Financial Update

Global markets plunge to two-year low

· TSX -297.59CP)Persistent worries about high energy-fuelled inflation and slowing earnings growth resulting from a 50% surge in oil prices this year slammed the Toronto stock market Monday and put the main index firmly in the red for the ytd
· Dow -56.58
· Dollar+.11c to $98.15US
· Oil -3.92 to $141.37US per barrel.
· Gold -4.60US to $927.30US per ounce

Canada's bosses worried about inflation

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Julian Beltrame The Canadian Press OTTAWA
Canadian businesses are sounding the alarm over inflation fears from rising fuel costs while remaining moderately upbeat about future economic prospects.

But the good news in the quarterly Bank of Canada survey of 100 companies was mostly a western phenomenon, with the preponderance of companies in the manufacturing-heavy East seeing slowing conditions ahead. And a separate survey -- this time of consumers conducted by the Conference Board of Canada -- has found gloom among Canadians spreading with the board's consumer confidence index dipping 6.2 points to 79.6, the lowest level since the fourth quarter of 1995. "I found it surprising that firms are more concerned about the inflationary impact of soaring oil prices than the growth impact,'' said Douglas Porter, deputy chief economist with BMO Capital Markets. "From the Bank of Canada's side there was a clear message they should be more concerned with inflation than growth at this point.''

Despite evidence the economy is slumping, executives polled between May 20 and June 13 were slightly more upbeat that their sales volumes would increase over the next 12 months than they were three months ago. 37% said sales would increase while 33 % said they would decline.
But there was more unanimity over the impact of energy prices, with 51 per cent predicting their input costs will rise due to soaring energy prices against 13 per cent who said costs would fall. As well, 42 per cent said they expect to pass on those higher costs to customers, as opposed to 22 per cent who predicted their output prices would fall. On a balance of opinion -- subtracting negative expectations from the positives -- both numbers were the highest ever recorded by the bank.

36% believed inflation will rise above 3% in the next two years, also a record response.

"The expected increase in input price growth over the next 12 months stems largely from the continuing strength in the prices of oil and other energy commodities, in combination with the higher prices of food and other non-energy commodities such as base metals,'' the bank said.
"Some firms also cited rising prices of imports from China.''

The rising price of gasoline was also a key factor in the Conference Board's finding of falling consumer confidence in Canada.

The survey of 2,000 conducted in early June found consumer confidence falling across all regions.

While concerns over fuel prices were expected, several economists said they were surprised businesses were not more pessimistic about the economy, which contracted by 0.3 per cent in the first quarter.

Bank of Nova Scotia economist Derek Holt suggested the positive sales increase numbers from executives may be due to the timing of the survey, which ended June 13, saying that market attitudes had soured since. "This update is unlikely to influence the Bank of Canada's rate decision on July 15th but reaffirms the bank's inflation concerns of late, at least in the short run,'' he said.

Porter also said he does not believe the central bank will move off its holding position on the overnight rate, but added governor Mark Carney now has added ammunition for the next move to be a hike later in the year.