The chase by Marty Cej:
The Bank of Canada yesterday cut its forecast for Canadian economic growth and warned that Europe will suffer at least a brief recession, presaging statements from Finance Minister Jim Flaherty later in the day that he will cut the government’s growth projections in the next few weeks and that Europe could trigger another global recession if it can’t resolve its persistent and worsening debt crisis. Today, European leaders will get another chance to fix their troubles and the Bank of Canada gets a chance to explain its latest interest rate decision in greater detail.
The Canadian central bank releases its Monetary Policy Report at 10:30 am Eastern. Linda Nazareth will report from the lock-up as the headlines break and we’ll follow the Q&A with Governor Mark Carney beginning at 11:15. We can expect Carney to field questions on the European mess, the pace of the U.S. economy, the impact of U.S. and European monetary policy on Canada, demand for Canadian exports from developing nations and maybe a question or two on the dollar. We can also expect Carney to field at least one direct question on when he might raise or cut the benchmark interest rate by an enthusiastic young journalist who has been put up to the question by his more experienced, smirking colleagues.
And now that the Bank of Canada has been explicit and as forthcoming with its monetary policy as any central bank can be, we’ll turn our attention to fiscal policy. Minister Flaherty refused to be drawn yesterday on whether the government will be able to stick to its plan to balance the budget by 2014.
Slowing economic growth will make it difficult (impossible?) to meet the government’s revenue expectations while at the same time increasing pressure on Ottawa to shelve planned spending cuts that might exacerbate a slowdown by putting more jobs at risk. And what about Canadians’ household debt levels, which are sitting at U.S.-like levels? And how about the still-booming real estate market? Are Canadians taking on too much risk with interest rates low and home prices continuing to rise?
We’ll also take a look at how interest rates being lower for longer will affect Canadian consumers and companies. Record low bond yields will put immense pressure on banks’ margins and prompt all sorts of accounting gymnastics at the insurers. Are current share prices justified by the outlook for slowing profit growth? And let’s not forget about the impact of puny yields on pension plans. Air Canada is a good example of a pension plan under pressure and it deserves a much closer look today.
And why are we talking about falling earnings expectations, record low bond yields and a slowing global economy? Because European leaders have yet to come up with a credible solution(s) to their debt crisis. Brussels today hosts the 14th crisis summit in 21 months – in fact, it hosts two summits today; a cocktail summit with all 27 leaders from the European Union at noon Eastern, followed by a dinner summit with just the 17 countries that share the euro currency. The 10 non-euro leaders will be shown into an adjacent room where they will sit at fold-out tables and be offered spaghetti or chicken fingers and fries. What markets hope to see is an agreement on detailed plans for bank recapitalizations, a bigger and bolder EFSF and sharper haircuts on Greek debt.
As much as expectations have been massaged lower, a major disappointment today will be priced out quickly and severely by financial markets.
In the meantime, industrial commodities are doing pretty well today after Chinese Premier Wen Jiabao said economic policy will be fine-tuned as needed and the Chinese industry minister said it is studying “stimulative policies” for smaller companies. The market has interpreted the comments as being pro-growth.
It is a big day for earnings. In Canada, we’re tackling Rogers Communications – which appears to have beaten expectations and has named a new CFO; Agnico-Eagle, Goldcorp, Methanex, Open Text and Lundin Mining.
In U.S. earnings, we have Ford, Boeing, Nasdaq, Lockheed Martin, Norfolk Southern, Sprint, Visa, Northrup Grumman and Corning.