Bank of Canada cuts key interest rate quarter-percentage-point- markets rally!

The Bank of Canada announced a surprise quarter-percentage-point cut to its key interest rate Wednesday – a move it calls “insurance” against the potentially destructive effects of the oil price collapse.

The reduction in the bank’s overnight rate to 0.75 per cent from 1 per cent – its first move since September, 2010 – comes as a precipitous drop in the price of crude slams Canada’s oil-dependent economy.

The oil shock will be “negative for growth and underlying inflation in Canada,” the bank warned in a statement.

Bank of Canada Governor Stephen Poloz is expected to explain his dramatic decision at an 11.15 a.m. news conference in Ottawa Wednesday.

The rate move, which few analysts anticipated, is an attempt by Mr. Poloz to shield highly indebted Canadian households from an oil-induced hit to their jobs and incomes – signs of which are already evident in Alberta.

The rate cut is a signal to private-sector banks to lower their own rates on mortgages and other loans.

It’s also likely to accelerate a slide in the Canadian dollar, now at roughly 83 cents (U.S.).

Cheaper crude, while good for the U.S. and global economies, is unequivocally bad for Canada.

The bank warned that lower oil prices would take a sizeable bite out of economic growth in 2015, delay a return to full capacity and hurt business investment – a trend that has already triggered mass layoffs and production cuts in Alberta’s oil patch.

But the effects could spread further, threatening financial stability as a result of possible losses to jobs and incomes, according to the central bank.

“The oil price shock increases both downside risks to the inflation profile and financial stability risks,” the bank acknowledged. “The Bank’s policy action is intended to provide insurance against these risks.”

The bank’s new forecast assumes a price of “around” $60 per barrel for Brent crude, more than $10 above where it is now. But the central bank said prices “over the medium term are likely to be higher” than $60.

As recently as June, oil was selling for $110 a barrel.

The bank also lowered its bank rate and the deposit rate by a quarter percentage point Wednesday, to 1 per cent and ½ per cent, respectively. And it removed any indication of which way rates might go next.

The bank’s decision coincides with a much more pessimistic economic forecast than the bank issued just three months ago.

Following the lead of most private-sector forecasters, the bank slashed its GDP growth forecast to 2.1 per cent this year (from 2.4 per cent), before rebounding to 2.4 per cent in 2016. The worst effects of the oil collapse will be felt in the first half of this year, when the bank expects annualized growth of 1.5 per cent, nearly a full percentage point lower than its October forecast.

The Canadian economy grew at an estimated rate of 2.4 per cent in 2014.

The bank said the economy won’t return to full capacity until the end of 2016, several months later than its previous estimate of the second half of next year. Among other things, the central bank pointed to significant “labour market slack.”

Crude’s effects on the economy will be broad and profound, the bank warned. Investment in the oil and gas sector will decline by as much as 30 per cent this year, while lower returns on energy exports will eat into Canadian incomes, wealth and household spending.

The bank also hinted at a possible spread to other parts of the country of a real estate slump already under way in Alberta. “The extent to which the downturn already evident in Alberta will spill over into other regions remains to be seen,” the bank pointed out in its monetary policy report.

“The ramifications of the oil-price shock for household imbalances will depend importantly on the impact of the shock on income and employment,” the bank added.

The bank also expressed growing angst about the impact that oil could have on inflation, which it said has been propped up by temporary effects, such as the “pass-through” effect of the lower Canadian dollar.

Consumer price increases, now running at roughly 2 per cent a year, are “starting to reflect the fall in oil prices,” the bank said.

The bank’s new forecast calls for overall inflation to fall well below its 2-per-cent target this year, averaging just 0.6 per cent. Core inflation, which strips out volatile food and energy prices, is expected to average 1.9 per cent in 2015.

Richest 1 per cent hold 48 per cent of global wealth report finds...

The wealth of the richest 80 people in the world doubled in cash terms between 2009 and last year, while the wealth of those in the bottom half fell in that time. In 2010, for example, it took 388 billionaires to equal the wealth of the bottom half of the world’s population; now it’s just 80 billionaires.

Business leaders and politicians land in the posh Alpine town of Davos, Switzerland, this week where global inequality and what to do about it will dominate discussions.

They meet as a new Oxfam report says that the richest 80 people in the world now have the same amount of wealth as the bottom 3.5 billion of the global population.

It’s not the only study flagging the dangers of the growing wealth gap; global organizations such as the International Monetary Fund and the Organization for Economic Co-operation and Development have repeatedly warned that inequality threatens not just the poor, but social cohesion and economic growth as a whole.

“The scale of global inequality is quite simply staggering,” Winnie Byanyima, executive director of Oxfam International, said in a statement. “Despite the issue shooting up the global agenda, the gap between the richest and the rest is widening fast.”

In the United States, President Barack Obama will give his annual State of the Union address on Tuesday January 20 2015 (tonight), where he is expected to address inequality – specifically wealth inequality – proposing a plan to raise $320-billion (U.S.) in the next decade by hiking capital-gains tax for wealthy Americans and closing loopholes to help finance tax cuts for the middle class.

The proposals have little chance of passing, given the Republican party’s control of Congress.

Source: The Globe

Consumer sentiment at its highest level in more than a decade,

SAMANTHA SUNNE

NEW YORK — Reuters

Brent crude spiked above $50 (U.S.) on Wednesday, boosted by the response to a bullish report on consumer sentiment, before paring gains on a strengthening dollar and broader global economic woes.

The University of Michigan released a report showing consumer sentiment at its highest level in more than a decade, thanks to low gasoline prices and job gains.

 While the report was definitely bullish, it was not enough to balance out the rest of the world’s diminishing demand, said energy economist James Williams at WTRG Economics.

“It doesn’t fix anything in Europe,” he said. “The world isn’t getting better.”

In China, the second-largest oil consumer, there were signs of weakness as the central bank announced new support measures after data showed a drop in bank lending and foreign investment growth falling to a two-year low.

The U.S. dollar index rose 0.54 per cent, which may have caused crude to fall back to early-morning levels, Williams said.

Brent crude futures for March rose 84 cents to $49.11 by 12:00 p.m. ET. WTI was trading up $1.24 at $47.49 a barrel.

Bob Yawger, director of energy futures at Mizuho Securities USA, partly attributed the gains to rising RBOB gasoline futures, which were up 2 per cent. “You see gas leading the crude oil to the upside,” he said.

The market was also responding positively to a report from the International Energy Agency (IEA), which said there were signs lower prices had begun to curb production in some areas, including North America.

“How low the market’s floor will be is anybody’s guess. But the sell-off is having an impact,” the IEA said in its monthly report on Friday. “A price recovery – barring any major disruption – may not be imminent, but signs are mounting that the tide will turn.

“A rebalancing may begin to occur in the second half of the year,” the agency added.

Analysts said Brent, which traded steadily above $48 before the IEA’s announcement, also had strong technical support.

Frances Horodelski says...

January starting off with a thud
The chase by Frances Horodelski:

Happy January 5th and national bird day!
Greece is again at the centre of the currency markets this morning as a the German magazine Der Spiegel quotes a German official as noting that the government is more comfortable with a Greece departure from the Eurozone given a more stable Eurozone since 2012. This is pressuring the Euro which is trading at levels last seen in late 2005/early 2006 and providing uncertainty to the global equity markets. This, despite the fact that 70% or so of Greeks want to stay in the common currency according to many polls. Note that following the article that suggests Germany is good with a Greek exit, new reports this morning from the Vice-Chancellor are back tracking saying that Germany wants Greece to stay in the union. This is what traders call “noise” – be careful how you trade “noise”. Bond markets around the world are falling (i.e. rates rising) while equity markets are also soft. U.S. futures are also down. Brent crude trading at $55 and WTI is trading near $51.
According to MKM Partners, the S&P 500’s negative last day of the year and first day of the year is unusual (the last time this happened was 2008) although technical analyst Jonathan Krinsky doesn’t put too much emphasis on the predictive nature of that weakness but 2008 wasn’t a very good year (January was down 6% in 2008 and the full year was down 38.49%). The S&P 500 has done this 10 times since 1980 and the market was up seven of those 10 times. While most markets are back to full complement this week, Russian equities will be closed Wednesday for the Russian Orthodox Christmas.
Beyond the macro concerns (including German inflation at 0.1% the lowest level since 2009), actual news is thin. The auto companies will be reporting sales for December (Honda already out with U.S. sales up 1.5% versus an estimated 6.3% gain and Fiat up 20% versus a +23% estimate). I’m seeing plenty of bullish reports on the big autos in particular GM and Ford but Toyota too. The earnings calendar is empty although Wednesday brings Family Dollar, Micron, Monsanto and WD 40. The big data day is jobs on Friday (for both Canada and the U.S.) and earnings season next week (Shiraz Mian from Zacks will provide a preview on BNN this afternoon). According to S&P Capital IQ, the outlook for earnings for 2015 have dropped from $132 at the end of the third quarter to about $126 today. The FOMC meeting minutes out on Wednesday could also provide market moving information. This week also sees the start of the Consumer Electronics Show (CES) in Las Vegas and BNN’s Michael Hainsworth will be reporting with all the new gadgets and technological stuff that they say you need. Watches are front and centre (but of course, Apple doesn’t attend so it will be everyone else’s watches and arm candy). Today we will be talking to the author of an RBC report that says the weakness in oil prices won’t be as bad as expected on the Canadian economy.
Bond traders might be focusing this week on an interview with Jeffrey Gundlach, the reigning bond king, in Barron’s on the weekend. He is of the view that the 10-year U.S. treasury yield could reach new lows in 2015 (previous low July 2012 1.388%) even though he sees the Fed raising rates in 2015 (as does virtually everyone). Oil prices are continuing to fall, lower yields around the world making the U.S. market still the most attractive and a rising U.S. dollar adds to its appeal. Watch the flattening of the U.S. yield curve and the implications for lenders and borrowers (and ultimately the economy). Others point out the possibility that the “slam-dunk” that is the ECB beginning to act (rather than just talk) in building its balance sheet to 3 trillion euros may not happen on cue as expected at the January 22nd meeting. Note that the ECB’s balance sheet has already been bumped some 8% from September’s levels but still some 850 million from the target.
Just a comment on money management and performance. I saw again over the weekend that 80% of active portfolio managers are underperforming their benchmark. Not to be an apologist but….doesn’t one think that maybe the benchmarks are wrong? Just a thought.
And if you’re looking for hot spots to worry about in 2015 according to the Institute for Economics and Peace, of the 162 countries they cover, only 11 were not involved in a conflict. And, we have lots of elections to consider this year beyond just Greece’s on January 25. There is Croatia on January 11, Nigeria on February 14th, Egypt in March, Finland April 19th and Turkey in June, the 13th.