per cent
-Saskatoon - down 32.7 per cent
-Victoria - down 24.4 per cent
Markets with the highest year-over-year increase in unit sales in June
-Trois-Rivieres - up 29.8 per cent
-Saguenay - up 11 per cent
-Saint John - up 4.2 per cent
-Ottawa - up 2.6 per cent
Markets with the greatest year-over-year price increases in June
-Regina - up 43.2 per cent
-Saskatoon - up 23 per cent
-Sudbury - up 20.6 per cent
-Saguenay - up 18.1 per cent
Markets with greatest year-over-year price declines in June
-Edmonton - down 2.6 per cent
-Calgary - down 2 per cent
-Victoria - down 1.1 per cent
-Windsor-Essex - down 0.5 per cent
Markets with the greatest year-over-year increase in listings in June
-Saskatoon - up 48.8 per cent
-Sudbury - up 45.1 per cent
-Regina - up 40.5 per cent
-St. Catharines & District - up 20.4 per cent
Markets with the greatest year-over-year decline in listings in June
-Edmonton - down 19.1 per cent
-Calgary - down 8.4 per cent
-Thunder Bay - down 7.1 per cent
-Windsor-Essex - down 7.1 per cent
OTTAWA – Assoc Press-The Bank of Canada expects inflation will rise above its target range early next year and peak at 4% but kept its key interest rate unchanged Tuesday over concerns the economy is slumping deeper than previously thought.
Predicting inflation will rise past its 1-3% range, while growth will slow to 1% this year - both sharp revisions from its last Monetary Policy Report in April - the central bank kept the benchmark overnight interest rate at 3%.
And bank governor Mark Carney gave no hints that he would move off that position in the foreseeable future, saying the risks to the Canadian economy, while "significant," were balanced equally on the downside and upside. The combination of slow growth and high inflation is a difficult puzzle for policy makers because battling one ailment exacerbates the other.
"That's the dilemma that rapidly rising high oil prices create for central banks everywhere. It boxes them in," said Douglas Porter, deputy chief economist with BMO Capital Markets. "It has the nasty side-effects of crimping growth and driving up inflation. This is like a mini-version of what central banks faced in the 1970s when oil prices spiked."
That era was marked by what's been called stagflation - a persistent period of economic stagnation and high inflation.
Porter called the bank's doubling of its inflation forecast to 4% since April "staggering," adding that he believes Carney is anxious to tackle prices, but cannot without risking sending the economy tumbling further.
Another factor is that the central bank is calling Canada's inflation spike "temporary," predicting price hikes will cool to the official target of two per cent by the end of 2009.
The bank is holding out some good news on growth as well, although recovering from the current slump will take longer. It said the economy would edge back up to 2.3 per cent growth next year, and fully rebound in 2010 to 3.3 per cent growth.
"The message from the bank is hold tight for a year and we'll come out of this," said Dale Orr, managing director of Global Insight Canada.
"But I don't want to underplay this. We're going through a difficult situation and there's nothing the bank is going to do about it. Inflation is getting in the way of the bank doing what they normally would do if they look at that kind of growth forecast." Orr said he agrees with the bank that inflation will not be a long-term problem. The slowing economy is building excess capacity, which will drive prices down, he explained. As well, a significant part of Canadian inflation peaking in early 2009 is based the dollar and the GST-cut effects, both of which will have run their course next year.
The Bank of Canada highlighted 3 major factors rocking Canada's economy - protracted weakness in the United States, ongoing financial markets turmoil and sharp increases in commodity prices, particularly oil.
"This has led to further increases in Canada's terms of trade and real national income, and has altered the outlook for global and domestic inflation."
The bank's new assessment of the economy is considerably more pessimistic than it was at the beginning of the year, when it was expecting 2008 growth to average 1.8 per cent - almost twice the current expectation.
The United Steelworkers, one of several labour groups that have urged Carney to stimulate the economy by reducing borrowing costs, said Tuesday the bank was exaggerating inflation fears. It notes that May's inflation was still only 2.2 per cent and that while it may rise, even the bank says the spike will be temporary.
Meanwhile, Canadian interests rates remain higher than those in the United States, keeping the Canadian dollar strong and harming the country's export-based manufacturing sector, said Steelworkers economist Erin Weir. Noting the economy shed 39,000 full-time jobs in June, "the Bank of Canada ... should have lowered interest rates to stimulate the business investment and consumer spending needed to mitigate this economic downturn," Weir said.
While many economists have predicted the bank's next move will be to raise interest rates, Carney did not tip off any bias in Tuesday's announcement.
Tuesday's neutral statement suggests the bank could stay on the sidelines for some time. The bank's next scheduled announcement on interest rates will be Sept. 3.
Sombre President George W. Bush sees 'difficult time' ahead for Americans
By Terence Hunt, The Associated Press
WASHINGTON - This is hardly the way he wanted to go out.
President George W. Bush found few encouraging things to say Tuesday as he assessed a grinding list of problems for his final six months in the White House. It runs from soaring gas prices, falling home values and anxieties about bank safety to un-won wars in Iraq and Afghanistan, genocide in Sudan and friction with Moscow and Beijing.
He bounded onstage for a news conference in the White House press briefing room with a smile and a quick good morning, but the next words out of his mouth were a recognition of pocketbook anxieties.
"Its been a difficult time for many American families who are coping with declining housing values and high gasoline prices," the president said.
Over the next 42 minutes Bush repeatedly found fault with the country's direction and the government's failure to solve problems in the 7.5 years that he has been in office.
He said Americans were "rightly concerned" about gas and home prices, that "there's a lot of nervousness" about the stability of banks, that the economy is "not as good as we'd like" and there is "no short-term solution" to the energy problem.
He blamed the Democratic Congress for failing to deal with the issues.
On the bright side, Bush said the banking system is "basically is sound" and the administration has taken steps to help stabilize housing and financial markets and increase confidence in mortgage giants Fannie Mae and Freddie Mac.
He urged Congress to quickly pass legislation to prop up both institutions.
The president tried to reassure people who are alarmed by pictures of anxious depositors lined up outside troubled banks.
"Take a deep breath," he said, because deposits are insured by the government up to $100,000.
As of Tuesday, Bush had 189 days before he walks out of the Oval Office for the last time. His term is ending with Americans on edge, the mood of the country sour.
Just 16 per cent said the U.S. is moving in the right direction in an Associated Press-Ipsos poll released Tuesday.
That's the lowest reading of public sentiment since the poll started in December 2003. Bush's approval was at 28 per cent, which ties the all-time low he hit in AP-Ipsos polling in April.
When a reporter reminded him of an embarrassing moment in February, when he said he hadn't heard forecasts of $4-a-gallon gasoline, Bush interrupted to say: "Aware of it now."
He called on Congress to follow his example and lift a ban on offshore drilling to help increase domestic oil production.
"I readily concede ... it's not going to produce a barrel of oil tomorrow, but it is going to change the psychology that demand will constantly outstrip supply," the president said.
Sensitive to his portrayal as a lame duck, Bush said: "People say, 'Aw, man, you're running out of time, nothing is going to happen.' I'll remind people what did happen."
He pointed to recent congressional approval of a bill to broaden the government's eavesdropping power and a war-funding bill that increases college aid for military service members and veterans who served after Sept. 11, 2001.
He said Congress should pass legislation dealing with housing, energy and trade.
It was Bush's first White House news conference since April 29, and it was announced about 90 minutes before it began.
The timing clashed with a major speech on Iraq by Democratic presidential candidate Barack Obama, who delayed his remarks a half hour for Bush's news conference.
Obama said overall U.S. interests have been hurt rather than helped by Bush's decision to increase troop strength in Iraq 18 months ago, and he vowed to stick to his plan to withdraw combat troops within 16 months of becoming president.
The global stage offers little relief for Bush.
He said he was "displeased" that China and Russia blocked new UN sanctions against the government of President Robert Mugabe of Zimbabwe, who was has retained power in an election the U.S. and many other countries call a sham.
Bush said the growing strength of extremists flowing from Pakistan into Afghanistan and the deteriorating security situation was troubling.
"Obviously it's still a tough fight there," said Bush, who will meet at the White House this month with Pakistan's prime minister, Yousuf Raza Gilani.
Bush said both Iraq and Afghanistan are important fronts in the war on terror.
"The question really facing the country is, will we have the patience and the determination to succeed in these very difficult theatres."
He ended the news conference with a wave and a smile.
"OK, I've enjoyed it. Thank you very much for your time. Appreciate it."
Thursday, July 10, 2008
Financial Update
Toronto stocks tumble into correction territory
Ottawa changes rules for government guaranteed mortgages
· TSX -198.93 A late day retreat pulled the TSX main index into an official correction. The index has tumbled 10.2% from the life high reached in the beginning of June, putting it in the general definition of a correction (a 10% fall from the peak level)
· Dow -236.77 On Wall Street, stocks were battered by credit loss worries, as well as falling tech shares after Cisco Systems' chief executive raised fears of a prolonged U.S. economic downturn.
· Dollar -.77c to $98.90US
· Oil + $.01 to $136.05US per barrel.
· Gold +$5.30US to $928.60US per ounce
Financials, energy send TSX down 199 points; mortgage sector worries depress NY
By Malcolm Morrison, The Canadian Press TORONTO - It was a volatile session on the Toronto stock market Wednesday, where a rally in energy and financial stocks fizzled, sending the TSX down sharply.
Financial sector concerns and a downgrade in the tech sector sent New York indexes packing despite a better-than-expected earnings report from aluminum giant Alcoa Inc.
Toronto's S&P/TSX composite index fell 198.93 points to 13,610.84 after running up as much as 171 points earlier in the session. New York's Dow Jones industrial average tumbled 236.77 points to 11,147.44.
The TSX had run ahead 97 points Tuesday - but that was preceded by two days of triple-digit losses that dipped the benchmark index into negative territory for the year.
"I think the pullback was warranted to a degree," said Gareth Watson, associate director and Canadian equity adviser at ScotiaMcLeod, who thinks the TSX will be limited to single-digit returns this year.
"You're going to see strength out of materials because I'm still a believer in the agriculture story, still a believer in the gold story for the second half, so I think materials will lead any type of increase here, potentially along with energy."
Canada Mortgage and Housing Corp. reported that the seasonally adjusted annualized rate of housing starts was 217,800 units in June, down from 227,700 in May. For the first half of 2008, starts were up 1.5 per cent from a year earlier.
A negative analyst note about Cisco Systems Inc. weighed on the technology sector. Cisco fell $1.30 to US$21.58 after an RBC Capital Markets analyst cut his price target on the network equipment maker. Cisco's CEO recently said technology spending will recover later than previously thought and its shares declined $1.30 to US$21.58.
The New York financial sector was sharply lower as U.S. government-sponsored lenders Freddie Mac and Fannie Mae continued their tumble. Freddie fell $3.20 to US$10.26, while Fannie fell $2.31 to US$15.31. The two companies have been dragging the broader market lower amid worries arose about their cash levels.
"As we go into earnings season, it's going to be much of the same as the first quarter," said Scott Wren, senior equity strategist at Wachovia Securities. "Financials are going to suffer the worst comparisons again."
On the financials, I think the outlook is still relatively neutral at this stage," said Watson. "But depending on what we see in the next quarter coming up, if in fact we can start to get a better gauge as to whether we have hit an inflection point, and that perhaps if the global economy starts to pick up some steam going in the fourth quarter . . . that could be a source of some strength for the Toronto market."
After the market closed, the federal Finance Department announced it's tightening the rules for government-backed mortgages. The maximum amortization will be limited to 35 years and the minimum deposit will be 5%. (see Article Below).
Ottawa changes rules for government guaranteed mortgages
By Craig Wong, The Canadian Press
OTTAWA - Ottawa is tightening the rules for government-guaranteed mortgages that will limit the maximum amortization period to 35 years and require a minimum down payment in a bid to prevent a meltdown like the one in the U.S. subprime mortgage market.
The Finance Department said Wednesday it will no longer guarantee 40-year mortgages and will require a minimum down payment of 5% of the value of a home.
Government-backed insurance is currently available on mortgages where the loan-to-value ratio is up to 100 per cent - in other words the buyer has borrowed all the money to buy a home and then gets insurance coverage on the whole amount.
The changes announced Wednesday will cut this ratio to 95%. Borrowers may still borrow the 5% down payment, but it will not be insured under the new scheme.
Finance spokesman Jack Aubry said the moves will strengthen the Canadian housing market and reduce the risk of a housing bubble.
"Limiting the use of 40-year mortgages and requiring a minimum downpayment will help ensure that people build real equity in their home faster," Aubry said.
The new limits, which are set to take effect Oct. 15, will affect only new government-backed insured mortgages.
Canadians who already hold mortgages won't be affected by the changes.
In April, Bank of Canada governor Mark Carney raised his concerns about the loosening standards in the Canadian mortgage system, particularly the growing popularity of mortgages amortized over a 40-year period.
In other words, mortgages that are designed to take 40 years to fully repay if the borrower sticks to the regular schedule of installment payments.
Carney told a Commons committee that the central bank was watching developments in the mortgage lending sector closely to ensure that the abuses seen in the U.S. subprime market do not occur in Canada.
In the United States, imprudent lending by banks and financial companies to high-risk borrowers at low rates created a housing bubble that eventually exploded when mortgages renewed at higher rates and borrowers couldn't pay and defaulted.
In Canada, defaults of bank-originated mortgages are extremely low - well below one per cent of the total, according to figures compiled by the Canadian Bankers Association.
The collapse in the U.S. housing market led to broader troubles in the U.S. economy, reducing demand for Canadian exports such as lumber and autos. It also led to a corporate and consumer credit crunch that is still being felt by ordinary Americans and companies.
In Canada, the government said Canadian banks and other lenders have not written many government-backed mortgages to borrowers with low credit scores, but to ensure this continues the changes will establish a credit score floor of 620.
Economists have noted a cooling in the Canadian housing in recent months after several years of strong growth. Higher loan-to-value ratios and longer amortization periods are believed to have prolonged the cycle by opening the market wider.
Scotiabank senior economist Adrienne Warren called it a "modest tightening in credit conditions" could exclude a few people at the margins from buying a house.
"We were already in a process of where we're seeing things cool off and I think this will just reinforce that," she said.
Warren added that most Canadian lenders have been more conservative than their counterparts in the United States.
"It's essentially a sort of cautious move and reaction to the difficulties we're seeing in the global housing market and particularly in the U.S.," she said.
Jason Scott, a mortgage associate with Urban Mortgage in Edmonton, said the changes will make it more difficult for younger buyers who are looking to get into the market.
"Reducing the maximum amortization is going to put people who are at the fringes of affordability out, 40-year amortization has been very popular with younger people who are purchasing their first home," he said.
The changes Wednesday also set a maximum of 45 per cent for the proportion of gross income that is spent on debt servicing and housing-related fixed or essential payments.
And mortgages that begin with "interest-only" payments and home equity lines of credit will also not be covered by the government guarantees. Ottawa noted that reducing amortization from 40 years to 35 years on a $200,000 mortgage with a 6% interest rate would increase the borrower's monthly payment by $41. The borrower would also save $49,000 in interest payments
Ottawa changes rules for government guaranteed mortgages
· TSX -198.93 A late day retreat pulled the TSX main index into an official correction. The index has tumbled 10.2% from the life high reached in the beginning of June, putting it in the general definition of a correction (a 10% fall from the peak level)
· Dow -236.77 On Wall Street, stocks were battered by credit loss worries, as well as falling tech shares after Cisco Systems' chief executive raised fears of a prolonged U.S. economic downturn.
· Dollar -.77c to $98.90US
· Oil + $.01 to $136.05US per barrel.
· Gold +$5.30US to $928.60US per ounce
Financials, energy send TSX down 199 points; mortgage sector worries depress NY
By Malcolm Morrison, The Canadian Press TORONTO - It was a volatile session on the Toronto stock market Wednesday, where a rally in energy and financial stocks fizzled, sending the TSX down sharply.
Financial sector concerns and a downgrade in the tech sector sent New York indexes packing despite a better-than-expected earnings report from aluminum giant Alcoa Inc.
Toronto's S&P/TSX composite index fell 198.93 points to 13,610.84 after running up as much as 171 points earlier in the session. New York's Dow Jones industrial average tumbled 236.77 points to 11,147.44.
The TSX had run ahead 97 points Tuesday - but that was preceded by two days of triple-digit losses that dipped the benchmark index into negative territory for the year.
"I think the pullback was warranted to a degree," said Gareth Watson, associate director and Canadian equity adviser at ScotiaMcLeod, who thinks the TSX will be limited to single-digit returns this year.
"You're going to see strength out of materials because I'm still a believer in the agriculture story, still a believer in the gold story for the second half, so I think materials will lead any type of increase here, potentially along with energy."
Canada Mortgage and Housing Corp. reported that the seasonally adjusted annualized rate of housing starts was 217,800 units in June, down from 227,700 in May. For the first half of 2008, starts were up 1.5 per cent from a year earlier.
A negative analyst note about Cisco Systems Inc. weighed on the technology sector. Cisco fell $1.30 to US$21.58 after an RBC Capital Markets analyst cut his price target on the network equipment maker. Cisco's CEO recently said technology spending will recover later than previously thought and its shares declined $1.30 to US$21.58.
The New York financial sector was sharply lower as U.S. government-sponsored lenders Freddie Mac and Fannie Mae continued their tumble. Freddie fell $3.20 to US$10.26, while Fannie fell $2.31 to US$15.31. The two companies have been dragging the broader market lower amid worries arose about their cash levels.
"As we go into earnings season, it's going to be much of the same as the first quarter," said Scott Wren, senior equity strategist at Wachovia Securities. "Financials are going to suffer the worst comparisons again."
On the financials, I think the outlook is still relatively neutral at this stage," said Watson. "But depending on what we see in the next quarter coming up, if in fact we can start to get a better gauge as to whether we have hit an inflection point, and that perhaps if the global economy starts to pick up some steam going in the fourth quarter . . . that could be a source of some strength for the Toronto market."
After the market closed, the federal Finance Department announced it's tightening the rules for government-backed mortgages. The maximum amortization will be limited to 35 years and the minimum deposit will be 5%. (see Article Below).
Ottawa changes rules for government guaranteed mortgages
By Craig Wong, The Canadian Press
OTTAWA - Ottawa is tightening the rules for government-guaranteed mortgages that will limit the maximum amortization period to 35 years and require a minimum down payment in a bid to prevent a meltdown like the one in the U.S. subprime mortgage market.
The Finance Department said Wednesday it will no longer guarantee 40-year mortgages and will require a minimum down payment of 5% of the value of a home.
Government-backed insurance is currently available on mortgages where the loan-to-value ratio is up to 100 per cent - in other words the buyer has borrowed all the money to buy a home and then gets insurance coverage on the whole amount.
The changes announced Wednesday will cut this ratio to 95%. Borrowers may still borrow the 5% down payment, but it will not be insured under the new scheme.
Finance spokesman Jack Aubry said the moves will strengthen the Canadian housing market and reduce the risk of a housing bubble.
"Limiting the use of 40-year mortgages and requiring a minimum downpayment will help ensure that people build real equity in their home faster," Aubry said.
The new limits, which are set to take effect Oct. 15, will affect only new government-backed insured mortgages.
Canadians who already hold mortgages won't be affected by the changes.
In April, Bank of Canada governor Mark Carney raised his concerns about the loosening standards in the Canadian mortgage system, particularly the growing popularity of mortgages amortized over a 40-year period.
In other words, mortgages that are designed to take 40 years to fully repay if the borrower sticks to the regular schedule of installment payments.
Carney told a Commons committee that the central bank was watching developments in the mortgage lending sector closely to ensure that the abuses seen in the U.S. subprime market do not occur in Canada.
In the United States, imprudent lending by banks and financial companies to high-risk borrowers at low rates created a housing bubble that eventually exploded when mortgages renewed at higher rates and borrowers couldn't pay and defaulted.
In Canada, defaults of bank-originated mortgages are extremely low - well below one per cent of the total, according to figures compiled by the Canadian Bankers Association.
The collapse in the U.S. housing market led to broader troubles in the U.S. economy, reducing demand for Canadian exports such as lumber and autos. It also led to a corporate and consumer credit crunch that is still being felt by ordinary Americans and companies.
In Canada, the government said Canadian banks and other lenders have not written many government-backed mortgages to borrowers with low credit scores, but to ensure this continues the changes will establish a credit score floor of 620.
Economists have noted a cooling in the Canadian housing in recent months after several years of strong growth. Higher loan-to-value ratios and longer amortization periods are believed to have prolonged the cycle by opening the market wider.
Scotiabank senior economist Adrienne Warren called it a "modest tightening in credit conditions" could exclude a few people at the margins from buying a house.
"We were already in a process of where we're seeing things cool off and I think this will just reinforce that," she said.
Warren added that most Canadian lenders have been more conservative than their counterparts in the United States.
"It's essentially a sort of cautious move and reaction to the difficulties we're seeing in the global housing market and particularly in the U.S.," she said.
Jason Scott, a mortgage associate with Urban Mortgage in Edmonton, said the changes will make it more difficult for younger buyers who are looking to get into the market.
"Reducing the maximum amortization is going to put people who are at the fringes of affordability out, 40-year amortization has been very popular with younger people who are purchasing their first home," he said.
The changes Wednesday also set a maximum of 45 per cent for the proportion of gross income that is spent on debt servicing and housing-related fixed or essential payments.
And mortgages that begin with "interest-only" payments and home equity lines of credit will also not be covered by the government guarantees. Ottawa noted that reducing amortization from 40 years to 35 years on a $200,000 mortgage with a 6% interest rate would increase the borrower's monthly payment by $41. The borrower would also save $49,000 in interest payments
Wednesday, July 9, 2008
Financial Update
· TSX +96.97 (Reuters)A late-day surge pulled the main index higher as gains in the wider market offset a drop by energy shares, which were hit by another big drop in oil prices. **The day's rally pulled the benchmark away from official correction territory, but it remained down 8.8 percent from the all-time high it reached in early June. A "correction" is generally defined as a 10 percent retreat from peak levels.
· Dow +152.25 boosted by the drop in oil prices, which eased worries about consumer and business spending.
· Dollar -.02c to $98.13US
· Oil -$5.33 to $136.04US per barrel. The decline in crude -which has fallen nearly $10 this week - helped ease anxiety over rising inflation and improved hopes the Bank of Canada won't need to raise interest rates next week, said Gavin Graham, chief investment officer at Guardian Group of Funds.
· Gold -$5.40US to $921.90US per ounce
Housing starts slow in June
HEATHER SCOFFIELD Globe and Mail Update
OTTAWA — Housing starts in June slowed to an annualized 217,800 – a drop from May but largely in line with economists' expectations.
The decline was seen in all regions of Canada, except Ontario. Activity in both single homes and condos fell.
“Despite the decrease in June, total housing starts remain at high levels.” said Bob Dugan, the chief economist at Canada Mortgage and Housing Corp. “This is mostly due to the multiple segment which has been continuously above the 100,000 unit threshold since the beginning of the year.”
· Dow +152.25 boosted by the drop in oil prices, which eased worries about consumer and business spending.
· Dollar -.02c to $98.13US
· Oil -$5.33 to $136.04US per barrel. The decline in crude -which has fallen nearly $10 this week - helped ease anxiety over rising inflation and improved hopes the Bank of Canada won't need to raise interest rates next week, said Gavin Graham, chief investment officer at Guardian Group of Funds.
· Gold -$5.40US to $921.90US per ounce
Housing starts slow in June
HEATHER SCOFFIELD Globe and Mail Update
OTTAWA — Housing starts in June slowed to an annualized 217,800 – a drop from May but largely in line with economists' expectations.
The decline was seen in all regions of Canada, except Ontario. Activity in both single homes and condos fell.
“Despite the decrease in June, total housing starts remain at high levels.” said Bob Dugan, the chief economist at Canada Mortgage and Housing Corp. “This is mostly due to the multiple segment which has been continuously above the 100,000 unit threshold since the beginning of the year.”
Tuesday, July 8, 2008
Financial Update
Global markets plunge to two-year low
· TSX -297.59CP)Persistent worries about high energy-fuelled inflation and slowing earnings growth resulting from a 50% surge in oil prices this year slammed the Toronto stock market Monday and put the main index firmly in the red for the ytd
· Dow -56.58
· Dollar+.11c to $98.15US
· Oil -3.92 to $141.37US per barrel.
· Gold -4.60US to $927.30US per ounce
Canada's bosses worried about inflation
Email the author
Julian Beltrame The Canadian Press OTTAWA
Canadian businesses are sounding the alarm over inflation fears from rising fuel costs while remaining moderately upbeat about future economic prospects.
But the good news in the quarterly Bank of Canada survey of 100 companies was mostly a western phenomenon, with the preponderance of companies in the manufacturing-heavy East seeing slowing conditions ahead. And a separate survey -- this time of consumers conducted by the Conference Board of Canada -- has found gloom among Canadians spreading with the board's consumer confidence index dipping 6.2 points to 79.6, the lowest level since the fourth quarter of 1995. "I found it surprising that firms are more concerned about the inflationary impact of soaring oil prices than the growth impact,'' said Douglas Porter, deputy chief economist with BMO Capital Markets. "From the Bank of Canada's side there was a clear message they should be more concerned with inflation than growth at this point.''
Despite evidence the economy is slumping, executives polled between May 20 and June 13 were slightly more upbeat that their sales volumes would increase over the next 12 months than they were three months ago. 37% said sales would increase while 33 % said they would decline.
But there was more unanimity over the impact of energy prices, with 51 per cent predicting their input costs will rise due to soaring energy prices against 13 per cent who said costs would fall. As well, 42 per cent said they expect to pass on those higher costs to customers, as opposed to 22 per cent who predicted their output prices would fall. On a balance of opinion -- subtracting negative expectations from the positives -- both numbers were the highest ever recorded by the bank.
36% believed inflation will rise above 3% in the next two years, also a record response.
"The expected increase in input price growth over the next 12 months stems largely from the continuing strength in the prices of oil and other energy commodities, in combination with the higher prices of food and other non-energy commodities such as base metals,'' the bank said.
"Some firms also cited rising prices of imports from China.''
The rising price of gasoline was also a key factor in the Conference Board's finding of falling consumer confidence in Canada.
The survey of 2,000 conducted in early June found consumer confidence falling across all regions.
While concerns over fuel prices were expected, several economists said they were surprised businesses were not more pessimistic about the economy, which contracted by 0.3 per cent in the first quarter.
Bank of Nova Scotia economist Derek Holt suggested the positive sales increase numbers from executives may be due to the timing of the survey, which ended June 13, saying that market attitudes had soured since. "This update is unlikely to influence the Bank of Canada's rate decision on July 15th but reaffirms the bank's inflation concerns of late, at least in the short run,'' he said.
Porter also said he does not believe the central bank will move off its holding position on the overnight rate, but added governor Mark Carney now has added ammunition for the next move to be a hike later in the year.
· TSX -297.59CP)Persistent worries about high energy-fuelled inflation and slowing earnings growth resulting from a 50% surge in oil prices this year slammed the Toronto stock market Monday and put the main index firmly in the red for the ytd
· Dow -56.58
· Dollar+.11c to $98.15US
· Oil -3.92 to $141.37US per barrel.
· Gold -4.60US to $927.30US per ounce
Canada's bosses worried about inflation
Email the author
Julian Beltrame The Canadian Press OTTAWA
Canadian businesses are sounding the alarm over inflation fears from rising fuel costs while remaining moderately upbeat about future economic prospects.
But the good news in the quarterly Bank of Canada survey of 100 companies was mostly a western phenomenon, with the preponderance of companies in the manufacturing-heavy East seeing slowing conditions ahead. And a separate survey -- this time of consumers conducted by the Conference Board of Canada -- has found gloom among Canadians spreading with the board's consumer confidence index dipping 6.2 points to 79.6, the lowest level since the fourth quarter of 1995. "I found it surprising that firms are more concerned about the inflationary impact of soaring oil prices than the growth impact,'' said Douglas Porter, deputy chief economist with BMO Capital Markets. "From the Bank of Canada's side there was a clear message they should be more concerned with inflation than growth at this point.''
Despite evidence the economy is slumping, executives polled between May 20 and June 13 were slightly more upbeat that their sales volumes would increase over the next 12 months than they were three months ago. 37% said sales would increase while 33 % said they would decline.
But there was more unanimity over the impact of energy prices, with 51 per cent predicting their input costs will rise due to soaring energy prices against 13 per cent who said costs would fall. As well, 42 per cent said they expect to pass on those higher costs to customers, as opposed to 22 per cent who predicted their output prices would fall. On a balance of opinion -- subtracting negative expectations from the positives -- both numbers were the highest ever recorded by the bank.
36% believed inflation will rise above 3% in the next two years, also a record response.
"The expected increase in input price growth over the next 12 months stems largely from the continuing strength in the prices of oil and other energy commodities, in combination with the higher prices of food and other non-energy commodities such as base metals,'' the bank said.
"Some firms also cited rising prices of imports from China.''
The rising price of gasoline was also a key factor in the Conference Board's finding of falling consumer confidence in Canada.
The survey of 2,000 conducted in early June found consumer confidence falling across all regions.
While concerns over fuel prices were expected, several economists said they were surprised businesses were not more pessimistic about the economy, which contracted by 0.3 per cent in the first quarter.
Bank of Nova Scotia economist Derek Holt suggested the positive sales increase numbers from executives may be due to the timing of the survey, which ended June 13, saying that market attitudes had soured since. "This update is unlikely to influence the Bank of Canada's rate decision on July 15th but reaffirms the bank's inflation concerns of late, at least in the short run,'' he said.
Porter also said he does not believe the central bank will move off its holding position on the overnight rate, but added governor Mark Carney now has added ammunition for the next move to be a hike later in the year.
Financial Update
· TSX lost Thursdays recovering falling another -133.18
· Dow closed for July 4th
· Dollar -.11c to $98.04US
· Oil -1.19 to $144.10US per barrel.
· Gold -9.00US to $930.75US per ounce
RBC issued national and provincial economic reviews Friday
Below is a quote from the National Report with the Provincial report for Ontario following.
“Canada's housing market is also poised to cool in the face of deteriorating affordability. Housing affordability in most major markets across the country have deteriorated to their worst levels in almost 20 years. However, the extent of any weakening is expected to be much less pronounced than what is occurring currently in the U.S. as the Canadian market did not experience many of the excesses evident south of the border.“
Transmitted by CNW Group on : July 3, 2008 05:00
Ontario's economy continues to struggle but some relief in sight, says RBC TORONTO, July 3 /CNW/ - According to the latest provincial forecastreleased today by RBC, a downbeat scenario continues to unfold in Ontario,with economic growth expected to hover around 0.7 per cent for 2008, theweakest pace of expansion for the province since the last recession in theearly 1990s.
"The unexpected decline in the national economy in the first quarter ofthis year was most likely the result of a notable contraction in activitywithin Ontario's trade sector," said Craig Wright, senior vice-president andchief economist, RBC. "The province's exports were pounded by the highCanadian dollar and downturn in the U.S. economy, as well as poor weatherconditions and a strike at a major U.S. motor vehicle parts manufacturer thatdisrupted auto production here."
Ontario's manufacturing sector will continue to see international saleshindered in 2008 as a result of the high dollar and sluggish U.S. economy.Little improvement is foreseen for the province's important auto sector amidplummeting motor vehicle sales in the U.S. and ongoing restructuring of the"Big 3" North American producers. However a projected weakening in theCanadian dollar and reacceleration of growth in the U.S. economy should bringOntario's exporters some relief by the end of this year and in 2009. The rest of the province's domestic economy is far more encouraging, thereport noted. Residential construction is holding up better than expected andgrowth in consumer spending continues to be supported by a robust labourmarket. Despite heavy losses of manufacturing jobs, Ontario continues to seesteady employment growth overall, thus keeping the unemployment rate near aseven-year low. "The domestic economy remains in relatively good shape andshould allow Ontario's economic growth to stay in positive territory," notedWright.
The main theme of the Provincial Outlook continues to be the differentpaths the Eastern and Western parts of the country are taking. Record-highcommodity prices and strong global demand for resources sustain unprecedentedprosperity in the Western provinces, while the strong Canadian dollar,downturn in the U.S. economy and high energy prices continue to cause hardshipin key sectors in provinces east of Manitoba. Saskatchewan is projected tolead all of the provinces in economic growth for both 2008 and 2009, followedby Alberta, while Newfoundland and Labrador and Ontario are expected to lagthe group this year, but should show some improvement next year.
The RBC Economics Provincial Outlook assesses the provinces according toeconomic growth, employment growth, unemployment rates, personal incomegrowth, retail sales, housing starts, and the Consumer Price Index.
According to the report (available online as of 8 a.m. E.D.T.,
atwww.rbc.com/economics/market/pdf/provfcst.pdf)
· Dow closed for July 4th
· Dollar -.11c to $98.04US
· Oil -1.19 to $144.10US per barrel.
· Gold -9.00US to $930.75US per ounce
RBC issued national and provincial economic reviews Friday
Below is a quote from the National Report with the Provincial report for Ontario following.
“Canada's housing market is also poised to cool in the face of deteriorating affordability. Housing affordability in most major markets across the country have deteriorated to their worst levels in almost 20 years. However, the extent of any weakening is expected to be much less pronounced than what is occurring currently in the U.S. as the Canadian market did not experience many of the excesses evident south of the border.“
Transmitted by CNW Group on : July 3, 2008 05:00
Ontario's economy continues to struggle but some relief in sight, says RBC TORONTO, July 3 /CNW/ - According to the latest provincial forecastreleased today by RBC, a downbeat scenario continues to unfold in Ontario,with economic growth expected to hover around 0.7 per cent for 2008, theweakest pace of expansion for the province since the last recession in theearly 1990s.
"The unexpected decline in the national economy in the first quarter ofthis year was most likely the result of a notable contraction in activitywithin Ontario's trade sector," said Craig Wright, senior vice-president andchief economist, RBC. "The province's exports were pounded by the highCanadian dollar and downturn in the U.S. economy, as well as poor weatherconditions and a strike at a major U.S. motor vehicle parts manufacturer thatdisrupted auto production here."
Ontario's manufacturing sector will continue to see international saleshindered in 2008 as a result of the high dollar and sluggish U.S. economy.Little improvement is foreseen for the province's important auto sector amidplummeting motor vehicle sales in the U.S. and ongoing restructuring of the"Big 3" North American producers. However a projected weakening in theCanadian dollar and reacceleration of growth in the U.S. economy should bringOntario's exporters some relief by the end of this year and in 2009. The rest of the province's domestic economy is far more encouraging, thereport noted. Residential construction is holding up better than expected andgrowth in consumer spending continues to be supported by a robust labourmarket. Despite heavy losses of manufacturing jobs, Ontario continues to seesteady employment growth overall, thus keeping the unemployment rate near aseven-year low. "The domestic economy remains in relatively good shape andshould allow Ontario's economic growth to stay in positive territory," notedWright.
The main theme of the Provincial Outlook continues to be the differentpaths the Eastern and Western parts of the country are taking. Record-highcommodity prices and strong global demand for resources sustain unprecedentedprosperity in the Western provinces, while the strong Canadian dollar,downturn in the U.S. economy and high energy prices continue to cause hardshipin key sectors in provinces east of Manitoba. Saskatchewan is projected tolead all of the provinces in economic growth for both 2008 and 2009, followedby Alberta, while Newfoundland and Labrador and Ontario are expected to lagthe group this year, but should show some improvement next year.
The RBC Economics Provincial Outlook assesses the provinces according toeconomic growth, employment growth, unemployment rates, personal incomegrowth, retail sales, housing starts, and the Consumer Price Index.
According to the report (available online as of 8 a.m. E.D.T.,
atwww.rbc.com/economics/market/pdf/provfcst.pdf)
Thursday, July 3, 2008
Financial Update
Toronto stocks plunge broadly on worries of demand for commodities
· TSX -432.92(Reuters) plunged in a broad selloff as economic sentiment darkened and coal companies saw shares plunge alongside the price of the commodity. The selloff came as a US report found that U.S. private-sector employers slashed 79,000 jobs in June -- the largest drop since November 2002 and worse than expected by economists. Investors also worried that slowing economic conditions in North America and Europe will slash demand for metals and crude.
· Dow -166.75
· Dollar +.60c to $98.68US Canada’s dollar gained the most in almost 2 months as prices of the nation's commodity exports surged
· Oil + $2.60 shot to new records briefly above US$144 a barrel as the U.S. government reported a bigger-than-expected drop in supplies -2million barrels, and the threat of conflict with Iran weighed on traders' minds$143.57US per barrel.
· Gold +$2.30US to $944.80US per ounce overshadowed by record oil prices, gold has also risen significantly higher
The party's over for Canadian spendthrifts
TARA PERKINS AND KEVIN CARMICHAEL From Thursday's Globe and Mail
TORONTO and OTTAWA — Canadian consumers, facing softer job creation and a chill in the housing sector, are likely to rein in the spending that has fuelled the economy, economists say.
Record energy prices and rising food costs could spook consumers into an even sharper pullback, they caution, though the situation now is not dire.
“I do think consumer spending has really only got one direction to go in this kind of environment, and that's toward slower growth,” said Douglas Porter, deputy chief economist at Bank of Montreal, who noted that the country is coming off one of the strongest spending periods in decades.
Consumers have been having a field day in recent years thanks to strong employment, low interest rates, tax cuts and the strong Canadian dollar, Mr. Porter noted.
The booming housing market was driving demand for furniture, appliances and other big ticket items, said Craig Alexander, deputy chief economist at Toronto-Dominion Bank.
“Households have been spending almost like drunken sailors over the past couple of years, which provided critical support to the economy when the export-oriented manufacturing sector had been suffering under the weight of a strong currency and flagging U.S. demand,” TD economists wrote in a report yesterday titled Canadian Consumers to Gear Down their Spending. “The central question is whether consumers can keep tipping pints or whether a hangover is in store.”
In April, when the Bank of Canada laid out its most recent thinking on the economy, policy makers said domestic demand was “expected to be the key source of economic growth” through 2010, offsetting weaker U.S. demand for exports.
Mr. Alexander believes the tide will finally turn for exporters in 2009 as the U.S. economy gradually improves, but Canadian consumer spending will grow at a slower rate than it is today. “You put those two offsetting factors together and it means that next year, economic growth in Canada will probably still be less than 2 per cent, and that's quite soft – a healthy pace of growth is probably about 2.8,” he said.
TD expects real personal expenditure to rise 4 per cent in 2008 and 2.6 per cent in 2009, down from 4.5 per cent last year.
There is some evidence that consumers are already reining in spending. Retail sales increased 4.2 per cent in April from the same period a year ago, the weakest growth in nine months, Statistics Canada reported on June 20.
Derek Nighbor, senior vice-president at the Retail Council of Canada, said sales figures were a bit soft across the board in March and things bumped up a little again in April.
“Overall, are we expecting things to be a bit softer in '08 and '09 than they have been in the last few years? Most definitely. That being said, this is not the early 1990s,” he said, noting that relatively speaking, Canada is still in pretty good shape.
Mr. Alexander said that “virtually every single key driver for consumer spending suggests that things are going to slow down.”
“In the housing market, we've already seen very clear signs that it's cooled down, and I think that this is going to translate into weaker spending on … housing-related items,” he said.
Employment growth is expected to slow to 1.6 per cent in 2008 and 0.5 per cent in 2009, compared to 2.3 per cent last year. The unemployment rate will likely edge up. And gains in personal wealth will moderate over the next two years, with real estate cooling and growth in financial assets slowing, the TD report said.
Moreover, the bank's economists expect soaring commodity prices to stabilize in coming months as beleaguered U.S. consumers tighten their own purse strings, crimping demand and sending ripples through the global economy.
Loonie headed toward US90 cents, predicts poll
The Canadian dollar will fall steadily versus the U.S. dollar during the next 12 months as commodity prices weaken and the gap between domestic and U.S. interest rates narrows, according to a Reuters poll released on Wednesday.
The domestic currency has held near par versus the greenback for much of the year, supported by record high oil prices and a surprise decision by the Bank of Canada last month to keep its key interest rate steady, rather than lowering it.
But the factors that last year fuelled the Canadian dollar's 17.5 % rally versus the U.S. dollar are expected to unravel and send the currency back down closer to the US90 cents level.
The Canadian currency is expected to be worth C$1.020 to the U.S. dollar, or 98.04 U.S. cents, in a month, and remain at that level for three months, according to the median estimate of 49 strategists polled between June 30 and July 2.
In 6 months, it is seen at C$1.050 to the U.S. dollar, or 95.24 U.S. cents, and in 12 months it is expected to be at C$1.070 to the U.S. dollar, or 93.46 U.S. cents.
Those estimates indicate the Canadian dollar will fall 5% over the next year from current levels around C$1.0155 to the U.S. dollar, or 98.47 U.S. cents.
Last year's rally was fuelled by a steady stream of strong Canadian economic data, Bank of Canada rate increases, a weaker U.S. dollar, merger-related activity and rising commodity prices.
Recently, domestic data has started to signal a weaker economy, rate cuts have been in vogue all year, commodity prices have not been as closely linked to the currency as last year and merger-related activity has fizzled.
Some participants in the poll said the Canadian dollar is too high and will soon lose steam as the U.S. Federal Reserve starts raising its key lending rate more aggressively than the Bank of Canada. The Bank of Canada's key rate is 3.00% while the Fed's rate is 2.00%.
"At current levels the Canadian dollar is overvalued versus the U.S. dollar," said Intesa Sanpaolo, one of the firms that participated in the poll. "With the Fed likely to raise rates in a more aggressive way than the Bank of Canada, the Canadian dollar should therefore start do depreciate gradually."
The Bank of Canada will make its next scheduled interest rate announcement on July 15, but most market participants are not expecting any change to rates until sometime in 2009.
Lofty prices for oil, a key Canadian export, could soon drag on the commodity-linked Canadian dollar since concerns about global growth would take a bite out of demand for oil.
Oil prices, which were a major catalyst behind the Canadian dollar's rally last year, remained with sight of the record high of $143.67 a barrel reached on Monday.
"We expect the positive influence from rising commodity prices to fade over the next three to six months reflecting slowing global growth," said BTMU, another firm that took part in the poll.
"In these circumstances, the negative spillover effects on Canadian economic activity from anemic U.S. domestic demand will weigh more heavily on the Canadian dollar."
© Thomson Reuters 2008
· TSX -432.92(Reuters) plunged in a broad selloff as economic sentiment darkened and coal companies saw shares plunge alongside the price of the commodity. The selloff came as a US report found that U.S. private-sector employers slashed 79,000 jobs in June -- the largest drop since November 2002 and worse than expected by economists. Investors also worried that slowing economic conditions in North America and Europe will slash demand for metals and crude.
· Dow -166.75
· Dollar +.60c to $98.68US Canada’s dollar gained the most in almost 2 months as prices of the nation's commodity exports surged
· Oil + $2.60 shot to new records briefly above US$144 a barrel as the U.S. government reported a bigger-than-expected drop in supplies -2million barrels, and the threat of conflict with Iran weighed on traders' minds$143.57US per barrel.
· Gold +$2.30US to $944.80US per ounce overshadowed by record oil prices, gold has also risen significantly higher
The party's over for Canadian spendthrifts
TARA PERKINS AND KEVIN CARMICHAEL From Thursday's Globe and Mail
TORONTO and OTTAWA — Canadian consumers, facing softer job creation and a chill in the housing sector, are likely to rein in the spending that has fuelled the economy, economists say.
Record energy prices and rising food costs could spook consumers into an even sharper pullback, they caution, though the situation now is not dire.
“I do think consumer spending has really only got one direction to go in this kind of environment, and that's toward slower growth,” said Douglas Porter, deputy chief economist at Bank of Montreal, who noted that the country is coming off one of the strongest spending periods in decades.
Consumers have been having a field day in recent years thanks to strong employment, low interest rates, tax cuts and the strong Canadian dollar, Mr. Porter noted.
The booming housing market was driving demand for furniture, appliances and other big ticket items, said Craig Alexander, deputy chief economist at Toronto-Dominion Bank.
“Households have been spending almost like drunken sailors over the past couple of years, which provided critical support to the economy when the export-oriented manufacturing sector had been suffering under the weight of a strong currency and flagging U.S. demand,” TD economists wrote in a report yesterday titled Canadian Consumers to Gear Down their Spending. “The central question is whether consumers can keep tipping pints or whether a hangover is in store.”
In April, when the Bank of Canada laid out its most recent thinking on the economy, policy makers said domestic demand was “expected to be the key source of economic growth” through 2010, offsetting weaker U.S. demand for exports.
Mr. Alexander believes the tide will finally turn for exporters in 2009 as the U.S. economy gradually improves, but Canadian consumer spending will grow at a slower rate than it is today. “You put those two offsetting factors together and it means that next year, economic growth in Canada will probably still be less than 2 per cent, and that's quite soft – a healthy pace of growth is probably about 2.8,” he said.
TD expects real personal expenditure to rise 4 per cent in 2008 and 2.6 per cent in 2009, down from 4.5 per cent last year.
There is some evidence that consumers are already reining in spending. Retail sales increased 4.2 per cent in April from the same period a year ago, the weakest growth in nine months, Statistics Canada reported on June 20.
Derek Nighbor, senior vice-president at the Retail Council of Canada, said sales figures were a bit soft across the board in March and things bumped up a little again in April.
“Overall, are we expecting things to be a bit softer in '08 and '09 than they have been in the last few years? Most definitely. That being said, this is not the early 1990s,” he said, noting that relatively speaking, Canada is still in pretty good shape.
Mr. Alexander said that “virtually every single key driver for consumer spending suggests that things are going to slow down.”
“In the housing market, we've already seen very clear signs that it's cooled down, and I think that this is going to translate into weaker spending on … housing-related items,” he said.
Employment growth is expected to slow to 1.6 per cent in 2008 and 0.5 per cent in 2009, compared to 2.3 per cent last year. The unemployment rate will likely edge up. And gains in personal wealth will moderate over the next two years, with real estate cooling and growth in financial assets slowing, the TD report said.
Moreover, the bank's economists expect soaring commodity prices to stabilize in coming months as beleaguered U.S. consumers tighten their own purse strings, crimping demand and sending ripples through the global economy.
Loonie headed toward US90 cents, predicts poll
The Canadian dollar will fall steadily versus the U.S. dollar during the next 12 months as commodity prices weaken and the gap between domestic and U.S. interest rates narrows, according to a Reuters poll released on Wednesday.
The domestic currency has held near par versus the greenback for much of the year, supported by record high oil prices and a surprise decision by the Bank of Canada last month to keep its key interest rate steady, rather than lowering it.
But the factors that last year fuelled the Canadian dollar's 17.5 % rally versus the U.S. dollar are expected to unravel and send the currency back down closer to the US90 cents level.
The Canadian currency is expected to be worth C$1.020 to the U.S. dollar, or 98.04 U.S. cents, in a month, and remain at that level for three months, according to the median estimate of 49 strategists polled between June 30 and July 2.
In 6 months, it is seen at C$1.050 to the U.S. dollar, or 95.24 U.S. cents, and in 12 months it is expected to be at C$1.070 to the U.S. dollar, or 93.46 U.S. cents.
Those estimates indicate the Canadian dollar will fall 5% over the next year from current levels around C$1.0155 to the U.S. dollar, or 98.47 U.S. cents.
Last year's rally was fuelled by a steady stream of strong Canadian economic data, Bank of Canada rate increases, a weaker U.S. dollar, merger-related activity and rising commodity prices.
Recently, domestic data has started to signal a weaker economy, rate cuts have been in vogue all year, commodity prices have not been as closely linked to the currency as last year and merger-related activity has fizzled.
Some participants in the poll said the Canadian dollar is too high and will soon lose steam as the U.S. Federal Reserve starts raising its key lending rate more aggressively than the Bank of Canada. The Bank of Canada's key rate is 3.00% while the Fed's rate is 2.00%.
"At current levels the Canadian dollar is overvalued versus the U.S. dollar," said Intesa Sanpaolo, one of the firms that participated in the poll. "With the Fed likely to raise rates in a more aggressive way than the Bank of Canada, the Canadian dollar should therefore start do depreciate gradually."
The Bank of Canada will make its next scheduled interest rate announcement on July 15, but most market participants are not expecting any change to rates until sometime in 2009.
Lofty prices for oil, a key Canadian export, could soon drag on the commodity-linked Canadian dollar since concerns about global growth would take a bite out of demand for oil.
Oil prices, which were a major catalyst behind the Canadian dollar's rally last year, remained with sight of the record high of $143.67 a barrel reached on Monday.
"We expect the positive influence from rising commodity prices to fade over the next three to six months reflecting slowing global growth," said BTMU, another firm that took part in the poll.
"In these circumstances, the negative spillover effects on Canadian economic activity from anemic U.S. domestic demand will weigh more heavily on the Canadian dollar."
© Thomson Reuters 2008
Wednesday, July 2, 2008
Financial Update
· TSX + 111.82(Reuters) Monday as record oil prices bolstered resources and energy shares, offsetting a weak showing by financial services shares on persistent concerns about the credit crunch.
· Dow +35.25
· Dollar -.72c to $97.99US
· Oil + $.60 charged to a new high of $143.67 before settling lower at $142.61US per barrel
· Gold +$4.72US to $936.02US per ounce
Consumer expectations more dangerous than inflation
BARRIE MCKENNA Globe and Mail Update
Ben Bernanke is among a shrinking pool of people who still believe inflation is ebbing.
He and his colleagues on the U.S. Federal Reserve Board's interest-rate-setting open market committee said as much last week. As they left the central bank's key interest rate unchanged at 2 per cent – again – the committee said it “expects inflation to moderate later this year and next year.”
Really?
It's hard to see that scenario playing out. As the price of oil flirts with new highs above $143 (U.S.) a barrel and food prices continue to spike, consumers are braced for just about everything to cost more in the months ahead.
It's what economists call inflation expectations. And the anticipation of higher prices can be as dangerous as inflation itself. When people feel threatened by inflation, they react by demanding higher wages, which push up employer costs, perpetuating the problem.
In Europe, for example, one recent survey of European consumers cites a perceived rate of inflation at 12 per cent. The official inflation rate is in fact running at 3 per cent. There have been protests throughout Europe by fishermen and truckers about soaring fuel costs.
In the United States, the “expected” rate of inflation is running at more than 5 per cent in the year ahead – the highest rate since the 1980s, according to the University of Michigan's survey of consumer confidence. Actual inflation is at roughly 4 per cent.
Consumers may be overreacting to the price of items they purchase most often: groceries and gas. Mr. Bernanke apparently believes the spike in food and fuel prices is transitory and won't affect prices more broadly. He's betting workers and companies won't push wages and prices of other items higher, exacerbating inflation.
Food and fuel prices make up just a quarter of the consumer price index. So why worry?
Instead, the Fed is focused on the downside: the housing crunch, the credit crisis and a slowing economy. If there's inflation, it will be cured by slow growth, Mr. Bernanke has apparently concluded.
So, for now, he keeps the federal funds rate at a historically low level of just 2 per cent – half the rate of inflation.
There is another, more worrying scenario. Speaking in Basel, Switzerland, yesterday, a top official of the Bank for International Settlements urged central banks around the world to keep inflation expectations at bay. Malcolm Knight, the bank's general manager and a former deputy governor of the Bank of Canada, said it would be wrong to assume the recent spike in inflation is just a “blip” that will recede next year.
“We cannot be entirely confident about this reassuring assessment,” Mr. Knight told reporters. He warned of a “clear and present danger” of rising global inflation and inflationary expectations.
In its annual report, released yesterday, the BIS warned that inflation may be the trigger for a much more serious problem: a prolonged period of deflation. The central bank for central banks warned that rising food and fuel prices, coupled with high household debt levels, could send the global economy into a tailspin.
The bank ominously suggested the cooling economy could easily drown inflation, causing “much greater and longer-lasting” economic problems.
Kevin Hassett, an economist at the American Enterprise Institute and a key economic adviser to Republican presidential hopeful John McCain, is among those who worry the Fed has become too complacent about inflation. He frets about a reprise of the devastating double-digit inflation of the 1980s.
“The inflation outlook right now is as scary as it has been since Paul Volcker grabbed his lance and impaled the dragon in 1979,” Mr. Hassett wrote in a commentary posted on the institute's website.
Mr. Volcker was Fed chairman from 1979-1987. Inflation hit 14 per cent as he took the job, and his relentless effort to tame it over the next few years pushed the U.S., and much of the world, into a deep recession.
Let's hope Mr. Bernanke and his colleagues have not forgotten just how painfully high inflation can go – and what it takes to get it under control again.
· Dow +35.25
· Dollar -.72c to $97.99US
· Oil + $.60 charged to a new high of $143.67 before settling lower at $142.61US per barrel
· Gold +$4.72US to $936.02US per ounce
Consumer expectations more dangerous than inflation
BARRIE MCKENNA Globe and Mail Update
Ben Bernanke is among a shrinking pool of people who still believe inflation is ebbing.
He and his colleagues on the U.S. Federal Reserve Board's interest-rate-setting open market committee said as much last week. As they left the central bank's key interest rate unchanged at 2 per cent – again – the committee said it “expects inflation to moderate later this year and next year.”
Really?
It's hard to see that scenario playing out. As the price of oil flirts with new highs above $143 (U.S.) a barrel and food prices continue to spike, consumers are braced for just about everything to cost more in the months ahead.
It's what economists call inflation expectations. And the anticipation of higher prices can be as dangerous as inflation itself. When people feel threatened by inflation, they react by demanding higher wages, which push up employer costs, perpetuating the problem.
In Europe, for example, one recent survey of European consumers cites a perceived rate of inflation at 12 per cent. The official inflation rate is in fact running at 3 per cent. There have been protests throughout Europe by fishermen and truckers about soaring fuel costs.
In the United States, the “expected” rate of inflation is running at more than 5 per cent in the year ahead – the highest rate since the 1980s, according to the University of Michigan's survey of consumer confidence. Actual inflation is at roughly 4 per cent.
Consumers may be overreacting to the price of items they purchase most often: groceries and gas. Mr. Bernanke apparently believes the spike in food and fuel prices is transitory and won't affect prices more broadly. He's betting workers and companies won't push wages and prices of other items higher, exacerbating inflation.
Food and fuel prices make up just a quarter of the consumer price index. So why worry?
Instead, the Fed is focused on the downside: the housing crunch, the credit crisis and a slowing economy. If there's inflation, it will be cured by slow growth, Mr. Bernanke has apparently concluded.
So, for now, he keeps the federal funds rate at a historically low level of just 2 per cent – half the rate of inflation.
There is another, more worrying scenario. Speaking in Basel, Switzerland, yesterday, a top official of the Bank for International Settlements urged central banks around the world to keep inflation expectations at bay. Malcolm Knight, the bank's general manager and a former deputy governor of the Bank of Canada, said it would be wrong to assume the recent spike in inflation is just a “blip” that will recede next year.
“We cannot be entirely confident about this reassuring assessment,” Mr. Knight told reporters. He warned of a “clear and present danger” of rising global inflation and inflationary expectations.
In its annual report, released yesterday, the BIS warned that inflation may be the trigger for a much more serious problem: a prolonged period of deflation. The central bank for central banks warned that rising food and fuel prices, coupled with high household debt levels, could send the global economy into a tailspin.
The bank ominously suggested the cooling economy could easily drown inflation, causing “much greater and longer-lasting” economic problems.
Kevin Hassett, an economist at the American Enterprise Institute and a key economic adviser to Republican presidential hopeful John McCain, is among those who worry the Fed has become too complacent about inflation. He frets about a reprise of the devastating double-digit inflation of the 1980s.
“The inflation outlook right now is as scary as it has been since Paul Volcker grabbed his lance and impaled the dragon in 1979,” Mr. Hassett wrote in a commentary posted on the institute's website.
Mr. Volcker was Fed chairman from 1979-1987. Inflation hit 14 per cent as he took the job, and his relentless effort to tame it over the next few years pushed the U.S., and much of the world, into a deep recession.
Let's hope Mr. Bernanke and his colleagues have not forgotten just how painfully high inflation can go – and what it takes to get it under control again.
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