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Briefing highlights

  • What to expect from BoC
  • Stocks, Canadian dollar, oil at a glance
  • What global PMIs show
  • Husky scales back spending plans
  • U.S. retailers in record Black Friday haul
  • What analysts are saying today
  • Required Reading

BoC expected to hold

About 40 central banks worldwide have eased up this year, but the Bank of Canada isn’t one of them and isn’t expected to join them this week.

“The BoC is very likely to again leave rates unchanged at its meeting on Wednesday, as still-solid domestic fundamentals and at-target inflation are balanced against remaining global downside risks,” said Veronica Clark, associate, U.S. economics, at Citigroup.

The central bank is worried about the global economic backdrop, specifically the uncertainty sparked by the Trump administration’s trade policy and its tariff war with China.

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Some economists believe Governor Stephen Poloz, Senior Deputy Governor Carolyn Wilkins and their colleagues may yet trim the bank’s benchmark overnight rate from its current 1.75 per cent as “insurance” against those global issues.

But not this week.

There’s just too much on the con side of the pros and cons to stop the Bank of Canada from marching to its own drummer.

First, Friday’s report on third-quarter gross domestic product was lame but highlighted some strong points, notably a hefty pickup in business investment.

“While some 40 central banks having eased monetary policy this year, we continue to think the BoC will remain an outsider by holding rates steady [this] week,” Royal Bank of Canada senior economists Nathan Janzen and Josh Nye said in a lookahead to the decision.

“That view was cemented by [Friday’s] GDP report, which showed a 1.3-per-cent annualized increase in Q3 that was bang-on the BoC’s forecast from October,” they added. “That’s a disappointing pace of growth regardless of expectations, but the details were actually slightly firmer than we thought. Business investment posted a surprising increase, marking just the second gain in the last six quarters.”

There’s an interesting side point here, as well, as Statistics Canada also revised some earlier quarters of GDP readings higher.

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“Material revisions left Canada’s growth rate tracking 1.7 per cent over the past year, much closer to the Bank of Canada’s estimate of potential than anticipated,” said CIBC World Markets senior economist Royce Mendes. “So, while the headline Q3 growth rate isn’t anything to write home about, the revisions coupled with strength in Q3 final domestic demand growth do reinforce the Bank of Canada’s current stand-pat view on rates.”

CIBC chief economist Avery Shenfeld, also pointed out that it will take some sour reports on the jobs market for the central bank to act soon.

“We’ll need to see a climb in the jobless rate over the next two surveys to maintain our projection for a Q1 quarter-point ease,” Mr. Shenfeld said, referring to CIBC’s forecast that the central bank will trim the overnight rate by one-quarter of a percentage point early next year.

Bank of Canada senior deputy governor Carolyn Wilkins and governor Stephen Poloz

Adrian Wyld/The Canadian Press

One of those sour jobs reports could come Friday, when Statistics Canada releases its November look at the labour market.

But it’s difficult to forecast what these reports will show.

Indeed, Bank of Montreal expects to see that Canada created 10,000 jobs last month as unemployment held at 5.5 per cent. CIBC, in turn, forecasts a loss of 9,000 positions, with the jobless rate rising to 5.7 per cent.

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Also at play are "a number of smaller factors telling the bank to hold tight," said BMO senior economist Robert Kavcic.

“First, housing activity has rebounded smartly in B.C. and Ontario, as the plunge in longer-term bond yields this year has done much of the work for the bank,” he added. “At the same time, mortgage credit growth has accelerated again – at just over 4 per cent, it’s not flashing warning signs, but the turnaround has reduced the impetus to ease.”

Another of those smaller factors is fiscal policy, and markets will learn more on Thursday in the new Liberal minority government’s Throne Speech.

“Fiscal policy is poised to add more to growth, with the federal budget deficit possibly jumping toward $30-billion in [fiscal year 2020-21] from $19.8-billion this year – the Throne Speech on Dec. 5 will be the first confidence test, and give a good indication of policy measures ahead,” Mr. Kavcic said.

Economists also don't expect much change in the central bank's statement Wednesday.

And if the market misinterprets anything, Deputy Governor Timothy Lane can clear it up, or just plain elaborate, when he gives an “economic progress report” to a business audience and holds a news conference in Ottawa Thursday.

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“We expect him to continue the messaging that the BoC has had over the last few weeks – downside risks to the outlook remain from global growth risks and trade uncertainty, but fundamentals remain solid in Canada with inflation at target,” said Citigroup’s Ms. Clark.

"This should continue to be the BoC’s base case into 2020, suggesting no need for further monetary policy accommodation if it holds," she added.

“While the BoC would lower rates if a substantially weaker outlook warranted it (along with the Fed), for now it will remain hesitant to do so given the future financial stability risks associated with a further build-up of debt given low interest rates.”

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Markets at a glance

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What global PMIs show

Canadian factory activity expands

From Reuters: Canadian manufacturing activity expanded in November for the third consecutive month as production climbed at a faster pace and new orders continued to grow, but the momentum was subdued compared to historical levels, data showed. The IHS Markit Canada manufacturing purchasing managers index, a measure of manufacturing business conditions, rose to a seasonally adjusted 51.4 in November, its highest level since February, from 51.2 in October. A reading above 50 shows expansion in the sector.

U.S. manufacturing contracts

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From Reuters: The U.S. economy’s manufacturing sector contracted for a fourth straight month in November as new order volumes slid back to around their lowest level since 2012, according to an industry report. The Institute for Supply Management said its index of national factory activity fell to 48.1 from 48.3 the month before. The employment index slid to 46.6 from 47.7 a month earlier, also marking a fourth consecutive month of declining employment in the sector. New orders dropped to 47.2 from 49.1, matching a reading from July that was the lowest since June 2012. The prices paid index rose to 46.7 from 45.5.

Worst may be over

From Reuters: Euro zone manufacturing activity contracted for a 10th straight month in November although the bloc’s battered factories may have turned a corner as forward-looking indicators in the survey appear to have passed a nadir. IHS Markit’s final manufacturing Purchasing Managers’ Index has been below the 50 mark separating growth from contraction since February, but at 46.9 it was above October’s 45.9 and higher than a preliminary estimate of 46.6.

German crunch eases

From Reuters: Germany’s export-dependent manufacturing sector contracted at a slower pace for the second month in a row in November, as companies sounded optimistic about their future business. IHS Markit’s purchasing managers index for manufacturing, which accounts for about a fifth of the economy, rose slightly for the second consecutive month to a five-month high reading of 44.1.

China manufacturing improves

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From Reuters: China’s factory activity showed surprising signs of improvement in November, with growth picking up to a near three-year high, a private sector survey showed, reinforcing upbeat government data released over the weekend. The Caixin/Markit manufacturing purchasing managers index rose to 51.8 in November from 51.7 in the previous month, marking the fastest expansion since December, 2016, when it was 51.9. Total new orders and factory production remained at buoyant levels in November, although they both eased slightly from record highs in the previous month, when they grew the fastest in over six years and nearly three years, respectively.

Husky scales back

Husky Energy Inc. is scaling back its spending from what it projected several months ago.

The Calgary-based company now plans 2020 capital spending of between $3.2-billion and $3.4-billion.

That represents a cut of $500-million over 2020-21 from what it projected it May, $100-million of it next year and $400-million a year later.

It also projected production of 295,000 to 310,000 barrels of oil equivalent a day.

Husky also said it assumes 2020 and 2021 prices of US$55 a barrel for the U.S. benchmark, West Texas intermediate. That’s down from the US$60 it assumed in May.

“At this pricing assumption, the company’s plan generates $500-million of free cash flow before dividends in 2020, growing to $1.5-billion in 2021,” it said.

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Ticker

Zijin to buy Continental

From Reuters: Zijin Mining Group Co., one of China’s biggest gold miners, has agreed to buy Canadian miner Continental Gold Inc for $1.33-billion, saying the purchase would increase its gold reserves and boost cash flow as well as profit. Zijin will pay $5.50 a share in cash for Continental, a premium of about 13 per cent to the Canadian company’s closing price on Friday, as it aims to secure Continental Gold’s flagship Buriticá gold project, the Chinese company said in a filing to the Shanghai Stock Exchange.

Retailers kick off Cyber Monday

From Reuters: U.S. retailers kicked off Cyber Monday by launching a slew of deals earlier than usual over the weekend, seeking to sustain the momentum of a record US$11.6-billion in online sales on Thanksgiving and Black Friday.

Saudis want deeper cuts

From Reuters: OPEC and its allies plan to deepen oil cuts and have the deal in place so it runs at least until June 2020 as Saudi Arabia wants to deliver a positive surprise to the market before the listing of Saudi Aramco, two sources familiar with the talks said. The deal being discussed by the Organization of the Petroleum Exporting Countries and other producers, known as OPEC+, would be to add at least 400,000 barrels per day to existing cuts of 1.2 million. The current deal runs to March. The IPO will be priced on Dec. 5, the same day OPEC meets in Vienna. The OPEC+ grouping holds talks on Dec. 6.

CEO pledges to improve Nissan performance

From Reuters: Nissan Motor Co. chief executive Makoto Uchida said he would work to improve the auto maker’s financial performance and co-operate closely with alliance partner Renault SA, while maintaining Nissan’s independence. Mr. Uchida became CEO of Nissan on Dec. 1, as Japan’s No. 2 car maker tries to recover from a profit slump and draw a line under a year of turmoil after the Carlos Ghosn scandal. Nissan is betting that bringing new blood into its executive ranks will help to get the company back on track financially after years of aggressive expansion in the United States and other regions pummelled overall profitability.

Also ...

What analysts are saying today

“The first Monday of the month sees a feast of manufacturing PMI data around the world and this morning the overall impression, with some exceptions, is slightly upbeat. Japan’s came in at 48.9, up from 48.4, India’s at 5.1 vs. 50.6, and China’s Caixin PMI came in at 51.8 vs. 51.7. Russia was the most striking disappointment at 45.6 vs. 47.2, but we saw a soft number for Sweden at 45.4 vs. 46 last, too. Markets haven’t looked beyond the Chinese data too much, and [the New Zealand and Australian dollars and Norway’s krone] lead cyclically sensitive currencies higher, while the yen is the worst of the G10 currencies, with the yuan also weaker after U.S./Chinese trade talks stalled in the wake of the U.S. bill supporting Hong Kong protesters.” Kit Juckes, global fixed income strategist, Société Générale

“Equities and oil prices are up on Monday in a sign of cautious optimism about the next steps toward a [U.S.-China] phase one trade deal. Reports on Sunday suggested the trade talks have stalled because of the disquiet in China about the Hong Kong legislation passed into law by President Donald Trump. China have reacted to the U.S. bill on Hong Kong with some countermeasures of their own, including delaying a decision on U.S. warships stopping in Hong Kong. Trade talks stalling is not good but it’s better than ending.” Jasper Lawler, head of research, London Capital Group

“Crude oil rose around 1 per cent at the start of the week, with speculation growing that OPEC could ramp up production restrictions in a bid to stabilize prices. With the gap between demand and supply expected to widen in 2020, the prospect of lower prices is clearly something that OPEC has to weigh up when they meet this week. However, with the U.S. pumping freely, the question is whether the likes of Saudi Arabia are willing to surrender further market share in a bid to raise the market pricing for all. However, with the final Saudi Aramco IPO set to be decided, there is a good chance that we could see Saudi-led action to help bolster oil prices in a bid to boost the short-term windfall they achieve from this historical listing.” Joshua Mahony, senior market analyst, IG

Required Reading

Revenue losses

Alberta’s property-tax break for gas producers is leaving municipalities facing losses of revenue. Emma Graney explains.

Toronto’s rental housing problem

The Toronto region has the highest proportion of renter households in Canada that don’t have enough room for all their occupants, a sign the city’s continuing rental crisis is forcing some tenants into cramped conditions to make ends meet. Matt Lundy reports.

Canada, India should collaborate

Columnist Rita Trichur looks at why Canada and India should collaborate on cybersecurity and bilateral trade as a hedge against China and the U.S.

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