Canadian Economic News: Not much to report

The biggest “item”, and I wish I could give it less importance is the forward curve on Canadian interest rates, which at +0.21 over the next 12 months tells you that the “market’s” interpretation of the current global economic situation is for interest rates in Canada to remain at their current – and very accommodative – 1% level for the foreseeable future!

Overnight, the Swiss National Bank (Switzerland’s central bank) gave up the ghost and reduced its benchmark overnight rate to 0.25%, the ECB cannot be far behind, for while inflation is still a problem in Europe, far more critical is the financial instability – The Italian president will be making a speech as soon as the European markets close.  Everyone is suddenly realizing that the contagion risk is a real and present danger, mainly because Europe’s “leaders” have successfully implemented policies “too little and too late” to calm the markets.  Europe is now facing a $2 trillion problem (Italy’s economy is around 9% of Europe GDP).  Give the market about two more weeks to realize that this potential massive transfer of wealth from Germany will have on that country’s bond market….

The one positive aspect for the G20 is the current direction of energy prices, oil is down at $92.5 (WTI) while the Brent is around $113.84 (what the world really pays) substantially lower than it was even a week ago, which acts as a massive wealth transfer to consumers.  For Canada, the weaker oil prices are a double edge sword, this should result in a weaker CAD (now around the 1.04/0.96 range against the USD), but will also help the economy of our major trading partners; Supporting Canada’s non-oil export sector.  Some are calling for a better second half for 2011 in the U.S.  One thing for sure the 3-4% GDP growth forecasts are now revised to 2% (maybe).  Canada’s Q1/11 performance was “on fire” but the second quarter is looking decidedly flat – April and May 2011 saw a small contraction in Canada’s GDP – at best we are hoping for a marginal positive number for the whole of Q2. 

Canadian core inflation at 1.3% has come down dramatically (it was at 3% earlier this year) and overall CPI is still over 3% -- beyond the Bank of Canada’s upper range target.  Very few economic indicators for Canada with only unemployment numbers expected on Friday.  The overall unemployment rate is anticipating remaining at 7.4% -- with maybe 15k new jobs for July (still equivalent to 150,000 jobs created in the U.S.)

In terms of the markets, selling in May and going away has proved to be a real winner, bond spreads have widened in Canada, but benchmark rates are down.  Canadian 10Y and 30Y risk free rates are down 50 bps over the past 3 months, so overall bond portfolios have done well, since the yield contraction and the risk spreads have been similar, but in opposite direction; and providing a nice little earning to investors.  I feel relatively smug as to my investment strategy this year – David Rosenberg of Gluskin said it best:  “Buy strong non-cyclical earnings with little debt”, and don’t be fooled by the anti FI crowd – they’ve bought MSNBC hook and sinker that Bonds are bad and equity is good.