Financial Update

U.S. problems shake Canadian confidence

· TSX +99.45
· Dow -134.50
· Dollar slipped below par -.82c to $99.88
· Oil +.41 to $127.76US per barrel
· Gold +5.60US to $892.90US
Bond Rates: http://www.bankofcanada.ca/en/rates/bonds.html

Brenda Bouw and Joshua ClippertonThe Canadian Press

Economic storm clouds over the United States are casting an ominous shadow over the border and Canadians are increasingly nervous about the price of gas, food and other goods.
But while caution is the byword, many say they're not ready to lock down their wallets just yet and the still-busy malls and shops suggest the country is weathering the economic inclemency better that its southern neighbour. "Anywhere you go, it's always crowded,'' said Amal Matr, out shopping in downtown Toronto with her daughter yesterday.

Although the cost of living is obviously rising, Matr said she doesn't think record fuel prices have so far affected the way people live their lives or how they spend at retailers.

"It's always busy,'' said Matr. "Last weekend we went to Canada's Wonderland (amusement park) and it was full. The parking lot was full. I don't think it's affecting anybody.''

The Conference Board reported yesterday that Canadian consumers' confidence in the economy is falling, hitting its lowest level in seven years in May.

The think-tank's confidence index fell seven points in May to 85.8, the lowest level since the survey switched to a monthly reading in December 2001.

When asked if they felt that their family would be better off financially in six months, 26.1 per cent of respondents agreed -- 4.4 percentage points lower than in the prior month.

The number of those who felt their families' financial situation would deteriorate over the next six months increased 4.2 percentage points to 17.1 per cent in May.

A rise in gas prices is likely one of the factors behind the dip in confidence, the board noted, although predicted hikes in the prices of other commodities such as food have also caused worry.
The last time consumer confidence fell sharply was in the fall of 2005 after Hurricane Katrina caused a spike in oil prices.

At Toronto's Eaton Centre yesterday, many shoppers agreed fuel prices were among the foremost concerns on their minds.

"I think everyone's watching their pennies because of the price of gas and the all the other things that are going up,'' explained shopper Rose Reffell.

"I think all the economies are suffering, so I don't think we're any worse than the States or Great Britain or anywhere else," she said.

Economy shrinks for first time in five years Grant Surridge, Financial Post

The Canadian economy shrank unexpectedly during the first three months of 2008, marking the first quarterly decline in almost five years.

The gross domestic product fell at an annualized rate of 0.3% in the first quarter, Statistics Canada said, the first decline since the second quarter of 2003. The drop was well below the roughly 0.4% annualized growth economists were predicting.

The Canadian economy began losing steam in the second half of last year as exports started to decline.

It then contracted in the first quarter because of widespread cutbacks in manufacturing related to rising inventories, most notably in the auto sector, the statistics agency said. Poor weather also hampered economic activity in the quarter.

A drop in inventories, much of it occurring at car dealerships, took the biggest chunk out of the gross domestic product. Consumer spending managed to hold strong, rising 3.2% in the quarter.
Douglas Porter, deputy chief economist with BMO Capital Markets, said the softness in real GDP gives a "highly distorted picture" of how the broader economy is faring, because real income growth remains bouyant. "Still, the weak results keep the door wide open for at least one more rate trim by the Bank of Canada in June."

The decline in Canada contrasts with the 0.9% annualized GDP growth reported south of the border for the first quarter.

For the month of March alone, the economy shrank 0.2%. That comes on the heels of a 0.3% drop in February.

With the quarter ending on successive monthly drops, CIBC World Markets economist Avery Shenfeld said the lack of momentum points to risks that the second quarter "won't be a whole lot better."

More gloom in the U.S. economy

The Associated Press NEW YORK

Dark clouds continue to hang over the U.S. economy: The manufacturing sector shrank for the fourth consecutive month, construction spending has been falling for more than two years, future orders are down and prices are skyrocketing.

The few bright spots, such as strong exports, may be the only things preventing a protracted recession, analysts said yesterday.

"It's exports, and, of course, government spending, that's keeping us above water,'' said John Silvia, chief economist at Wachovia Corp.

The Institute for Supply Management said yesterday that its manufacturing index rose to 49.6 from 48.6 per cent in April. It was below a reading of 50, signaling that business for machine-tool makers, chemical producers, food companies and many other industries is contracting.
And it appears activity could continue to shrink. Order backlogs, an indication of future work, fell 5.5 percentage points lower than April.

The report is "not a number that gives you a clear signal that things are going to improve dramatically, but given the overall report, it gives you some optimism,'' said Oscar Gonzalez, an economist at John Hancock Financial Services. "At least by this report, the economy is not heading into a severe recession.''

Wall Street took little comfort in the data. Stocks fell in late trading.

The ISM index showed some of the most pronounced weakness is in businesses related to construction, as the worst housing slump in decades shows no sign of abating.

The Commerce Department reported that construction activity fell 0.4 per cent in April, following a 0.6 per cent decline in March. Spending has not increased since last September.

Private residential housing construction dropped by 2.3 per cent last month, the 26th consecutive monthly decline. Private nonresidential building rose by 1.6 per cent, however.

Spending on shopping centres, office buildings and hotels gained despite the slump in business and vacation travel caused by the slowing economy and rising costs for gas and air tickets.

For manufacturers, prices continue to rise for everything from adhesives to scrap metal. The ISM's index of prices, which rose in May, is now the highest it has been since April 2004. Costs climbed for all commodities except zinc and methanol.

The rising cost of food and fuel, and the added inflation they could spark, may prompt the Federal Reserve to maintain interest rates at current levels when its policy-setting committee meets on June 25.

The Fed last lowered rates to two per cent in April, signalling the campaign that reduced rates seven times could be ending.

While inflation has battered U.S. consumers, the weak dollar has made U.S. exports cheaper for foreign buyers; as a result, exports grew at a 2.8 per cent pace in the first quarter, boosting businesses throughout the economy