Toronto Gold Bullion Newsletter Archive - Daily FX report dated 23/8/2010

North America remains plagued by investor confusion. The longer it lingers, the more likely it is that markets will remain in a lull, treading water until big news pushes them in one direction or another.

This week, investors will be watching Canada’s retail sales numbers for June, as well as the most recent U.S. housing sales and durable goods orders. At the moment, none of these data points are expected to instill any sustainable confidence.

Canadian banks also begin reporting third-quarter earnings on Tuesday, but those, too, are expected to illustrate only moderate growth.

However, economic results that are in line with estimates can still offer some meaningful insight. A solid comeback in retail sales after two consecutive monthly declines will give investors some hope that the Bank of Canada’s estimate of 3.5 per cent gross domestic product growth in 2010 can indeed be met. Strong U.S. durable goods orders, as expected, could also rebuild some confidence after even higher jobless claims took a toll on American markets last week.

Because economists are not predicting a significant show of strength in either of these measures, it is likely that equity markets will continue to trade in a range. Although the Toronto Stock Exchange had a positive week, it remains stuck between 11,000 and 12,000. In the U.S., the S&P 500 has traded between 1,000 and 1,150 for over three months.

“Is this the economic pause that refreshes?” Douglas Porter, deputy chief economist at BMO Nesbitt Burns, asked in an report. His answer: “More like, the pause that terrorizes.”

He is one of many who hoped a market cool-down would give investors time to reflect on how hot the North American economy had been earlier this year, allowing them to realize more moderate growth was only inevitable. Instead, elation has turned sour, and fears of a double-dip recession are worsening.

CIBC World Markets’ chief economist Avery Shenfeld noted that investor sentiment is turning so negative that the Federal Reserve may just have to step in.

“The clouds are dark enough that we expect [Mr.] Bernanke to use his high-profile platform in the week ahead to remind markets that he still has weapons available to combat recession and deflation risks,” he wrote in a report. These weapons will largely centre around quantitative easing, Mr. Shenfeld expects, which will mean injecting additional U.S. dollars into the economy and hoping that money spreads around and spurs some growth.

Contrarily, the Bank of Canada has to worry more about controlling growth rather than stimulating it. It is widely expected that the bank will raise the overnight target rate to 1 per cent in September, but stronger-than-expected retail sales, driven by autos and consumer electronics, could help further strengthen the case that another hike may be needed.

If the Bank of Canada does raise rates again, it would likely have a huge effect on Canada’s two-year government bond yields, which have been dragged down in recent weeks.

South of the border this week, durable good orders are expected to rise 2.8 per cent month over month, demonstrating that companies may be reluctant to re-hire but are ready to invest in new equipment. Existing home sales, however, are poised to plunge 13 per cent now that new homeowner tax credits have ended.

“For the housing sector, stabilization is the best one can hope for until employment picks up,” wrote Sal Guatieri, senior economist at BMO Nesbitt Burns.