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Earning Announcement Season!

Canadian banks are announcing their first quarter results.  Overall the trend is one of rising revenues and profits (all six major Canadian banks have announced rising profits and five have announced rising revenues), which support the overall economic story for Canada that the recession is well over, and companies, can and do borrow for productive purpose.  No doubt, yesterday’s announcement that house prices across Canada were still rising is giving food for thought to Mark Carney, the Bank of Canada’s Governor.  

Ok, so in a nutshell, Canadian companies (manufacturing or otherwise) are doing well, headline inflation at 3.3% is well above the target range of 1% to 3% that the BoC tracks, and the core CPI is around 1.6% at the middle of the range, and yet overnight Canadian interest rates remain excessively simulative at 1% (in effect real interest rates are negative).  All Canadian banks issued subordinated debt in 2006/07 as a way of increasing tier one capital; several banks are now exercising the call options on these 10 year bonds.  Market perception of Canadian banks will allow them to re-issue such instruments at much lower cost.

Despite all the evidence that the Canadian economy is firing on all cylinders (virtually every sector of the economy is exhibiting strong growth) the market’s perception is that an increase in the Bank of Canada’s overnight rates is months away (maybe Q1/2012).  In early May, Canada had elections, it was reasonable for the BoC to stand aside until the election cycle was completed, as to not make waves during that process.  But a new majority government has been elected, the government’s perception is that it must reduce expense to balance the budget (since the economy is growing), and yet the Bank of Canada stands still….

Maybe the market perception is wrong (usually not) and that Carney will decide at the next quarterly meeting to raise interest rates.  Already the BoC has given the excuse that America’s economy was slowing – GDP numbers seem to be indicating this (as is unemployment) he can now add the problems in Europe’s “Club Med” that appear to be heading the way of a Greek tragedy – eventually someone will notice that excessive borrowing is not cured by more borrowings.  

It could be that the Bank of Canada is concerned over the USD/CAD exchange rate.  Historically, the BoC has stated that they do not consider exchange rates when making monetary policy, yet it remains that a strong CAD is contractionary, on the surface the strong CAD doesn’t appear to have damaged Canada’s manufacturing export machine, yet there are rumors that the some companies are re-locating their production facility to the US because of the strength of the CAD (mostly in the auto sector – as if Southern Ontario needed another slap!).

On a final note, for anyone who believes that cutting government spending is actually stimulative I have two words:  Great Britain.  Proof (as if any was needed) that when a government cuts expenses, GDP will be negatively affected.  It seems obvious to anyone who has ever studied economics – but still seems to challenge the conservatives’ world view.

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