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Stories Report on Business is following today:
Bank of Canada hikes rates
The Bank of Canada became the first central bank in the Group of Seven to raise its benchmark interest rate from the emergency low level of the financial crisis and recession. Governor Mark Carney this morning boosted the overnight rate by one-quarter of a percentage point to 0.5 per cent, still spectacularly low by historic norms, as he dismissed concerns, at this point at least, of a broadside from Europe.
Most economists had expected Mr. Carney to raise the rate as the economy powers ahead - it expanded at an annual pace of 6.1 per cent in the first quarter - and inflation grows slightly hotter. But there was a question of whether he might hold off for a month, until the next meeting in July given the market turmoil sparked by Europe's debt crisis.
In its statement this morning, the central bank did raise concerns over Europe but said the spillover into Canada "has been limited to a modest fall in commodity prices and some tightening of financial conditions." Inflation, on the other hand, is unfolding as expected, reflecting "the combined influences of strong domestic demand, slowing wage growth, and overall excess supply ... Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments."
That means there won't necessarily be a rapid-fire series of rate hikes as Mr. Carney, ultra cautious in his comments and outlook, weighs the data piece by piece.
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The central bank said the global recovery is proceeding, but unevenly around the world. There is strong momentum in emerging economies, some "consolidation of the recovery" in the U.S., Japan and other industrialized countries, and the potential for a fresh round of weakness in Europe..
In Canada, the bank said, household spending is expected to slow, though it expects business spending to pick up, which it said will important for a "more balanced recovery."
Observers noted Mr. Carney's caution.
"It was hard to characterize today's statement as overtly dovish, but it did seem to lay out a very 'cautious' plan to continue raising rates," said Mark Chandler, chief of Canada fixed income and currency strategy at RBC Dominion Securities. "... We had been looking for more cautious comments about the global expansion and they came in the form of warnings about 'higher borrowing costs and more rapid tightening of fiscal policy' in Europe, with 'limited' spillover into Canada - through a modest fall in commodity prices and some tightening in financial conditions. However, this reflects more the risks around the bank's forecast, with the base-case apparently little changed (though they failed to reiterate that they look for the economy to reach full capacity by the second quarter of 2011)."
Added BMO Nesbitt Burns deputy chief economist Douglas Porter: "While the bank has taken the first step to tighten policy, it is an incredibly tentative step. The bank has left its options wide open even on the July rate decision; while we still expect a follow-up rate hike at that time, we continue to believe that the bank will take a pause at some point this year, particularly with the Fed likely on hold until 2011."
Toronto-Dominion Bank economist Grant Bishop put it this way: "While the bank took the 'elevator down' when cleaving rates, ongoing uncertainties and an easing pace of growth point to a very careful pace of tightening. The bank may not hike at each meeting and might 'pause' on increases if near-term financial conditions warrant. The emphasis on global conditions in today's communiqué is no accident and, after the rocky last couple of years, policy makers are keenly aware that Canada is not an island." Read the story
Join us at noon ET for a live discussion on the decision
Related: Canada's economy keeps roaring ahead
Stocks, Canadian dollar sink
Welcome back from a long weekend in the United States and Britain. Global stocks are sinking, oil prices are falling, the euro is dropping and the Canadian dollar is dipping. Europe's debt crisis is still weighing on investors' minds, pushed along by a warning for the continent's financial sector yesterday from the European Central Bank, and adding fuel today are new concerns after a report showing manufacturing slowed in China.
European exchanges were down more than 2 per cent at about 6:30 a.m. ET, oil was down about 2.5 per cent and the loonie dipped to the 95-cent U.S. range. The euro is back at a four-year low. North American markets followed Europe down.
"The initial selloff in risk was linked to news the ECB warned euro zone banks face up to €195-billion in a 'second wave' of potential loan losses over the next 18 months due to the financial crisis," said Sue Trinh, Royal Bank of Canada senior currency strategist in Hong Kong. "The expected loan losses will be on top of some €238-billion in bad debts written off by the end of 2009. Additionally, Chinese [purchasing managers index]fell from 55.7 to 53.9 ... in May and comments from [People's Bank of China]member Li Daokui, that China's property market problems are worse than in the U.S. or U.K. before the financial crisis did not help risk appetite."
Related: ECB warns of more loan losses
Fears mount of China slowdown
Some of this morning's jitters relate to a reading on the purchasing managers index in China, which has sparked fears that the engine of the world's growth may be slowing. The economic measure fell in April to 53.9 from 55.7. Given the troubles in Europe, the reading from the world's third-biggest economy added to concerns over global growth. China has been a driver of the global recovery as its purchases soar along with its economy.
Canadian savings rate sinks
Among the tidbits in yesterday's GDP report from Statistics Canada was the fact that the personal savings rate fell in the first quarter to 2.8 per cent of disposable income. That's down from 3.5 per cent in the fourth quarter of last year, and the lowest level since the third quarter of 2008. It also compares to 5.3 per cent a year ago.
There's no real surprise there, according to BMO Nesbitt Burns deputy chief economist Douglas Porter. "There is a long relationship between nominal interest rates and the savings rate (with interest rates leading by a few months), which was only temporarily knocked off course by the global financial crisis in late 2008 and early 2009," he wrote. "With consumer confidence reviving in the past year, the savings rate has headed due south, back in line with the low level of interest rates."
While it may not be surprising, it may raise red flags for some consumers, particularly given the Bank of Canada's decision to hike interest rates this morning. As the savings rate dipped, the Statistics Canada report showed, mortgage debt surged. That raises the question of whether there are some consumers out there - as the central bank has warned - who may not be able to handle higher debt servicing costs as rates rise.
Mr. Porter said in an interview that some consumers may have thrown caution to the wind, which is part of the risk of keeping rates so low for so long. But others, he said, would have acted responsibly, and as they should, by taking advantage of the low rates at the right time. "But there is the risk that some are overdoing it, yes."
BP shares plunge
Adding to the pressure in European markets is a plunge in shares of BP PLC this morning after its weekend failure to cap the oil leak in the Gulf of Mexico. Today was the first day of trading in London after a holiday weekend, and the first chance investors had to get out after the so-called "top kill" operation failed to halt the crude spewing into the Gulf from the disaster on the Deepwater Horizon drilling rig. BP also said its costs have now mounted to $990-million (U.S.).
"With the cost of the spill so far already mounting up to $990-million there was something of a rout when trading started in London with more than £10-billion wiped off BP's market cap in a matter of minutes," said IG Index chief market strategist David Jones. "Despite the apparent best efforts of BP, the ongoing uncertainty has led some investors to throw in the towel today, driving the price down to its worst levels since March 2009."
Related: BP faces daunting Gulf liability costs
Scotiabank beats estimates
Bank of Nova Scotia easily topped analysts' estimates this morning with a record second-quarter profit of almost $1.1-billion and record earnings in its Canadian retail banking business. On a per-share basis, the bank's profit of $1.02 surpassed projections of 91 cents.
Canada's third-largest bank by assets, Scotiabank profit jumped from $872-million or 81 cents a year earlier. Profit in its Canadian retail banking business jumped 42 per cent to $584-million.
"Our results reflect strong contributions from personal and commercial banking and wealth management, as well as the excellent performance of our wholesale business," Scotiabank chief executive officer Rich Waugh said in a statement. Read the story
HP slashes 9,000 jobs
Hewlett-Packard Co. announced this morning it plans to cut about 9,000 jobs over several years as it pumps money into its Enterprise Services business. Having swallowed and digested EDS, the company said it would invest $1-billion (U.S.) in the "next generation" of that business, focusing on what it called state-of-the-art commercial data centres.
"Over the past 20 months, we focused on integrating EDS and improving profitability," the general manager of HP Enterprise Services, Tom Iannotti, said in a statement. "Now that the integration is largely complete, we have identified significant opportunities to grow and scale the business." Read the story
Of interest rates, The Clash and Bob Dylan
Bay Street economists were in a singalong mood this morning as they awaited the Bank of Canada's rate decision.
From a morning research note from BMO Nesbitt Burns deputy chief economist Douglas Porter: "Should they stay, or should they go? If they go there could be trouble, but if they stay there will be double. With apologies to The Clash, that's about the dilemma the Bank of Canada faces in today's highly anticipated interest rate decision."
From a research note from Scotia Capital economists Karen Cordes Woods and Derek Holt: "By some accounts, if Bob Dylan were penning this morning's Bank of Canada rate announcement, he'd be relying heavily on the lyrics from 'Blowin' in the Wind.' The concern is that the overnight market correction sets an awkward backdrop for today's BoC statement, and reduces the odds of a hike. We disagree. We view this central bank as being driven by the conviction of its internal thought processes."
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