Tuesday, January 17, 2012

Bank of Canada, Banks and Baltic

Eagerly awaited by pundits across Canada are this morning's Bank of Canada director rate.  Absolutely no one is expecting (and 30 seconds ago the BoC made the announcement) a rate hike, but they are all awaiting with baited breath the "wording" hoping to extract some guidance on when (and if ) rates are going to rise.  First off, Mark Carney has made it clear that a rate hike will be governed by the global economic outlook -- he has exactly (more or less) the same data that anyone else has (with the predictable laggs).

The first line of the statement starts with: "The outlook for the global economy has deteriorated and uncertainty has increased..." so the BoC will have to wait until things improve.  Needless to say that the futures are still flat as far the the eye can see (Q1/13) so no guidance there.  Canada's economy seems to have grown by 2.4% in 2011 -- there the BoC has an edge, most commentators were working on the basis of weak Q4 -- in fact Year on Year to November 2011 was 1.5%... outlook for 2012 is 2.0% and 2.8% in 2013 -- of course this last number is total BS no one has any idea what will happen in 2013 (we're still trying to figure out 2011, and that's already happened).  However, the overall trend for Canada is for weak to moderate growth.  The second to last paragraph talks about Canada's economy operating at full capacity (by the end of 2013), but again the BoC has a relatively poor record of estimating economic capacity utilisation.  This could be a sign that by the end of 2013 for the BoC to tighten interest rates, but that's 24 months away...

In other news, Citibank data revealed that over the past 24 months, nearly 50% of its pre tax income is from write-back of reserves.  Provisions that are released because they were deemed as excessive.   It may explain why banks are trading at a discount to book value -- in fact since the financial sector is 1/3 of the S&P 500, and we know that Citi was not the only bank "writing back provision"it speaks volume to the quality of corporate earnings in America...

Finally, the Baltic Dry index is back in the news, it has reached its lowest level since 2009.  Until recently, the BDI was a useless index because so much new capacity was added in 2010 and 2011.  But this massive ship building program is now over, and indications are that trade volume (for bulk carriers as opposed to containers) has collapsed, it stands at 1013 which was just about the low point during the 2008 crisis, another 30 point drop and we will have to go back to the early '90s to see such low rental costs for bulk carriers.  


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