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

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.

Financial Update

TSX +111.15 kicking off the week by surging higher, buoyed by firm oil prices and a jump by BCE Inc after Canada's top court backed the buyout of the telecom company....

· Dow -.33

· Dollar -.11c to $98.44.

· Oil +1.38 to $136.74US per barrel

· Gold -$16.50US to $887.20US

Bond Rates: http://www.bankofcanada.ca/en/rates/bonds.html <http://www.bankofcanada.ca/en/rates/bonds.html>


Bank of Canada ceases $1B in liquidity injections

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Record staff and Record news services The Bank of Canada says it won't renew a $1 billion term liquidity injection to chartered banks once it has matured on Thursday, a further sign that the central bank believes the credit crisis is easing in Canada. The central bank cited "continuing improvement in market conditions since the end of April'' for the decision. "Indicative measures of bank funding costs remain well below those in a number of other major currencies,'' the bank said in a statement. The bank has been providing two streams of $2 billion in cash injections through 28-day purchase-and-resale agreements since December, but has of late begun to reduce the rollovers to $1 billion upon reaching maturity. Yesterday's announcement effectively removes one stream with the second maturing on July 10.

CIBC likely to take another big hit after downgrades

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David Friend The Canadian Press

Canadian Imperial Bank of Commerce is likely to endure another multi-billion charge that could dig more than $2 billion out of its flesh in the third quarter, some industry watchers are predicting. Estimates ranged from $1 billion to more than $2 billion yesterday as analysts weighed in on Moody's downgrading monoline insurer XL Capital Assurance to junk late last week."We expect CIBC will write off its remaining fair value exposure to XLCA in its third-quarter 2008 results,'' Blackmont Capital analyst Brad Smith wrote in a note, putting the total writedown at $1 billion.