This weeks top stories include how Carney tells bankers to change their attitudes, how companies feel that the economy is picking up, how Employment Insurance claims are down for the second straight month, how Canada is at risk of hollowing out, how Norway was the first in Europe to raise their interest rates, how home prices rose again in August, how the Toronto market has been downsized on the affordability index and how growth has stalled in Canada.
Carney to banks “change your attitude”
Mark Carney, the Bank of Canada’s (BoC) Governor warned the global banking industry that it requires a change of attitude as it is at risk of failing to learn a lesson from the recent credit crisis. In a speech given in Montreal on Monday at the national financial industry conference he spoke out against banks stating that they are not taking advantage of richer earnings to build up capital. He feels that the banking sector is taking for granted the current environment and is under the impression that governments will step in to save lenders from collapse. The banks that have made it through the crisis are recording larger profits and earnings due to numerous factors including less competition from the banks that did fail. Carney stated, “Relief is in danger of giving way to hubris. We will not remind market participants of the many oaths they swore a year ago; nor do we expect scores of financiers to join religious orders. However, we do expect those fevered battlefield vows to be respected through daily peacetime concern for and contributions to building a better, more resilient financial system.” His comments came with under two weeks left before the Group of 20 nations meet in St. Andrews, Scotland, to develop a framework aimed at creating a stronger, more resilient financial system. Some of the major issues that will be addressed at the meeting will be curbing banking behavior including executive pay and bonuses. Canada is head strong on this matter as a number of major Canadian banks have already made a move to alter pay schemes. Banks are working in a very constructive environment as they take in fatter margins from their core businesses and an appetite is returning among corporations for mergers and acquisitions. The gains come from a substantially reduced amount of competition among banks as debt laden banks have failed and the securitization markets have not come back to life. The reduced competitive dynamics are expected to last a while and will give time for the core of the financial sector to build sufficient capital for the future. The increased capital will be required to move forward when the regulatory changes come into effect. Canada may have a key role in shaping those regulatory changes as it takes over the presidency of the Group of Seven in 2010. There is also a need to accelerate the return of the securitizations market because when properly structured, securitizations can diversify risk and lower borrowing costs. The governor closed off by saying that the central bank is working with government and industry players to explore alternatives. How do you feel about all of this? Please comment below.
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Companies feel that economy is picking up
Analyst’s expectations have been broken again but in a positive way this time. Majority of companies are beating analyst’s expectations for quarterly profit and revenue improvements as we are finally pulling out of the recession. This leaves market watchers focused on what the corporate leaders will say about future prospects. Some sector leaders have grim outlooks including Canadian fertilizer giant Potash Corp. Others feel that the worst is behind them and are pointing to signs that an emerging economic recovery is already underway. With us being 1/3 of the way into the earnings season, 84% of S&P 500 companies have already topped earnings expectations and revenues are coming in well over what was expected with 65% of companies topping estimates. This may leave to suggestion whether or not the profits are actually revenue growth or money made from recent cost cutting seen during the crisis. The signs that we are emerging from the recession seem to be coming in from every direction. When the recession took effect last year we saw a number of companies slash or eliminate their dividends to shareholders to conserve cash. Last week Freeport McMoran Copper and Gold Inc. reinstated its annual dividend while Travelers Cos. Inc. and Peabody Energy Corp. raised their quarterly dividends. Since shares of stock take the largest hit when there are dividend cuts, companies tend to only raise their dividends when they have confidence they are sure that future cash flow will be enough to maintain the higher dividend rate. This is usually taken as a sign that conditions may be improving in some sectors.
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EI claims down for 2nd straight month
Statistics Canada released a new report that outlines the most recent employment insurance benefits numbers and majority of them are positive. The number of people receiving Employment Insurance (EI) benefits in the month of August was down 19 100 or 2.4% from July. This was the second straight monthly decline seen since the beginning of the recession. The numbers fell in almost all provinces with the largest decreases seen in Newfoundland and Labrador, Ontario, Manitoba and Saskatchewan. August saw 763 200 beneficiaries which was still up a whopping 52.5% from the start of the recession in October 2008. The number of initial and renewal claims received in the month of August were actually up by 22 500 or 8.2% to 298 300 after seeing two months of declines. The number of beneficiaries in Newfoundland and Labrador were down 4100 or 8.7% to 43 600 which was the provinces first drop in EI claims since the start of the economic downturn. Ontario also saw their numbers drop by 5.6% or14 800 to 247 400 and was the provinces second straight monthly decline. Saskatchewan was also down 5.3% or 730 with only 13 000 people receiving regular EI benefits. Manitoba saw its third straight monthly reduction falling 4.5% or 690 to 14 500. Quebec and New Brunswick were the only provinces that had increases in their number of beneficiaries in the month of August with Quebec up 4.9% or 9700 to 208 000 following a decline in the month of July. New Brunswick saw an increase in beneficiaries up 650 to 37 100 in the month of August. This leaves the question of whether or not we are actually out of our recession yet. What do you think? Please comment below.
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Canada could hollow out
CIBC released a report on Tuesday outlining the risks of the Canadian industrial base hollowing out if the Bank of Canada (BoC) doesn’t intervene and bring down the high flying loonie. The concern is that plants will close because they are unprofitable at the current exchange rates and may end up permanently relocating elsewhere. They are also concerned that these plants will not move back when the currency comes down at a later date. The report, written by Avery Shenfeld CIBC chief economist, was issued just hours before BoC Governor Mark Carney appeared before the House of Commons finance committee in Ottawa. Mr. Shenfeld stated, “We are hollowing out our industrial base by letting speculative foreign exchange market forces, in effect, dictate the mix of monetary conditions.” He also stated that the BoC has sent a clear message about the threat a high dollar poses to Canada’s recovery and went on to verify that the benchmark interest rate would be held well into next year to give an offsetting boost to output which has helped the domestic economy. He then said, “But in the real world, the mix of output also matters.” and went on to call for stronger measures to bring the loonie down closer to its real value. His concern is that if the loonie stays overvalued we could be losing on business plants and equipment on the altar of a strong currency. Export Development Canada also released a report on Tuesday warning that if the dollar persists around the 95 cent U.S. mark it could see a loss of as much as 3% from the country’s economic growth next year. BoC officials have not ruled out intervention in foreign exchange markets to hold down the value of the loonie but have been relying on verbal intentions to subdue it and wait it out to see if it will correct itself. The dollar that we are currently seeing is a strong speculative influence and not a fundamental shift which would place the loonie in the range of 86 cents U.S. Mr. Shenfeld’s view is that a Canadian dollar higher than 90 cents U.S is an overvalued dollar at this point. Regardless, anyone that comments on the dollar has the same thing to say, it is clearly too strong for the economy’s own good. The consensus is that the BoC should sell Canadian dollars to buy U.S dollars to try and weaken the Canadian dollar and hope that some of the speculators get nervous when up against the BoC and begin to sell their own Canadian dollars. Even if this were to take place, there are a number of factors that would still need to be addressed. The main being rising unemployment, higher defaults at banks, protectionist rhetoric and inflation fears. How do you think those should be addressed? Please comment below.
Norway first to hike rates in Europe
Norway’s central bank ordered the first interest rate increase in all of Europe this week as it signaled more tightening to come with the global economic downturn winding down. Norges Bank raised its deposit rate by 0.25% to 1.5% on Wednesday as was expected by economists and analysts alike. The rate raise will help its recovering economy offset the large fiscal stimulus used by the government during the global crisis. Most of the developed world is still quite far from raising their interest rates and Norges Bank warned that it may scale down projected tightening if their currency strengthens too much. Norway’s economy suffered only a mild recession after the credit markets fell apart 13 months ago and was aided by its large offshore oil and gas sector. Fortunately for the Norwegian economy oil prices remained relatively high and the measures implemented to warn off the recession have been effective. Household demand for services and goods mixed with the willingness to pay for housing are signs that the liquidity crisis in the banking sector is passing and has caused Norway to phase out the extraordinary measures it had implemented earlier. Australia and Israel have already raised their interest rates but there is no move expected from the European Central Bank or the Bank of England before the second half of 2010. Norway emerged from a mild recession faster than anticipated due to massive stimulus measures and strength as the world’s number 5 oil exporter as well as Europe’s second largest natural gas producer. The government did its part injecting 4% of Gross Domestic Product (GDP) in stimulus this year and is planning to add the same amount next year. I wonder if Canada will emerge the same way. What do you think? Please comment below.
Home prices rise in August
Canadian home prices are steadily recovering but have not reached the levels seen before the recession took effect. According to a recent survey, even though housing prices were up in the month of August, they are still 3.4% below their peak in August 2008. The Teranet National Bank house price index, which measures resale prices in six urban markets across Canada, showed that housing prices nationally were up 2% in the month of August. That represents the fourth straight month over month increase as well as the second month in a row where prices were up in all six markets. The turnaround is consistent with an improvement in market conditions seen during the first half of this year with more homes selling and fewer homes coming back on the market for resale. August also marked the ninth straight month where national housing prices have declined on a year over year basis with the decline diminishing steadily since it peaked at 6.9% in May of this year. The three housing markets that took the smallest hit were Montreal, Halifax and Ottawa where the housing prices are now higher than they were before the recession took effect a year ago. The hardest hit cities are still well below the pre-recession peaks with Calgary’s prices 12.9% below their peak and Vancouver 7.7% lower than its peak.
Toronto market downsizes affordability
The third quarter of this year saw housing affordability deteriorate at a fast pace as housing prices were up past their pre-recession levels. The improvement in stock markets helped drive prices higher as low interest rates, pent up demand and a lack of available listings also did their part. The average price of a home in Toronto was $402 762 in the period between July and September of this year and was the largest increase seen in any Canadian city. The improved economic outlook and low rates helped fuel a strong comeback in the housing market. Dejardins, a mortgage lender in Canada, released their Affordability Index on Wednesday and it outlines how Toronto fell 3.4 points to 125.8 in the third quarter of 2009 when compared to the second quarter of 2009. The index works in a way that the lower the number, the less affordable the property is. Based on the current number, the average income for someone living in Toronto is 25.8% higher than the income that is required by mortgage lenders to finance an average home. The start of this year saw exceptional numbers when it came to affordability with prices and interest rates falling simultaneously. More recently, we have seen a large increase in home prices that are threatening to push the index below the long term average in the Toronto housing market. The strong comeback in the housing market has the Bank of Canada (BoC) Governor, Mark Carney, worried that consumers will take on too much debt and are not factoring in higher costs that are around the corner. There is a possibility that we are currently creating conditions similar to a bubble that could possibly burst because the market has caught up so quickly but analysts haven’t said anything on the matter as of yet. Oddly enough, Vancouver remains the most unaffordable housing market because a consumer’s disposable income is not enough to cover the costs of an average home. On the other side, Saguenay Quebec was the most affordable market as they were the only market to see a decline in housing prices during the third quarter of 2009.
Growth stalls in Canada
According to a report to be released today, from the Canadian Centre of Policy Alternatives, the Canadian economy is still stuck in neutral and a recovery is still quite a ways away. The report outlines how the government needs to start delivering on stimulus pledges and continue spending to support the economy. The report, titled Canada’s Long Road to Economic Recovery, had an excerpt that I found particularly true “The traditional engines of private sector expansion – investments, exports and construction continue to stall. Public investment has been essential to stabilizing Canada’s economy. Without it, Canada would have fallen deeper into recession.” The thought is that more is needed from the government to get Canada through to a recovery. Economists are currently waiting for Canada’s gross domestic product (GDP) numbers that are scheduled to be released today and are preparing for a weak result that will call into question the Bank of Canada’s (BoC) prediction of a 2% increase in the third quarter of this year. Some economists are on the fence with a few expecting a contraction in GDP. The private sector accounts for roughly 85% of the GDP and with exports of goods and services falling by more than 8% in the second quarter of this year, which was down 27% from last year, optimism is bleak. For a real recovery to take place you need broad momentum in the private sector of the economy and right now there are no signals that it is underway. The month of June saw GDP rise by 0.1% followed by an unofficial announcement from Mr. Carney that the recession in Canada was already over. The report has some notes worth mentioning as well. There was a promise of spending to stimulate the economy which hasn’t reached it’s full potential. The Conservative government pledged $18 billion in infrastructure spending this year but only 22% of that money has actually been spent to date. Potential spending has been held down by red tape requiring provinces to match the federal spending portion. This has lead to higher unemployment in the short term and is possibly risking future growth. For Canada to pull itself out of the current recession, yes I did say current, the government must spend more on infrastructure to create jobs and need to put large investments in roads, bridges, housing and health care improvements. In other words, the government actually needs to spend the money it said it would. What do you think? Please comment below.
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@Jennifer Lancey
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