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Briefing highlights

  • Impact of wage hikes small
  • Markets at a glance
  • TD takes U.S. tax hit
  • Lululemon upgrades forecast
  • CIBC buys Wellington Financial
  • Companies more optimistic
  • Cash for rate hike grows
  • What to watch for this week

'Storm in a teacup'

As economist David Madani puts it, minimum wage hikes are a tempest in a teacup.

Or, given what's happened in Ontario, I guess a Tim Hortons cup might be more apt.

Mr. Madani, senior Canada economist at Capital Economics, wasn't referring to the decision by a couple of Tim Hortons franchises to cut back benefits and paid breaks for workers in Ontario, where the minimum wage jumped last week to $14 from $11.60, with another raise on the way.

He was, rather, referring to the debate over the economic impact of the increases, which the Tim Hortons news stirred up again.

"Minimum wage hikes are a storm in a teacup," Mr. Madani said.

"Minimum wage increases in Ontario and Alberta this year will have only a modest positive effect on aggregate labour income, suggesting that any increase in unit labour costs and inflation will likely be negligible," he added in a study.

"We doubt that the increases will prompt many businesses to raise prices significantly. While some businesses might reduce employee work benefits or reduce staffing levels, it's also important to highlight that, given healthy industry profit margins, there is scope for businesses to absorb higher costs without raising prices or delaying planned investments."

The overall effect is "far from clear cut" because there are both pros and cons.

First, the increases may "limit employment gains in low-paid sectors." But they "won't have a big impact on the broader economy or inflation," and, thus, won't sway the Bank of Canada.

Mr. Madani studied the potential impact on aggregate labour income by looking at the proportion of minimum-wage earners, who account for as little as about 5 per cent of Saskatchewan's work force to as many as almost 12 per cent in Ontario.

According to his calculations, minimum-wage earners number about 1.3 million across the country, or 8 per cent of employees, with Ontario home to 720,00 or 5 per cent of Canadian workers.

Add to that the fact that minimum-wage earners often work fewer hours than their salaried counterparts, averaging 30 hours a week compared to 37.

"On that basis, the average weekly earnings of minimum wage employees in Ontario will likely increase to as high as $420, from $348," Mr. Madani said.

"Annually, that amounts to $21,000, up from $17,400," he added, basing this on a 50-week work year.

"Given the 720,000 workers on minimum wage, that increase in annual wages will be worth $2.6-billion, which is a modest 0.3 per cent of national aggregate labour income. Similar calculations for the other provinces reveal an even smaller positive impact, all else constant."

To be clear, Mr. Madani was discussing economics. He wasn't wading into the debate over what's right and wrong.

But I am: Imagine trying to live on just $21,000. And on top of that you suffer a cut to benefits and breaks.

And, to be even more clear:

Canada's jobs market may be on fire, but that doesn't mean higher-paid opportunities necessarily abound for some workers.

And if there's going to be a setback to employment growth, now is as good a time as any, with the jobless rate at a decades-low of 5.7 per cent after the creation of almost 425,000 positions last year, most of them full-time.

And we're still talking about employment growth. Toronto-Dominion Bank, for example, still projects job gains of 1.2 per cent in Ontario this year, and 0.5 per cent next, with the jobless rate easing to below 6 per cent. Alberta is forecast to see jobs growth of 1.6 and 1 per cent, with unemployment falling to about 7 per cent from the oil-shock high of more than 8 per cent.

And inequality is a beast.

And the someone who serves you coffee still deserves a decent wage.

Starbucks plans to change nothing.

"At Starbucks Canada we are not cutting shifts or hours, and have no planned price changes as a result of the minimum wage increase in Ontario," the chain said in a statement, boasting of a "comprehensive" employee package that remains the same.

"Partners who work a minimum of 20 hours a week are eligible to receive customizable medical and dental benefits, tuition reimbursements, Starbucks 'Bean Stock,' future savings, along with career and personal support services, a free pound of coffee each week, in-store discounts and other great perks. This includes our leading $5,000-a-year mental health benefit for psychology and social worker services."

Oh, and back to that earlier point from Mr. Madani about "currently relatively high" profit margins and the ability to swallow higher costs:

"Profit margins in the retail, and food and accommodation industries are 3.6 per cent and 5.3 per cent, respectively, well above their long-term historical averages of 2.9 per cent and 4.2 per cent."

For the record, what happened at Tim Hortons was decided by the franchises in question, not the corporate parent, which has criticized the moves.

My bleeding heart aside, Mr. Madani's point is that the effect on unit labour costs and inflation will probably be tiny.

"Since minimum wage hikes raise production costs for most businesses, there's also the risk that part of the increase will be passed along to all consumers," he added.

"The Bank of Canada estimates, however, that the overall impact on inflation and real aggregate wages are likely to be minuscule to ambiguous."

There will be a hit employment growth, though projections vary. Consider that a recent Bank of Canada study put the number at about 60,000 jobs over a couple of years.

"There is plenty of uncertainty around those job losses, however, with the bank suggesting a broad range of between 30,000 and 140,000," Mr. Madani said.

"Even 60,000 would represent a significant decline of nearly 10 per cent given that there are only 720,000 minimum-wage workers to start with in Ontario," he added.

"The estimate of job losses also doesn't account for the likely loss of hours worked among those who manage to keep their jobs. The upshot is that the overall boost to national income from the higher minimum wage will be very modest."

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Markets at a glance

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TD takes tax hit

Toronto-Dominion Bank expects a hit of about $400-million to its first-quarter profit from the Trump administration's tax overhaul.

The Canadian bank said today the new legislation "makes broad and complex changes to the U.S. tax code that will take time to interpret," but it will prompt TD to adjust both its American deferred tax assets and liabilities to the lower base rate and the carrying balances of investments related to tax credits.

That will cut earnings on a one-time basis.

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Lululemon sees better fourth quarter

Lululemon Athletica Inc. is kicking off 2018 with stronger projections for its fourth-quarter results.

The Canadian yoga wear retailer said today it now expects to report fourth-quarter revenue of $905-million (U.S.) to $915-million, up from its earlier forecast of $870-million to $8.85-million.

It also projected earnings per share of $1.24 to $1.26, up from $1.18 to $1.21.

"We are thrilled with our performance this holiday season," chief executive officer Laurent Potdevin said in a statement in advance of meeting today with analysts and investors.

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'Vacation's over, young man': The week ahead

My mom had a stock phrase that she'd pull out on the last day of every summer and winter break when I was a kid: "Vacation's over, young man."

It drove me nuts then, and irks me to this day. But she'd be right this time around, given what's on tap for the next few days compared to last week's immediate post-holiday calendar.

We'll get some biggies on the economic and corporate fronts that hold clues to the year ahead for investors still savouring the rally in stocks.

"Equity markets picked up right where they left off, posting strong gains across the board [last] week," said Bank of Montreal senior economist Robert Kavcic.

"No, that thumping sound wasn't bitcoin hitting the floor or iguanas dropping out of trees, it was the bulls getting an early start on 2018. The S&P 500 rose 2.6 per cent, with technology, energy and materials leading, while defensive and rate-sensitive sectors lagged."

Tuesday: Avon calling

RBC expects the euro zone's labour report to show further, if modest, easing of unemployment in November, with a decline in the jobless rate of 0.1 of a percentage point to 8.7 per cent.

"Were the recent trend in the unemployment rate to continue through 2018, that could see the rate fall below 8 per cent by year-end," RBC said.

"And the most recent country-level data provide a number of reasons to believe that is a possibility, with the September and October data showing unemployment at last beginning to fall in France."

In Canada, we get the latest look at the housing market. Canada Mortgage and Housing Corp. releases its monthly reading of construction starts, for December, which CIBC World Markets expects will show a drop in the annual pace.

"A very mild November gave builders soft ground for their shovels to break into, but December will be a different story," said CIBC's Nick Exarhos.

"Starts are poised to decelerate significantly from the 252,000 pace seen the prior month, coming down all the way to 207,000. Still, that's in line with the underlying trend in [building] permits, and still signals healthy demand for housing."

There are also a couple of quarterly earnings reports, from Avon Products Co. and, just to grease the markets, WD-40 Co.

Wednesday: More housing

Statistics Canada is expected to give us the second look at the housing market, with November building permits, which BMO believes will show a decline in value of 3 per cent.

Investors also get a glimpse of how consumer prices fared in China in December, along with financial results from Lennar Corp, among others.

Thursday: Ready, Mr. Trump?

China reports its latest trade reading, which will, of course, show another surplus in December, more ammunition for the Trump administration.

And some market biggies: Bank of America Corp kicks off U.S. bank earnings, while Delta Air Lines Inc. also reports.

Friday: Happy holidays?

Federal Reserve watchers will be eyeing the U.S. report on inflation, which economists expect to show a dip to 2.1 per cent on an annual basis in December from 2.2 per cent a month earlier.

"A drop in gasoline prices over the course of the month likely left consumer prices up only 0.1 per cent on a seasonally adjusted basis in December," said Royce Mendes of CIBC.

"That will still leave headline inflation running at a decent 2.1 per cent, but that won't be much solace to Fed policy makers," he added.

"A 0.2-per-cent increase on the core measure will see [core] inflation remain at 1.7 per cent, keeping central bankers cautious in the first quarter."

    Alongside the inflation reading will be a report on retail sales, which analysts believe rose by about 0.4 to 0.6 per cent in that crucial month of December.

    "It was a decent holiday shopping season, the best since 2011, according to reports, paced by online activity, but even traditional retailers did okay," said BMO deputy chief economist Michael Gregory.

    "We look for retail sales to rise 0.6 per cent in December, after rising 0.8 per cent in November, also reflecting a pickup in vehicle sales and a nudge up in (seasonally adjusted) gasoline prices."

    On the corporate side, BlackRock Inc. reports results, as do JPMorgan Chase &Co. and Wells Fargo & Co.

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