Briefing highlights
- How interest rates could jump
- Economy expands 0.1% in August
- Markets at a glance
- Barrick, Randgold raise dividends
- Air Canada quarterly profit slumps
- Cenovus to cut spending, posts loss
- Torstar posts quarterly loss
- GM tops earnings estimates
- Centerra won’t ‘engage’ on takeover
- What to watch for today
Home for the holidays
Here’s a “sad truth,” courtesy of Ian Pollick: Interest rates could jump again just in time for holiday shopping.
Indeed, the head of North American rates strategy at Canadian Imperial Bank of Commerce says the Bank of Canada may have boxed itself in with its recent comments, inadvertently signaling to markets what could come if economic indicators are strong through November.
Many observers, including Mr. Pollick, expect the central bank won’t touch its benchmark overnight rate until January, but could, in fact, move again at its next meeting in early December.
Which makes some indicators, including one today, important.
To recap, Bank of Canada governor Stephen Poloz, senior deputy governor Carolyn Wilkins and their colleagues raised the benchmark to 1.75 per cent last week. And, as The Globe and Mail’s Barrie McKenna reports, they made it clear they’re going to keep on raising rates.
But how fast they do that will depend on the numbers.
Mr. Poloz drove home that point again Tuesday when he and Ms. Wilkins appeared before the House of Commons finance committee.
Bank of Canada governor Stephen Poloz and senior deputy governor Carolyn Wilkins speak as they review a document on an electronic device before appearing at the House of Commons Standing Committee on Finance, Tuesday, Oct. 30, 2018, in OttawaAdrian Wyld/The Canadian Press
“The policy rate will need to rise to neutral to achieve our inflation target,” Mr. Poloz reiterated.
“That said, the appropriate pace of increases will depend on our assessment at each fixed announcement date of how the outlook for inflation and related risks are evolving,” he added in the text of his opening statement, echoing what the central bank said when it raised the key rate by one-quarter of a percentage point last week.
“In particular, we will continue to take into account how the economy is adjusting to higher interest rates, given the elevated level of household debt, and whether strong consumer confidence builds on solid job and income growth and leads to greater-than-expected consumption.”
Key last week was the central bank’s decision to drop from its statement a reference to a “gradual” path for rate increases.
Asked by the committee Tuesday, Ms. Wilkins said she and her colleagues did that so markets wouldn’t just assume the key rate would rise at every second meeting, and that decisions were based on data.
All of this means that each central bank meeting is a “live” one, said CIBC’s Mr. Pollick, noting the importance of recognizing the sad truth he cited.
“To the degree that the bank just told the market ‘every meeting is live’ and, should the November data cycle be a strong one, then it would behoove BoC to hike at that time,” Mr. Pollick said in a report.
He’s not advocating that, by the way.
“The sad truth is that while we dogmatically believe they couldn’t do a back-to-back hike, if data are strong we may be proven wrong,” Mr. Pollick said later.
“The BoC suggested they altered their language because they did not want financial markets to ‘assume’ a pre-ordained hiking cycle – specifically, a hike at every other meeting,” he added.
“If we went through a strong data cycle in November, it would be odd for the bank not to go (unless there was a total meltdown in risk assets) in December. Presumably, if December is skipped given good data, then January is in play and that would be a hike at ‘every other meeting.’ While we disagree with the magnitude of their suggested rate path, we agree on the direction.”
The latest report on the economy, from Statistics Canada today, pegged growth at 0.1 per cent in August, pumped up by the resources and financial services sectors. Note, though, that 12 of 20 sectors slumped.
“While August’s GDP was slightly better than expected, the gains were not widespread, with only eight of the 20 broad industrial sectors seeing higher output,” said National Bank senior economist Krishen Rangasamy.
“The rebound in oil and gas was expected amidst the restart of some of Syncrude’s operations (after a prior outage),” he added.
“The services sector was powered by finance/insurance and real estate. That’s much in line with the observed stabilization of the housing market (home sales bounced back in Q3) after a rough start to the year. All in all, this morning’s report does not change our view that real GDP growth should moderate to just under 2 per cent, annualized, in Q3, following a 2.9-per-cent print in Q2.”
Read more
- Barrie McKenna: Bank of Canada raises key rate again, hints at more frequent increases ahead
- Poloz reiterates that interest rates need to keep rising
- David Parkinson: Faster BoC rate hikes now will help prevent more later
- Expect a rate hike and more mellow Bank of Canada this week. (No, not mellow just because of that)
- David Parkinson: For Canada’s economy, USMCA’s biggest benefit is end of uncertainty
Markets at a glance
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Barrick, Randgold boost dividends
Barrick Gold Corp. and Randgold Resources Ltd. are sweetening their pots in advance of their big merger.
Randgold’s 2018 dividend will now come in at US$2.69 a share, up from the original US$2, while Barrick’s fourth-quarter payout will rise by 2 US cents to 7 US cents.
Toronto-based Barrick also said it will “target” an ongoing annual dividend of 16 US cents, up four pennies from what it now pays, “based on the strong fundamentals of Barrick at present and following completion of the merger, including stronger cash flow generation, additional overhead cost savings, potential asset sale proceeds, and lower interest costs.”
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What to watch for today
A strong lineup of quarterly corporate results: Air Canada, Cenovus, Cogeco Inc. and Cogeco Communications Ltd., General Motors, GlaxoSmithKline, Great-West Lifeco Inc., Kellogg Co., Sherritt International Corp., Suncor, Torstar Corp. and TransAlta Corp.
“The Q3 earnings season has been solid, with growth holding up around 20 per cent year over year,” said BMO senior economist Robert Kavcic.
“But, like with the broader economy, the caution is that we’ve now seen the highs - sequential growth has begun to fade, and year-over-year growth is set to slow meaningfully in the upcoming quarters to a more normal clip,” he added.
“We’ve also seen some high-profile top line/sales guidance misses. In fact, the overall share of S&P 500 companies beating revenue expectations has slumped to below 45 per cent as the season has played out, down from nearly 70 per cent around the middle of the year. Keep in mind that this now looks a lot more normal (see the ratio through 2015 and 2016). But ‘normal’ was obviously not good enough for a heated equity market.”
Read more
- Air Canada quarterly profit slumps on higher fuel costs
- Cenovus to cut spending as it posts loss on higher expenses, lower crude prices
- Torstar reports third-quarter loss as revenue falls
- GM reports profit well above estimates, sees strong full year
Michael Babad