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."