Financial Update January 8th,2009

TSX falls hard
· TSX -350.77pts (Reuters) as oil and gold shares slid with commodity prices and profit-taking set in after six sessions of gains.
· DOW -245.40pts Startling job losses in the US and a warning from tech bellwether Intel Corp added to the gloomy investor sentiment and heightened fears of an extended recession.
· Dollar -1.01c to $.83.54US.
· Oil -$5.95to $42.63US per barrel. "Oil by far was the biggest negative. People were looking for inventories to build, but they built a lot more than expectations and that's why the price of oil has come down," said Ian Nakamoto, director of research at MacDougall, MacDougall & MacTier
· Gold -$24.30 to $841.10US per ounce
www.bankofcanada.ca/en/rates/bond-look.html Canadian bond prices

U.S. private-sector employers shed 693,000 jobs in December, a report by ADP Employer Services showed, suggesting more dire news to come in U.S. government jobs data due on Friday.
Canadian employment figures for December are also due on Friday and are to show the economy shed some 22,000 jobs. It will also likely underscore economists' forecasts that the economy is in for a rough ride through the first half of the year and will see little or no growth in 2009 as the recession takes hold.

David Friend The Canadian Press

Canadians should brace themselves for another year of economic woe that could top the misery that unfolded in the latter half of 2008, according to some of the country's leading bank economistsThe flood of dire financial challenges facing the United States is still working its way steadily across the border into Canada, TD Bank chief economist Don Drummond told a gathering at the Economic Club of Toronto yesterday.
"We shouldn't really be thankful for the end of 2008 because I think (it) will have proven to be a better year than 2009,'' he said.
"We'll have a rough fourth quarter, but it'll really hit in Canada in the first quarter, and we'll start to see a lot more variables that look somewhat like the United States.''
The dramatic economic decline will likely push Bank of Canada governor Mark Carney to further slash interest rates, to as low as 0.5 per cent, in an effort to fend off deepening economic problems, suggested Avery Shenfeld of CIBC.
"The Bank of Canada has been aggressively cutting interest rates and has more to do,'' he said at a news conference after the meeting.
However, he added that "going all the way to a zero interest rate might not be necessary, given that we're going to get the stimulus from both the U.S. actions and fiscal policy, and we also have a cheaper dollar.''
Last month, Canada's central bank slashed a key interest rate to 1.5 per cent, its lowest level in half a century.
The bank economists focused especially on the world economy, and how what started as a U.S. economic slowdown began to relentlessly expand in recent quarters.
"There is no question that the current situation is without precedent,'' said Bank of Montreal's Sherry Cooper.
"It is global, it is affecting sectors around the world and there is no place to hide.''
In Canada, the global economic meltdown will continue to affect the country for at least the first half of the year before it returns to moderate growth, the economists agreed.
A report from BMO Capital Markets suggested real GDP will contract just over two per cent, while unemployment will rise to eight per cent by the end of the year.
Home prices are also expected to erode further while consumer spending tightens, especially in auto sales, the BMO report said.
Cooper said she believes government policies and monetary stimulus will bring the country out of a recession, and that a recovery will start in the third quarter.
"At the end of the day we will have outperformed much of the rest of the world, certainly the rest of the G7,'' she said.

Canadians not deflated

Jacqueline Thorpe, Financial Post

Deflation may be public enemy number one among central bankers, monetary policy wonks and bond market aficionados, but a survey shows it has not even a blip on the average Canadian's radar screen.
The poll released Wednesday shows 50% of Canadians expect inflation to increase over the next year, versus 21% who expect the current recession to be deflationary.
The finding, contained in Pollara Inc.'s annual financial outlook survey, underscores the grip inflation continues to hold on the Canadian psyche. It could ultimately be a good thing, providing a bulwark against deflation -- a downward spiral in prices caused by consumers delaying purchases in anticipation of cheaper goods in the future. Deflation can become debilitating if it causes companies to cut production and employment, leading to ever-weaker output.
That inflation, rather than deflation, is still the main concern for Canadians could be understandable if the survey were conducted last summer when commodity prices were soaring and gasoline roared across $1 a litre, but the poll of 2,670 people was conducted between Dec. 11 and 15, 2008. That was after gas prices had tumbled, sale signs filled shopping malls, stock markets had tanked, house prices were beginning to fall and constant talk of depression and deflation filled the airwaves.
After decades of worrying about inflation, it could be that Canadians have not yet wrapped their heads around the idea that prices can also materially drop.
It could also be that with the domestic economy in relatively better shape than in the United States, Canadians simply do not see deflation posing as much of a threat as south of the border. There, the U.S. Federal Reserve has pulled out all the stops to try to prevent deflation, including cutting interest rates to nearly zero.
Meanwhile, it is hard for any average consumer to see lower prices as a threat.
"Nobody understands deflation can be bad for them because they don't recognize it could also involve their pay cheque," said Avery Shenfeld, senior economist at CIBC World Markets.
Mr. Shenfeld was among a panel economists who attended the release of the survey at an Economic Club of Toronto outlook on Wednesday.
"The reason prices are falling is usually that the economy is in a mess."
The Bank of Canada could take some heart in the perception that deflation is not considered as big a threat as policymakers or the media do. For deflation to become dangerous it has to seep into the consciousness, causing consumers to curtail purchases.
"Inflation expectations tend to be pretty sticky in both directions which is actually good thing for public policy," Mr. Shenfeld said.
While deflation is no big threat, the survey, with a margin of error of plus or minus two percentage points 19 times out of 20, shows Canadians see many economic demons over the next year: A record high 91% believe the economy is in recession; almost a third believe the recession will last 13 to 18 months; 68% believe employment will worsen while 31% believe either it somewhat likely or very likely someone in their household may lose a job.
Oddly, many Canadians still expect their personal financial situation to be maintained or even improved in 2009, said Michael Marzolini, chairman of Pollara. This could be because the Canadian unemployment rate has not dramatically soared yet.
Canadians are all government interventionists now, survey data show.
"The villains are on Wall Street or in Washington," Mr. Marzolini said of the average perception. "The current solution is direct government intervention, spending on infrastructure job retraining, tax cuts and even bailouts and protectionism. The private sector has become part of the problem. It has been seen to fail