Economic Data points to BoC restraint -- maybe!

The news out of the U.S. continues to be dismal, yet the market feels like celebrating!  Up here in Canada the news is OKish.  The big date is September 8^th when the BoC will have another chance to raise interest rate from 0.75% to 1.0%.  For Carney and friends the incentive to raise rates is high because it would provide the BoC with some ammunition in the event that the Canadian economy starts to tank again.

The reasons for not raising rates are numerous:

(1)                                       Canadian inflation is already in the lower target range:  Core CPI at 1.6% and total CPI at 1.8% -- Canada’s interest rate range is between 1% and 3%. – Inflation was affected by the introduction of consumption taxes in three provinces.

(2)                                       Housing “seems” to have slowed down – although the hard data points back to June (National Bank Teranet Index) July and August “sale” data is much lower than it has been in the past few months.

(3)                                       Corporate profitability of Canadian firms is down

(4)                                       The American economy appears to be slowing down – it may even return to recession levels

Inflation: Last week’s headline inflation figures were distorted by the introduction of consumption taxes in Nova Scotia, British Columbia and Ontario. This explains in part why total inflation jumped more in some provinces than others. However, core CPI, which is not affected by sales taxes, showed a 1.6% inflation rate on a twelve-month basis. So far in third quarter inflation is below the Bank of Canada target forecast level of 1.8%. Canadian inflation is still comfortably positive – unlike in the U.S. who appear to be heading towards deflation.

For the BoC more good news on the real estate front where it would appear that the Canadian housing “bubble” seems to be deflating (its not so much a bubble when trending house price against income growth).  It’s impossible to forecast where inflation will be heading; right now energy prices are falling as are house prices (two critical components of the inflation index), but how much of a fall is hard to estimate.  The Canadian dollar – as a petro currency takes away some of the energy price movements, as for housing, it is still largely a balanced sector.

Canadian corporate profitability has dropped for the second quarter.  Two segments were to blame: Oil & Gas and Insurance.  However, the rest of the corporate landscape saw an 0.8% increase in profitability -- not great but still positive.  Worse was that the source of the weakness was generalized as both domestic and foreign demand were weak.  Overall profits for Canadian companies are still only 92.7% of their pre-recession level.  One sector that has done remarkably well is manufacturing, which both at the operational level and bottom line level has reached the pre-recession level.  However since manufacturing only accounts for ¼ of Canada’s GDP…. 

The Bank of Canada will have a difficult task on the 8th, the odds are 50-50 that the BoC will raise rates by another 0.25%, but few now would argue that further raise are considered, especially with America's economy slowing.