Friday, July 29, 2011

Canadian GDP down in May 0.3%

It seems that Canada's economy didn't generate much growth in May -- it actually contracted by 0.3%!  Primary cause was the energy sector, a  combination of summer shutdown and very adverse weather (such as huge forest fires) cause the sector to go negative to the tune of 5.2%.  For those who don't remember April GDP growth was a big fat zero!

Now that's not to say that the rest of Canada's economy shines a beacon of growth.  In fact, the rest of the economy was either flat or exhibited small drop, primary downer number was manufacturing which was down 0.4% for the month.
Main industrial sectors' contribution to the percent change in gross domestic product, May 2011
Obviously the numbers announced by the Americans this morning (Q1/11 GDP number was revised down from 1.9% to 0.4%, and Q2/11 was revised from 1.7% to 1.3%), hardly helped.  Canadian interest rate futures are down to 37 bps, which tells you that Canadian interest rates are going nowhere fast, the probability of an increase in Canadian benchmark rates is zero for 2011, and very small for Q1/12 and Q2/12.  CAD is ranging in the 1.05/06 range for the past few days -- question in everyone's mind is QE3 -- if the US economy is at stall speed the FEDs may decided that the plunge protection team has to get back on its horse, and counteract the natural direction of the market.


Canadian Banks raise cheap capital

An article in the Globe and Mail this morning discuss how four of Canada's largest banks used the market turmoil to raise cheap cash.  In fact, the cost of debt for Canadian banks over the past few months (5 year paper) has dropped.  Canadian banks' funding base for 5 year debt is based off the Bank of Canada's 5 year treasury rate (the Canadian benchmark) which has declined from 2.9% to 2.15% today.    

All the money being invested in Canada is having a dramatic impact on Canadian sovereign and corporate yields.  For Canadian banks, worried about the risk of contagion -- their biggest fears are, as Rumsfeld famously described "Unknown unknowns", raising cash makes perfect sense, especially since there is strong demand for Canadian banks paper.  

Problems in the financial system can arise from unexpected directions that will surprise bankers' liquidity.  So far the markets are calm, Futures are down.  There's a bit of Fed POMO activity this morning that could make the market go north, but it remains that the is no volume in the upside, all the volume is in the downside.   To make things even more interesting, Europe is also going into meltdown...Spain announced elections in September, and CDS spreads are exploding, because everyone now recognizes that the Greek bailout announced last week is just not enough (unfortunately for the ECB and the EU leadership).

August could be very interesting (but not in Canada)

Thursday, July 28, 2011

Canadian Income rise 3.3% YoY between April 2010 and May 2011

If any proof was required, today from StatsCan
From April to May, average weekly earnings of non-farm payroll employees increased 0.5% to $875.64. On a year-over-year basis, average weekly earnings were 3.3% higher compared with May 2010.
 Whereas American income is static, in Canada income continues to rise.  However, inflation up here is a bigger problem than south of the border.  In fact, two of the principal daily expense of Canadians are food and fuel and both are up substantially more (4.8% and 9% respectively) than income. Still, they don't represent 100% of Canadians' monthly expenditure.

Canada is looking at growth of income and that's what's important.  My guess is that the strength of the CAD will mute inflation pressures, although one of the most important source of inflation in Canada are services....In terms of "where the earnings are being generated"  Warehousing services and manufacturing are the leaders with a 5.5% and 4.5% respective increase in income

I guess this is positive, but inflation in strong in Canada --- it mutes the overall "real" growth.  However, it does seem to indicate a certain tightening on the labor markets which means wage inflation maybe on the rise.  I know I'm starting to sound like a broken record, it remains that aside from the disaster down South and in Europe the Bank of Canada would have already tightened interest rates.  to a certain extent the higher CAD is acting as a break.

Wednesday, July 27, 2011

Summer Holiday Season

Sorry for the infrequent posts, its just that there's not much to talk about up here in the great white north!

Anyway, Canada's "Case Shiller Index" the Teranet - National Bank House Price Index came out today, guess what, house prices are up again (+1.3%) for May 2011 (for a total of Y0Y _4.4% increase in prices) -- shock and surprise, below is a reproduction of the 6 city national index

So that's about it, Canadian prices continue to rise.  Oil is at $99/bbl and despite the strength of oil prices the only city that is lagging in price rise in Calgary -- Canada's "oil town".  Vancouver which is already one of the world's most expensive real estate is the big winner with a 6.6% increase in price, followed by Montreal at 6.3%.

Another argument for Mark Carney, the Governor of the Bank of Canada.  Although events south of the border would seem to preclude any increase in Canadian interest rates.

Monday, July 25, 2011

Consumer Price Index – Down (a bit)

Back in the saddle after two weeks of R&R it is strange to see the world’s problem to be the same they were a fortnight ago.  The British characterization of the GOP as a “Bunch of Nutters” was a good expression of the world’s view of America, and to a certain extent the exasperation of seeing an artificial crisis.  Despite what the GOP is saying that we got to put the credit card away, the debt ceiling crisis is about having spent the money and not wanting to pay the bill.  So far the markets are calm, down a bit, but nothing to set your hair in fire.

Up here in the Frozen North, statistics do not wait for those on holidays!  Consumer price index for June was released in Friday, while not as bad as May’s number of 3.7%, 3.1% is hardly a source of happiness, especially when you consider that the two outstanding items were food (4.8%) and energy (15%) – with Gasoline up 28%...

Nevertheless, prices on a seasonally adjusted basis were down 0.4%, so there is something to cheer!  Markets are still not pricing much of an increase in interest rates.  Friday’s Greek solution seems to be a walk in the right direction – although the proposal is extremely complicated so it is hard to see how this will work out.  One thing for sure it assumes that Northern Europe’s taxpayers will continue to support governments that support “perceived” largesse’s, and that governments in Southern Europe will be able to maintain the current level of tightening.  

American’s countdown to stupidity continues, with the GOP holding a gun to America, they look crazy enough to pull the trigger, as one GOP member commented last week: “there’s not much point in taking hostages, unless you are ready to execute them” Yep that from an elected member of Congress!

Monday, July 18, 2011

The French and their cars

Many years ago, landing for the first time in Tokyo, i finally understood the Gozzila movies. As a child of the sixties, ultra-man was part of my daily TV intake, granted you could see the zippers of the monster's costumes, but it was the city that always turned me off, it just didn't look real, until I landed in Tokyo. Tokyo looked like a city in the Gozzila flicks.

The same goes for French movies, they have a certain look that is all theirs, one reason is French cars; Renault, Citroen, and Pegeot. After about a week in the French outback i realised why French movie have that particular look, virtually all cars here are built by French companies, a few German cars, but virtually no Japanes cars! I don't know why, there is no doubt that the French are chovinistic, still. Another thing that suprised me is the number of "France blanche" signposts (white france), I'm in an extremely rural part of France, the population here is 99% white, still, they resent the foreigners

That's my big insight, i've been readimg the press, Canadian or otherwise, and aside from Newscorp's recent problems-- i thought that Lord Black had an excellent description of Murdoch, the world is quiet, aside from Greece, and Italy, and of America's continued desire to prouve that their political class is full of imbiciles.

Markets are off this Monday morning, but i dont really care! I've refrigerated a few bottles of Rosee wine for lunch, melon and ham, raw milk cheese and a number of salades are on the menu, a hard life I lead

Tuesday, July 12, 2011

Gone fishing

Don't know how reliable internet will be "en vacances", so see you all in 2 weeks, more or less!

Friday, July 8, 2011

Strange Data Points

In May 2011 Canada created 22,000 jobs, America created 25,000
In June 2011 Canada created 28,000 jobs, America created 18,000

In June 2011 the birth/death model added 131,000 jobs to the American  numbers (There is no birth/death model in Canada nor does Canada retro-actively adjust its job creation numbers -- No, I don't know why!).

Just saying,

Employment up 28K

Although the headline number is better than May (where the number of jobs created was 22k) it is somewhat disappointing  first June is the month in which youth (temporary) labor spikes up in, as the students leave school and enter the job market to provide for beer money during the next school year.  Hence although 28,000 jobs were created the unemployment rate didn't budge at 7.4% -- it is a high participation rate that accounts for all the increase in the labor force.  Moreover, the bulk of the job creation was in part time work, as opposed to the may data that was mostly an increase in full time jobs.

On the 12 month rolling numbers 238,000 jobs were created (1.4%) which is actually an expression of strong economy (and removes the seasonal factor element of the equation).  Where the numbers get bad, 55k jobs were created in the public sector, and only 22k were created in the private sector.  apparently, it is self employed workers which accounted for the reduction -44k.  On a YoY analysis the bulk of the job creation has been int he private sector 159k, whereas the public sector accounted for 87k (self employed unchanged).  However, in terms of growth rate, the public sector growth rate is higher than the private sector.

Actually, the winning demographic for new jobs were women in the 25-54 age bracket this age group  accounting for 28k in new employment whereas other segments remained steady.    Although not a significant percentage of the labor force, construction saw little if any job growth in June, the bulk of the new jobs were in transportation and warehousing industry.

Overall the report says little as to Canada's economy, the bulk of new jobs are temporary in nature and the overall unemployment rate remains unchanged.  The positive aspect here is the increase in the labor participation rate, when individuals decided to enter the labor force, it is considered a positive sign of a healthy economy.

For more information, with pictures and everything see here

Thursday, July 7, 2011

Europe 1, Rating Agencies 0

Yesterday, a rating agency (not my favorite people) downgraded Portugal's debt 4 notches to junk!  The implications for Portugal was serious, and the pricing of Portugal's sovereign debt rose to 12% (unsustainable).  This should have been the beginning of the end for the "Kick the Can" crowd, ECB/IMF and EU would finally have to face the reality that several European countries have intractable problems that will require some hard decisions.

I've often stated in this blog that the current generation of European managers will avoid at all cost the ending (in any form) of the Euro.  The reason is that it is their dream -- they are the architects of the Euro (with all its flaws, and successes -- these too are important).  Obviously Europe's bureaucrats are pissed with the rating agencies (i'm pissed too that they allowed Greece, Ireland and Iceland to maintain AAA ratings for so long when the rot was apparent to all) and this morning (this afternoon in Europe) the ECB has announced that they will accept as collateral Greek and Portuguese Sovereign bonds -- despite their junk status.

The ECB was already pissed with S&P for "not buying" the French bank's Greek exposure restructuring proposal -- because of accounting legerdemain for European banks, the French proposal would enable them not to take a hit on their Greek bond exposure (on a pure discounted cash flow basis this proposal represents a 18% haircut).  The rating agencies called their bluff, of course one of the dilemma is that the plan was a proposal and not in fact an actual policy -- so the ECB/EU are blaming the rating agencies for jumping the gun!

I admire Europe's desire to create its own "independent" rating agency -- frankly the three that exists (Moody's S&P and Fitch) are not exactly covered in glory for the number of terrible transactions they have  supported based on deeply flawed models (CDO, MBS etc).  It is also possible that the rating agencies are playing the game for the benefit of the credit default swap market -- it's easy to forget that the rating agencies were bought and paid for by the investment banks (although I would be surprised since there's no upside here for the rating agencies).

What the ECB has proved today that they will do absolutely anything to avoid a true restructuring for Greece, Portugal and Ireland.  Maybe the fear that things will extend to Italy are forcing their hand.  This final step (complete socialization of the disaster that is Greeks sovereign debt is the end game, no default will occur until all of Europe's financial institutions are departed themselves of their exposure to the PIIGS).

P.S.  things are very quiet in Canada -- so this is what I write about instead

Wednesday, July 6, 2011

The European Banks Solvency test

The leaks are out, and most of the 26 banks that are in in need of immediate capital (and maybe require too much capital to remain solvent.  Some names are obvious:  Irish banks and insurance companies, others are suprising; WestLB and Bayerisher Landesbank.  That the second tier Portuguese and Spanish banks are in trouble is no surprise, and obviously the "prime" Irish banks are on the list too.  The European central bank investigated the risk associated 91 European banks and found 26 in trouble.  Also included in one of the two Cypriot banks (surprisingly not both!)

What is amazing is that on the base case scenario the shortfall is around Euro 45 billion (for the Spanish institutions) but it is Euro 119 billion if the stress test is employed.  That's a lot of money!

See the Zero Hedge article.

Tuesday, July 5, 2011

Payroll inflation 3.5% YoY April 2010 to 2011

The title says it all, wage inflation is rising in Canada.  This blog (and many many others) have been concerned that the BoC ultra accommodative interest rate policy would cause wages to rise substantially faster than warranted.  In a sense, it is a good reflection of the CPI which as of April 2011 has risen by 3.7%, but it also means that the lag that one would expect between wage inflation and price inflation is absent (which makes no sense), there is a problem here that will have to be addressed sooner rather than later.  

A combination of factors  are at play here:

(1)  Canadian unemployment at 7.1% (and 6.1% if using American statistical methodology) is getting close to the historical average of 5.5%, 
(2)  The Bank of Canada has made certain assumptions about Canada's output gap (the difference between potential and actual GDP), which still assumes a 15% gap (Q4/10 data).  Several economists take the view that this doesn't take into consideration that certain jobs will never come back -- and therefore the BoC is overestimating the size of the output gap, which means that Canada's economy is operating near its potential.
(3)  A strong housing market has both given Canadian a sense of wealth but also a keen understanding as to how expensive housing has become in Canada -- Montreal, Toronto and Calgary  to an extent, but Vancouver and Victoria has seen house price which everywhere else in the world would be considered bubble territory.
(4)  Canada is more unionize than the U.S.  and unions still have broad popular support -- Canadians understand the role of unions and these have not yet been demonized (although the new SunTV -- a Canadian "Fox" is certainly trying), so they still weld bargaining powers, moreover skills mismatch may explain why Canadian company are ready to pay more for labor, they just cannot find cheaper qualified personnel.

In a nutshell the BoC has a problem:  personal credit and house price have entered problem areas, certain tools have recently been deployed to address the housing issue (reducing the term of loans and decreasing maximum leverage), but these tool are like very large ships and are slow to act.  Once the wage inflation genie is out of the bottle, redressing will require excessive monetary tightening.  Wages increases are just an additional data point, if any were required, that the BoC will soon have to act because of strong inflation pressures, due to purely Canadian factors. 

Of course comparison with the U.S. shows that wage inflation in Canada is almost twice that of the U.S., moreover, since most American face rapid medical insurance cost inflation (in Canada it is absorbed by the Government), the difference is in fact even higher.  Still Canadian companies faced with a cross border competitive environment are facing a dilemma, especially in light of Canada's recently strengthening currency.

The Governor of the Bank of Canada may be forced to take action sooner rather than later, my guess is that the BoC is overestimating the output gap (BTW a very common occurrence from past empirical analysis), and is now realizing the scope of the problem.  they may be forced to act more quickly in raising interest rate only as a reflection of growing wage inflation, discounting exogenous factors (U.S., Europe and China) and deal with the problem at hand.


Spending Canada day weekend at the cottage I had run out food, and so off I was to the nearby supermarket.  While exiting my car I am hailed by a young man who's just exited the store with his young (2 year old) son in arms (I've known him my entire life).  He's the third generation plumber of a family enterprise.  It was started by his grandfather in the late 60s when our cottage area, although gorgeous, was largely undeveloped -- the motorway ended many miles away, and so to get to this location on a Friday evening often involved more than 2 hours of driving , to far  for most cottage goers.

The enterprise grew slowly but surely as road access improved dramatically during the 1970s, leading to an explosion of cottages in the area.  Moreover, the price of these (and size) also exploded.  During this time this small, well regarded firm grew.  There were ups and down (especially in the mid 80s when things got difficult).  The grandson (my interlocutor) took over the business in 2005 from his father --- who had built the firm and its turnover.  However, as the attraction to the area were its spectacular lakes become more and more populated (and the McMansion replaced "summer cottages" -- the largest house in the area is near 35,000 sq) the volume of work started to ebb.

Grandson was facing a dilemma in that as a family firm, with long term employees (some had started as 16 year old apprentice and are now in the mid 50s) local expansion was impossible (the area is bordered by a national park).  Since the quality of their work was high -- often undertaken for  the CEO of large Canadian firms who owned the cottages in the area, he was able to translate this strong reputation for residential work into  commercial work in Montreal and its suburbs.  Grandson purchased a condo in a norther suburb of Montreal for his workers (to limit the commute time) and was able to grow the business by expanding outside of his zone of comfort.

Today this small but high quality family owned firm has 35 employees and a turnover of more than C$5 million.  Certain changes have been made, moving the parts warehouse away from the cottage area enabled him to reduce inventories by more than 50%, but since he purchased a condo (now three) his working capital has not changed (and he generates capital gains on his "Montreal" based real estate assets).

As a third generation plumber, Grandson could have kept his company small in in our cottage area, maybe reducing the number of staff working for him, and maintaining his lifestyle.  Instead, he took the plunge, used his contacts to grow the business and create well paying jobs for the local population, because although his workers "sleep" in Montreal, the live in the cottage area.  Impressive achievement

Monday, July 4, 2011

Producer Inflation is edging off

Not entirely surprising, since oil has been in the $90/100 range for a few months, producer price indices have gone negative for a bit. Industrial producer prices are off by 0.2% and raw material prices are down 5.2% (over one month) again the volatility of oil prices is largely to blame here.  A week ago, the WTI traded as low as 89.95, while this morning it "opened" near 95.50 a 6% increase in 7 days.

However, StatsCan had more information on raw materials, not only are prices falling but inventories are rising  (especially aluminum), this could be temporary or an indication of something more permanent.  Car sales stats that came out Friday last week (U.S.) were disappointing.  Although the recent Japanese discovery of rare metals in the sea off the coast of Hawaii  in quantities (and concentration 1,000x larger than what is available on land) could be interesting 

The not so good news is that the IPPI (Industrial Producer Price Index) for the past 12  months is up 5.2% -- it goes to show how serious things are getting on the Canadian inflation front.  Futures for rising interest rates are back up to the 52 range (which implies a 50 bps increase in the short term interest rates within the next 12 months), which is just a market sentiment index (its not an indication of anything but what the market "believes" today).  Two weeks ago it was around 20 (which implied to increase in rates for the next 12 months).

Combating inflation is the sudden strengthening of the CAD, which last week moved from the 1.01/99 range to the 1.04/96 range on Friday.  Amazing week in the markets last week, based on virtually no good news on the economy and very limited corporate earnings the market rose by 5%, still below the May high, but generally disappointing economic news (especially light vehicle sales) did not stop the market rise (on very thin volume).  It would seem that the fabled  "plunge protection team" was in full swing last week!

GDP growth was flat in April -- which was better than expected (0.1%), it would seem that GDP growth is "decelerating" in Canada following the blistering Q1 performance of +3.9%.  It would seem that Q2/11 will be a 1.7% GDP growth -- that remains in line for full year GDP growth of 2.5%.

Aside from that a quiet week -- little serious data out of Canada.