Briefing highlights
- Bank of Canada expected to raise rates
- Britain’s Carillion in liquidation
- Collapse raises questions about Canadian workers
- U.S. markets closed
- TSX, currencies at a glance
- What to watch for this week
- Home sales rise in December
This is Blue Monday, a.k.a. the most depressing day of the year.
If you're Canadian, you're cold, in desperate need of sunlight and, no doubt, watching the holiday bills roll in. There's a pretty good chance, too, that you're buried in debt, so just wait until Wednesday, when you may well be staring an interest rate hike in the face.
Bank of Canada watchers expect governor Stephen Poloz, senior deputy Carolyn Wilkins and their policy-making colleagues to raise their key overnight rate by one-quarter of a percentage point, to 1.25 per cent.
That's still low, and a quarter-point's not much. But up to three rate hikes are expected this year. And if you're among the many Canadians who borrowed cheap over the past decade, so now you're saddled with a debt burden that ranks among the highest in the world, Wednesday could be depressing, indeed.
Of course, the timing could be right from a broader economic viewpoint, at least as the Bank of Canada sees it.
"Governor Poloz has consistently said that markets should look to the data for guidance on the direction for policy, and a jobless rate at the lowest level in at least 41 years, and generally upbeat sentiment point strongly toward a January rate hike," said Benjamin Reitzes, Canadian rates and macro strategist at Bank of Montreal.
"For those concerned about the caution points, Mr. Poloz has noted in recent months that markets pay too much attention to the minutiae of his words and the data should matter more. Even so, this decision isn't entirely clear cut."
Bank of Canada senior deputy governor Carolyn Wilkins and governor Stephen Poloz
Globe and Mail Update
Along with Wednesday's rate decision, which follows two increases and then a pause in 2017, the central bank will release a monetary policy report that's expected to include "some modest tweaking" to its economic projections," Mr. Reitzes said.
He expects the Bank of Canada to trim its economic growth forecasts for last year's fourth quarter to between 1.5 and 2 per cent, which would put 2017 as a whole at 3 per cent.
"Look for Q1 to get introduced at around 2 per cent," he added.
Canada had a healthy 2017, with blockbuster growth at the front end, followed by a slower second half. At this point, and amid uncertainties such as new mortgage regulations and negotiations to overhaul the North American free-trade agreement, economists expect slower growth this year, at just above 2 per cent.
Those uncertainties will also make for a cautious central bank.
"Given high household debt levels, uncertainty surrounding the impact of the [commercial bank regulator's] mortgage measures and risk associated with the NAFTA renegotiations, the bank must be careful in how quickly it raises rates so as to not derail the economy," said Toronto-Dominion Bank economist Dina Ignjatovic.
"As such, we expect a gradual pace of tightening over the next two years, of about 25 basis points every six months."
The central bank is also watching to see how last year's rate hikes are affecting Canadians, who are juggling heavy debts. The key measure of household debt to disposable income stood at above 171 per cent in the third quarter of 2017, and economists believe it may have fattened further in the final three months of last year.
There are also some reasons why Mr. Poloz and his colleagues might wait it out until their March meeting, among them still "soft" wage gains and the central bank's own labour market indicator, which still indicates some slack, BMO's Mr. Reitzes said.
"Beyond the data, and perhaps most importantly, the uncertainties around NAFTA, household debt, and new mortgage rules are big potential negatives for the outlook," he added.
"While the BoC has said they will not allow uncertainties to paralyze policy making, we'll see if their actions match their words. [Last] week's NAFTA headlines about higher odds of a U.S. exit might have sparked increased concern at the BoC, perhaps prompting at least some second thoughts before hiking."
There's also the issue of the Canadian dollar, which spiked on the last Statistics Canada jobs report as markets bet on a Wednesday rate hike, only to drop a few days later on those NAFTA fears.
"The accompanying statement has to be somewhat hawkish, as its main purpose will be to explain why a hike was necessary," CIBC World Markets chief economist Avery Shenfeld said of Wednesday's policy announcement.
"But the BoC might do a better job than it did in September in communicating the message that it can take its time on further hikes," he added.
"Its growth and inflation outlook should be little changed, but the bank could add a note of caution on trade issues as a way of cooling the fires of the Canadian dollar."
There are other views, of course..
David Rosenberg, for one, chief economist at Gluskin Sheff + Associates, believes the market overreacted to that labour market report, suggesting the jobs picture isn't as pretty as it seems.
And David Madani, senior Canada economist at Capital Economics, expects the central bank to raise rates this week, but be forced to backtrack later in the year because of housing market troubles.
And, of course, were the U.S. to actually pull out of NAFTA, economists believe the Bank of Canada would cut rates again.
(For the record, Blue Monday is believed to have its roots in a marketing campaign, but it has taken on a life of its own. The third Monday in January, it's said to be so depressing because of debts, bills and weather, among other things.)
- Barrie McKenna: Economy primed for rate hike. Now it’s up to Poloz
- Outlook 2018: Loonie (lame), interest rates (pain)
- Outlook 2018: The eroding wealth and hideous finances of Canadian families
- Rosenberg slams Bay Street for ‘cheerleading’ and ‘wild overreaction’ to economic data
- Rachelle Younglai: Canada’s jobless rate hit four-decade low in December as hiring surged
- David Parkinson: Canadian businesses face tight capacity as case for rate hike grows: BoC
- Prepare for higher interest rates as early as next week
Carillion collapses
One of Britain's largest construction companies, which has extensive operations in Canada, has been put into liquidation, throwing the future of 43,000 workers worldwide into doubt and raising troubling questions for Prime Minister Theresa May, The Globe and Mail's Paul Waldie reports.
Carillion PLC is involved in more than 400 government projects in the U.K. including construction of the new £1.4-billion ($2.4-billion Canadian) high-speed rail line. It also manages schools, prisons, military houses and provides maintenance services to Network Rail. In Canada, the company employs around 6,000 people and provides a variety of services in the energy, health care and transportation sectors.
The liquidation filing came after frantic efforts over the weekend by the company, its lenders and government officials to restructure Carillion's finances.
Read more
At a glance
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What to watch for this week
Derek Holt, head of capital markets economics at Bank of Nova Scotia, sums it up well: "[U.S.] government shutdown talks are at an advanced stage and will combine with the start of the Q4 earnings season to shape the main market risks over the coming week."
On the earnings front, a couple of big U.S. banks kicked things off last week, but there are several more over the next few days.
"Advance guidance has warned of a negative hit to short-term earnings primarily due to the repatriation tax on overseas profits and improved profit prospects thereafter," Mr. Holt said.
"That does not mean, however, that [this] week could not carry material surprises. The new information will be the baseline profits independent of the tax effects that analysts will be stripping out to focus upon earnings adjusted for tax policy changes."
And then there's Washington.
"A new funding deal or a continuing resolution that extends funding for a little longer will be needed in order to avoid a partial government shutdown by week's end," Mr. Holst said.
"At issue is that a whole lot of horse trading must go on with respect to issues that have absolutely nothing to do with funding government operations.
Tuesday: Earnings pick up
U.S. investors return to a pick-up in the pace of quarterly corporate reports, including Citigroup Inc., CSX Corp., Kinder Morgan Inc. and The Charles Schwab Corp.
It's also inflation day in Britain, and Royal Bank of Canada expects to see the annual rate dipped in December to 3 per cent from November's 3.1 per cent.
"Recall that, last month, confirmation of CPI inflation printing over one percentage point above the 2-per-cent target triggered the requirement for [Bank of England governor Mark] Carney to write an open letter of explanation to the Chancellor [of the Exchequer]," RBC said.
"That letter should be expected alongside the February inflation report from the Bank of England, even if CPI falls back below 3 per cent year over year, as expected."
Wednesday: Rate expectations
We've been over what to expect from the Bank of Canada, and we're already depressed, so no need to revisit it.
And if you happen to be debt-free, there are other things to watch for, anyway, notably earnings reports from Bank of America Corp., Goldman Sachs Group Inc., U.S. Bancorp and Alcoa Corp.
Watch, too, as executives of Facebook, Twitter and YouTube are called before the U.S. Senate commerce committee, which has scheduled a hearing to "examine the steps social media platforms are taking to combat the spread of extremist propaganda over the Internet."
Also on tap is the release of the Federal Reserve's Beige Book of regional economic conditions.
"The Fed's regional report will reflect a merry holiday shopping season, an upswing in business spending, and strengthening manufacturing and housing sectors," said BMO senior economist Sal Guatieri.
"Respondents should express more optimism following the passage of tax reform legislation," he added.
"On the downside, the report will likely confirm that worker shortages are spreading to more industries and regions. The last report (issued in late November) said employers were raising wages and non-wage benefits to retain and attract workers, a likely precursor of price hikes."
Thursday: China in focus
China releases several indicators, among them fourth-quarter gross domestic product, retail sales and industrial production.
Economists generally expect the report to show economic growth of 6.7 per cent.
That, said BMO senior economist Jennifer Lee, "would mark the smallest gain in just over a year, though, broadly speaking, in line with the average pace over the past three years."
There are also some big corporate earnings reports: American Express Co., Bank of New York Mellon, Canadian Pacific Railway Ltd., IBM and Morgan Stanley.
Friday: Factories
It's a slower pace to end the week, with little on the earnings front.
But we will get Statistics Canada's latest look at the manufacturing sector.
Observers expect the report to show shipments up by between 1.5 and 2 per cent in November.
"Manufacturers have been growing production volumes in the 2– to 3-per-cent range over the past year," said Nick Exarhos of CIBC.
"It's going to be hard to sustain that pace in the year ahead, with the turn in business investment needed to grow capacity unlikely to come in the near term."