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Trade: Bumpy road ahead

Watching Mark Mobius this morning was somewhat surreal; in effect Mark was saying that if the economy tanks, the U.S. government will prime the pump with stimulus II or QE II, and if the economy is OK, then its OK, so in a nutshell Mark’s prediction is that its all positive for stocks, even if the news is bad, it will be good because of Keynesian intervention by the U.S. government (and China I presume).  Funny enough Mark was not challenged, possibly because the numb nuts permabull cheerleaders in CNBC don’t know what to say to a money manager who is always such a bull.

Trade numbers came out yesterday for Canada, and the number were poor, the market anticipated a reduction in the trade deficit in the range of $300 million instead the trade deficit rose by $700 million, a $1.1 billion expectation gap.  Exports dropped more quickly than import.  The only good news from the report was the rise in impost of machineries – a potential sign that productivity will continue to rise…. (Again, our bias is 20th century manufacturing capacity – still there are few other outward appearance of potential productivity improvements).

The trade numbers have a dramatic consequence on GDP growth.  We continue to hedge down towards an annualized GDP growth for Canada of 3.2% -- I may still be right (great…).  It looks like the revised GDP growth numbers for the second quarter will be around 2.5% (after the trade numbers), which is short of the BoC target of 3%.

The reason I raised Mark’s comment about the U.S, economy (Mark is already convinced that the Chinese are about to embark on their own stimulative package anyway) is how this will impact the demand for Canada’s primary exports:  energy and raw materials.  One thing is certain, the world will continue to require the things that Canada produces.
  
Consequences & Predictions:
(1)               Canadian dollar remains in the 0.96 -1.01 range (against the USD).  Canadian dollar exchange rate is highly correlated to oil prices (90%) and the direction of the S&P 500 (94%) [causal???]
(2)               Inflation will remains subdue – around 1.6% to 1.8% for the rest of 2010 – excluding the adjustment for GST in September
(3)               Interest rates may rise another 0.25% to bring the BoC rage to 1.0%, bit with weak employment and a housing market that seems to have rolled-over there will be little pressure to increase interest rates beyond the September 8th review date

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