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It looks like the Bank of Canada may follow in the Fed’s footsteps. In the past
two weeks, we’ve seen July GDP surge 0.7% and August inflation accelerate
in Canada. Usually, that combination would not be conducive to rate cuts,
but the GDP gain is simply unsustainable, as the big increases were in oil &
gas output and manufacturing. And, inflation is likely to retreat with
commodity prices falling and the economy slowing.
Given the recent dramatic turn of events in global financial markets and the
intensifying credit market strains, we now expect the Bank of Canada to cut rates at the
October 21 meeting, if not sooner. The two downside risks cited by the Bank—the U.S.
economy and credit conditions—have worsened markedly over the past three weeks.
The U.S. economy is in recession and the economic data stateside have deteriorated
further. Canada will feel the knock-on effects of the U.S. downturn. In addition, the
global slowdown is undercutting commodity prices, which will in turn weigh on
domestic demand in Canada. Meantime, credit conditions have tightened globally.
While Canada has fared better than most, we have been impacted as well. In response,
the Bank of Canada initiated at least $20 bln in PRAs in an attempt to calm money
markets. With these key risks intensifying, the Bank’s forecasts for Canadian growth and
inflation have likely been revised down, opening the door for easing at, or perhaps
before, the next scheduled meeting.
The credit crisis is taking big bites out of economic activity around the
world, and even the strongest Canadian provinces are not immune. The
challenge facing Central Canada is well-documented—a manufacturing
sector burdened by competitiveness issues and a deepening U.S.
downturn. While Ontario managed to skirt technical recession in Q2, real
ROBERT KAVCIC GDP was up only 0.2% y/y, the slowest pace in four years. Exports
continued to weigh on growth—final domestic demand was up a solid 4.2% y/y. The
outlook is even weaker as the credit crunch continues to take its toll on U.S. growth.
Meantime, the outlook for the once-resilient western provinces is now also
deteriorating. A global economic slowdown has dragged oil prices down more than
$50 in the space of just three months, to levels close to those that represent break-
even prices for marginal oil sands projects—most reports peg this in the $80-$90
range. At the same time, tighter credit conditions threaten to hit the resource and
agriculture sectors. While large oil companies have built up plenty of cash during the
commodity boom, the junior energy and farm sectors tend to be more financing-
dependent. Finally, tighter lending standards and declining confidence threaten to
weigh further on western housing markets that have led the country for the past four
years—average prices are down in B.C. for the first time since 2001, and residential
construction in Alberta is running at half the pace of last year. This is not a death
sentence for the economy of Western Canada—job growth and consumer spending
are still solid, and near-$100 oil will keep cash from existing projects flowing. Rather,
it’s meant to point out that no region of the country is fully sheltered from the howling
credit crisis, and a period of modest economic growth is in the cards out west after a
four-year boom.
CANADA
Real GDP at Basic Prices +0.7% (July)
CANADA Conference Board’s Consumer Confidence Index
• Despite decent economic +2.6 pts to 85.7 (Sep.)
data this week, equities Industrial Product Prices -0.2% (Aug.)
pummelled, led by
Raw Material Prices -7.7% (Aug.)
commodities
Auto Sales +1.7% y/y (Sep.)
• CAD weakens markedly
U.S.
Conference Board’s Consumer Confidence Index Nonfarm Payrolls -159,000 (Sep.)
UNITED STATES +1.3 pts to 59.8 (Sep.) Unemployment Rate unch at 6.1% (Sep.)—5-yr high
• Congress passes package Personal Income +0.5% (Aug.) Manufacturing ISM -6.4 pts to 43.5 (Sep.)
• Economic downturn sped Average Hourly Earnings +0.2% (Sep.) Factory Orders -4.0% (Aug.)
up in September Nonmanufacturing ISM -0.4 pts to 50.2 —but still Construction Spending unch (Aug.)
• Latest merger news: Wells expanding Real Personal Spending unch (Aug.)
Fargo and Wachovia. What Chicago PMI -1.2 pts to 56.7 (Sep.)—
about Citigroup? Redbook -1.3% (Sep. 27 wk)
but still expanding
Auto Sales -27% y/y (Sep.)
S&P Case-Shiller House Prices -16.3% y/y (July)
Challenger reports announced layoffs rise
33% y/y (Sep.)
EUROPE Initial Claims +1k to 497k (Sep. 27 wk)
Indications of stronger growth and a move toward price stability are good news for the economy.
Overnight Rate 3.83 3.00 3.00 2.67 v 2.50 v 2.50 v 2.58 v 3.17 v 4.35 3.13 v 2.69 v
3-month Treasury Bill 2.99 2.54 2.31 2.04 v 2.00 v 2.34 v 2.85 v 3.36 v 4.14 2.47 v 2.64 v
10-year Bond 3.73 3.67 3.63 3.38 v 3.40 v 3.57 3.76 3.94 4.27 3.60 3.67
Canada/U.S. Interest Rate Spreads
(average for the quarter : bps)
90-day 90 89 79 78 v 57 v 60 v 74 88 u -34 84 v 70 v
10-year 7 -22 -23 -12 u -13 u -17 u -21 u -24 u -36 -12 -19 u
UNITED STATES
Real GDP (q/q % chng : a.r.) 0.9 2.8 -0.6 v -0.6 0.5 v 1.4 v 2.2 u 2.5 u 2.0 1.5 0.8 v
Consumer Price Index (y/y % chng) 4.2 4.3 5.3 4.3 3.6 2.7 1.5 1.6 2.9 4.5 2.3
Unemployment Rate (%) 4.9 5.3 6.0 6.4 6.6 6.8 6.8 7.0 4.6 5.6 6.8
Housing Starts (mlns : a.r.) 1.05 1.03 0.91 0.83 0.80 0.83 0.89 0.95 1.34 0.96 0.87
Current Account Balance ($blns : a.r.) -703 -733 -702 -643 -609 -577 -553 -539 -731 -695 -570
Interest Rates
(average for the quarter : %)
Fed Funds Target Rate 2.75 2.00 2.00 1.50 v 1.50 v 1.50 v 1.58 v 2.08 v 5.00 2.06 v 1.67 v
3-month Treasury Bill 2.09 1.66 1.52 1.26 v 1.43 v 1.74 v 2.11 v 2.48 v 4.47 1.63 v 1.94 v
10-year Note 3.66 3.88 3.86 3.49 v 3.53 v 3.74 v 3.96 v 4.18 v 4.63 3.73 v 3.85 v
EXCHANGE RATES
(average for the quarter)
US¢/C$ 99.6 99.0 96.0 93.0 v 92.0 v 91.2 v 90.4 v 89.6 v 93.5 96.9 v 90.8 v
C$/US$ 1.004 1.010 1.042 1.075 1.087 1.097 1.107 1.117 1.074 1.033 1.102
¥/US$ 105 105 108 108 v 110 v 114 113 111 118 106 v 112 v
US$/Euro 1.50 1.56 1.50 1.39 v 1.38 v 1.35 v 1.33 v 1.31 v 1.37 1.49 v 1.34 v
US$/£ 1.98 1.97 1.89 1.77 1.74 1.73 1.72 1.70 2.00 1.90 1.72
Note: Blocked areas represent BMO Capital Markets forecasts
Up and down arrows indicate changes to the forecast uv
Employment Coming just days before the federal election, and during the midst of the financial
Friday, 7:00 am hurricane, the September employment report will carry some outsized attention.
Sep. (e) unch However, since the survey was conducted in the middle of the month (i.e. before the
Consensus +12,500 (+0.1%)
Aug. +15,200 (+0.1%) worst of the turmoil), the results may lack fireworks. Looking through the recent big
Unemployment Rate swings in employment, there has been no net new job creation over the past six
Sep. (e) 6.2% months, and we expect a similar no-growth story for September, with the risks tilted to
Consensus 6.2%
Aug. 6.1% the downside. That may compare favourably with the 9-month string of job losses in
Average Hourly Wages the U.S., but it’s a long way from last year’s average monthly gain of 30,000. The
Sep. (e) +3.7% y/y subdued performance is expected to bump up the unemployment rate a tick to 6.2%,
Aug. +3.8% y/y
matching the highest level since late 2006, and up from the 5.8% secular low at the
start of the year. Average wages are likely to moderate a bit further to a 3.7% y/y pace,
well down from the scorching 4.9% peak also seen at the start of the year.
Merchandise Trade Surplus Exports likely weakened in August amid a pullback in commodity prices and slowing
Friday, 8:30 am U.S. spending. That should cut the trade surplus to $4.2 billion from July’s $4.9 billion,
Aug. (e) $4.2 bln taking it to a six-month low. But we likely “ain’t seen nothing yet” on the trade front,
Consensus $4.7 bln
July $4.9 bln with resource prices in retreat and the U.S. consumer battening down the hatches. As
recently as late last year, the surplus dipped to $2 billion, and it could easily go lower
still if the U.S. economy takes a serious step back. Net exports look to remain the
biggest drag on the Canadian economy for quite some time yet.
Bank of Canada Surveys In an already crowded economic calendar on Friday, the Bank of Canada will for the
Friday, 10:30 am first time release the results of its Senior Loan Officer Survey. This will provide some
clear evidence if lending standards have been significantly changed in Canada in
recent months. (The only caveat would be that the survey may already be a tad dated,
since it was likely conducted prior to the most intense financial turmoil.) Perhaps
providing an early read, Governor Carney said in last week’s speech that “there is no
evidence at this point that our corporations are facing unusual credit restrictions”. In
addition, the Bank will also release its usual Business Outlook Survey, and it’s expected
to show some ratcheting back in expectations for sales, employment and capital
spending, as well as less serious price pressures.
Pending Home Sales Look for pending home sales to drop for the second straight month in August. We are
Wednesday, 10:00 am calling for a 1% decline in this leading indicator of housing activity, adding to July’s
Aug. (e) -1.0% outsized 3.2% fall. This will leave sales just slightly below year-ago levels, as dramatically
Consensus -1.1%
July -3.2% reduced prices and foreclosures beckon to potential homebuyers with the ability to
obtain credit. Anecdotal reports also suggest that foreigners are taking advantage of
these times as their opportunity to dip their toes into the U.S. housing market.
Trade Deficit The August trade deficit is expected to narrow but only modestly. Crude oil prices
Friday, 8:30 am dropped, on average, by about $15/bbl in the month but it takes time to show up in
Aug. (e) $59.5 bln the trade data. Meantime, after possibly hitting rock bottom in July, the Fed’s trade-
Consensus $59.0 bln
July $62.2 bln weighted U.S. dollar surged in August, which will curb already-slowing export activity.
Also, the exports component in the manufacturing ISM series leads the trade numbers
by a month or two and the component edged lower in June and July, suggesting that
exports grew at a slower pace in August. Finally, China’s trade surplus continued to
widen in the month. Look for a trade shortfall of about $60 bln in the month.
AUSTRALIA MEXICO
Employment Trade Deficit
Sep. (e) unch Aug. F (e) $2.2 bln
Aug. +14,600 July $1.1 bln
Reserve Bank of Australia Monetary Jobless Rate
Sep. (e) 4.3%
Policy Meeting
Aug. 4.1%
MEXICO
CPI Core CPI
Sep. (e) +0.7% +0.6%
Aug. +0.6% +0.4%
OCTOBER 6 – OCTOBER 10 North American Calendar
MONDAY OCTOBER 6 TUESDAY OCTOBER 7 WEDNESDAY OCTOBER 8 THURSDAY OCTOBER 9 FRIDAY OCTOBER 10
CANADA
8:55 am Redbook 10:00 am Pending Home Sales 8:30 am Initial Claims 8:30 am New Housing Price Index
Oct. 4 Aug. (e) -1.0% Oct. 4 (e) 475,000 (-22,000) Aug. (e) +0.1% +2.3% y/y
Sep. 27 -1.3% Consensus -1.1% Sep. 27 497,000 (+1,000) July +0.1% +2.7% y/y
July -3.2% 10:00 am Wholesale Inventories
1:15 pm Fed Chairman Bernanke 10:30 am BoC Business Outlook and
10:35 am DoE’s Petroleum Status Aug. (e) +0.4%
speaks on the economy Report (Oct. 3 week) Consensus +0.4% Senior Loan Officer Surveys
and markets in July +1.4% (Q3)
Washington 10:00 am Conference Board CEO
Confidence Index*
2:00 pm FOMC Minutes from Q3 8:30 am Goods & Services
Q2 39 Trade Deficit
September meeting
10:35 am DoE’s Natural Gas Status Aug. (e) $59.5 bln
3:00 pm Consumer Credit Report (Oct. 3 week) Consensus $59.0 bln
Aug. (e) +$5.0 bln July $62.2 bln
Chain-Store Sales
Consensus +$5.8 bln 8:30 am Import Ex.
Sep. (e) +1.4% y/y
July +$4.6 bln Prices Petroleum
Aug. +1.7% y/y
5:00 pm ABC News/Washington Sep. (e) -3.0% -1.0%
Post Consumer Comfort Consensus -2.5% n.a.
Index Aug. -3.7% -0.3%
Oct. 5 2:00 pm Budget Surplus
Sep. 28 -41 Sep. ’08 (e) $60.0 bln
Sep. ’07 $111.6 bln
Presidential Debate
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