Financial Update For Nov. 24, 2009

TSX +44.69 to 11,624.02 touching its highest level in nearly 14 months as an early rally in oil prices powered energy stocks, while financials gained ground ahead of a flood of bank earnings reports.

• DOW +132.79

• Dollar +1.24c to 94.71US

• Oil +$0.09 to $77.56US per barrel.

• Gold +$5 to $1,164.70USD per ounce Gold prices extended their record run hitting a new all time high

BMO Financial Group, the first of Canada's banks to report its fourth quarter results, posted a 16% increase in profit Tuesday led by its personal and commercial banking segment.

Canadians can't shop their way to recovery, say economists

Paul Vieira, Financial Post

OTTAWA -- The robust retail data for September suggest domestic consumption was strong enough to help Canada post positive growth for the third quarter and, technically, pull the country out of a recession.

But a strong broad-based recovery - the type warranted following the depth of this recession - is not in the cards, at least for now, analysts warn, as the surging loonie and tepid U.S. household demand hold the Canadian economy back.

Consumer spending, in fact, may be the only thing going for the Canadian economy at this point - and even then it shouldn't come as much of a surprise given record-low interest rates, and the relative health of the Canadian housing and banking sectors vis-à-vis the United States.

There is certainly no denying the strength of the retail data, released Monday. Sales grew 1% month over month in September, Statistics Canada reported, following a similar, and upwardly revised, finding for August. Overall, it was the seventh monthly gain in the past nine months, and results in an annualized increase of 5.2% for the quarter. Consumer spending makes up roughly 60% of the Canadian economy.

"Right now, that's all there is" in the Canadian economy, said Carlos Leitao, chief economist at Montreal's Laurentian Bank Securities. "What is keeping the economy afloat is domestic demand. It can go for a while, but not forever. It's not sustainable."

Mr. Leitao added some of the retail surge in Canada may be due to households opting to open their wallets after fearing they were headed for a worst-case depression scenario.

However, in a note to clients, Laurentian Bank warned Canadian households continue to accumulate debt amid meagre income growth, and remain vulnerable to future economic shocks, such as sudden rate hikes or tax increases. Further concern emerged in insolvency data from last week, which suggested personal bankruptcies ramped up considerably in the third quarter - a sign that domestic consumption has its limits.

Douglas Porter, deputy chief economist at BMO Capital Markets, said some contribution from the trade-oriented sector is required to secure growth.

"We need some kind of recovery in exports and manufacturing, even if it is feeble, for a broad-based recovery. Domestic spending has been enough to end the recession. But it will not be enough to start a recovery."

For now, the September retail data, combined with gains in the month for manufacturing and wholesale sales, likely point to economic expansion for the final month of the third quarter, after July and August posted flat to negative growth. Economists, such as those at Royal Bank of Canada, now project GDP to expand anywhere from 0.5% to 1% for the three-month period ended Sept. 30 - well below most expectations for the period, including the 2% growth envisaged by the Bank of Canada.

Any hope for stronger growth won't materialize, Mr. Porter said, until there is evidence that the U.S. economy has "broken free from the shackles of its recession." The U.S. economy grew by an estimated 3.5% in the third quarter, but analysts argue the growth was "artificial" because it was spurred by government stimulus schemes, such as the cash-for-clunkers.

Meanwhile, the strong dollar, which gained more than US1¢ Monday, means manufactured goods are more expensive for U.S. consumers. But it also means lower prices for imports and that might be skewing the retail data, said Peter Hall, chief economist at Crown financier Export Development Canada. "That might be benefiting [domestic] consumption right now."

Should the Canadian dollar remain at current levels a year from now, Mr. Hall warned that could shave up to 3% from the country's bottom-line GDP. "That's pretty staggering."