Financial Update

'Economy remains robust,' Bank of Canada governor Carney says

· TSX -43.55 as a strong showing from financials was offset by resource shares that were hit by another sharp drop in oil prices
· Dow +207.38 swinging in the opposite direction as the drop in oil prices eased worries over inflation, while optimism was helped by unexpectedly strong earnings.
· Dollar -.46c to $99.32US
· Oil dropped sharply for a 3rd day in a row-$5.31 to $129.29US per barrel. One week ago crude hit an intraday record high of US$147.27 a barrel· Gold recovering 8.20to $970US per ounce
NY(Reuters) - Merrill Lynch & Co posted a much larger-than-expected $4.89 billion quarterly loss on Thursday after writing down soured debt, and unveiled plans to sell billions of dollars of assets -- including a part of its lucrative brokerage business -- to shore up capital. The loss was the 4th straight for Wall Street's 3rd largest investment bank, and was more than twice as big as analysts expected.

Carney …By Julian Beltrame, The Canadian Press

OTTAWA - Canadians all over the country are profiting from the ongoing commodities boom and helping to rescue the economy from recession, the Bank of Canada says.

"The Canadian economy remains robust," governor Mark Carney told a news conference after releasing the bank's quarterly monetary policy report update Thursday.

In surprisingly upbeat analysis given its warning two days earlier about spiking inflation, the central bank said "available evidence" indicates the economy has bounced back from a first-quarter dip and grew at an annualized rate of 0.8 per cent in the April-June quarter.

And it says the economy will recover further, growing at a rate of 1.3 per cent in the current July-September third quarter, 1.8 per cent in the fourth and 2.8 per cent in the first half of next year.

Unlike most industrialized countries, Canada benefits from rising oil and natural gas prices, Carney said - and this effect is not confined to Alberta and other producing provinces.

"There are variety of industries that feed into the energy industry, including manufacturing industries in Ontario and other areas of Central Canada; there are wealth effects in portfolios; there are wage effects for secondary and tertiary industries spread across the country," he said.
This money adds strength to other sectors, including construction and services in Central Canada, he added.

"And that puts us, in the industrialized countries, in very rare company."

Carney also said Canada's banking system is the envy of the world, as financial institutions in the United States and Europe remain enmeshed in an ongoing debt crunch.

"The Canadian system is very strong," he emphasized. "The banks are well capitalized, they are quite frankly at the leading edge of disclosure."

"In a world of de-leveraging of the financial system, many global financial institutions are trying to get where our financial institutions are, and they are quite a ways away."

The Bank of Canada's report says domestic borrowing is about three-quarters of a percentage point less expensive now than it was last summer at the beginning of the credit crisis.

The bank's latest assessment came as Ontario's manufacturing sector got more bad news with the announcement that Sterling Trucks is eliminating one of its two remaining shifts and laying off 720 workers this fall in St. Thomas.

The truck maker joins the growing ranks of Canadian manufacturers squeezed by an economic slowdown in the U.S. that has cut demand for everything from vehicles to lumber and cement.
And Jayson Myers of the Canadian Manufacturers and Exporters sharply questioned Carney's contention that oil wealth is being widely spread.

"If anybody should know it, the Bank of Canada should know it, the damage this is causing to the value-adding, the manufacturing sector and the high-value services sector," he said. "We are in very serious danger of losing a very large part of the value-adding sector of the economy."

Global Insight economist Dale Orr also questioned the central bank's contention that oil revenues are lifting most boats, saying provinces without oil and gas resources are net losers, particularly manufacturing-heavy Ontario.

The central bank, however, sees the economy as a glass half full and filling up quickly, more quickly than several economists said was likely.

"Our primary concern is that event risk will remain extraordinarily high and the financial infrastructure of the economy will remain strained for a long time yet," said Scotiabank economist Derek Holt.

The Bank of Canada's key concern remains inflation. But even here, it stressed that outsized price increases will be a passing phase and concentrated mostly on gas and fuel prices.

It says the consumer price index will rise sharply from the current annual rate of 2.2 per cent to 4.3 per cent in early 2009, then tumble down just as quickly to the two per cent target by the end of next year.

The overall thrust of the eight-page monetary policy report is positive, however, despite recent shaky economic data.

Even during the first quarter's 0.3 per cent pullback in gross domestic product - which it attributes to shoppers going on a winter holiday and businesses clearing inventories - incomes rose 2.4 per cent on an annualized basis thanks to an 8.1 per cent improvement in Canada's terms of trade - the price of exports relative to the cost of imports.

With more cash in their pockets, Canadians have returned to the stores and will continue to drive economic activity, the bank says.

Its analysis coincided with a report by the C.D. Howe Institute, a private-sector economic think-tank, and a warning from Export Development Corp., a federal Crown corporation.

Colin Busby, a policy analyst with C.D. Howe, said global demand for oil and gas has sent prices for Canadian energy exports to historic highs while the cost of imported machinery and other manufactured goods has fallen.

This, Busby said, mitigates the need for expansionist fiscal policy by Canadian governments and loose monetary policy by the central bank.

However, the EDC said the confidence of Canadian exporters has hit its lowest level since it began tracking their sentiment in 2000.

"Canadian exporters are clearly hurting right now thanks to a major slowdown in the U.S., a slowing global economy and a persistently high Canadian dollar," said EDC economist Peter Hall.
However, the Bank of Canada predicts the plight of exporters will ease as the impact of the past rapid appreciation of the Canadian dollar dissipates and the U.S. economy recovers.

While the bank downgraded its economic forecast for the year to one per cent growth, from the 1.4 per cent it predicted three months ago, its forecasts for 2009 and 2010 remain largely unchanged.

Although business borrowing has slowed, "growth in household credit remains robust," the bank said. "This likely reflects high employment and increases in wealth and real income."

The bank's forecast is based on the assumption that oil prices will remain near current levels but non-energy commodity prices will decline 15 per cent over the next two years, while the Canadian dollar will average 98 cents US.

It predicts U.S. growth of 1.6 per cent this year, slowing to 1.5 per cent next year, and global growth of 4.1 per cent this year and 3.4 per cent in 2009, pulled back by U.S. weakness.