Toronto Gold Bullion Newsletter Archive - Daily FX report dated 25/05/2011

The Bank of Canada should raise borrowing costs within the next few months to show consumers and businesses that it has a grip on inflation, the Organization for Economic Co-operation says in a new assessment of Canada’s economy.

Policy makers need not be aggressive in raising rates, as the reduction of fiscal stimulus, slower consumer spending as households pare record levels of debt, and a higher dollar will restrain economic growth this year, the Paris-based OECD says in the report.

Yet at 1 per cent, the Bank of Canada’s benchmark lending target – the overnight rate for loans between private banks – is “highly stimulative,” the OECD says in its biannual economic outlook for Canada and 33 other member countries.

The OECD considers a neutral benchmark rate for Canada to be between 4 per cent and 4.5 per cent, a highly academic target that nonetheless demonstrates how aggressive central bank Governor Mark Carney has been in fighting the financial crisis.

Canada’s headline inflation rate was 3.3 per cent in April, faster than the central bank’s speed limit of 3 per cent. While hotter inflation is mostly the result of a surge in food and energy prices, the OECD said there’s evidence that expectations for higher future prices are starting to rise. That’s important because the belief that inflation exists can become a self-fulfilling prophecy.

“Monetary policy remains highly stimulative despite indications that short-term inflation expectations have begun creeping upwards in recent quarters,” says the report. “The Bank of Canada should therefore resume the normalization of policy rates soon in order to pre-empt a broadening of inflationary pressure.”

The OECD predicted Canada’s economy will expand 3 per cent this year, compared with its forecast of 2.3 per cent six months ago, and 2.8 per cent in 2012, compared with the previous estimate of 3 per cent.

Through a video link from the OECD’s headquarters, Calista Cheung, the Canada desk officer, explained that the recommendation to raise rates “soon” means “within the next quarter,” provided there are no dramatic changes to the overall economic outlook.

Ms. Cheung’s urging for higher interest rates highlights a growing divergence between what experts think the Bank of Canada should do, and what investors think Mr. Carney will do.

On April 7, seven of 12 economists on the Toronto-based C.D. Howe Institute’s shadow monetary policy committee, a mix of Bay Street analysts and academics that convenes ahead of each Bank of Canada policy decision, said the central bank should have lifted its benchmark rate to 1.25 per cent on April 12. All but one of the group’s members said the overnight target should rise at the May 31 policy meeting.

But in financial markets, the sentiment is much different.

The odds that the Bank of Canada will increase interest rates by September last week sank below 50 per cent for the first time since March, Bloomberg News reported, citing an analysis of trading of overnight index swaps, which are financial assets whose value is linked tightly to expectations of future interest rates.

According to Bloomberg, the probably of a quarter-point increase by the Bank of Canada’s Sept. 7 policy announcement dropped to 38 per cent last week after Statistics Canada reported that inflation eased in April from March. The odds were 55 per cent before the Statscan release, and as high as 75 per cent last month, Bloomberg said.

Royal Bank of Canada on Tuesday revised its outlook for interest rates, predicting Mr. Carney will opt against raising borrowing costs next week, dropping its year-end prediction for the overnight target rate to 1.75 per cent from 2 per cent.

Dawn Desjardins, RBC’s assistant chief economist, told clients in a note that slower economic growth from the disruption to supply lines caused by the natural disaster in Japan and renewed worries about Europe’s debt crisis will outweigh fears about future inflation.

Article provided via The Globe and Mail

http://www.theglobeandmail.com/report-on-business/economy/oecd-urges-bank-of-canada-to-raise-rates/article2033384/

" USD- Durable orders fall most in six months "..

New orders for long-lasting U.S. manufactured goods fell more than expected in April to record their largest decline in six months as aircraft and motor vehicle orders tumbled, a government report showed on Wednesday.

The Commerce Department said durable goods orders dropped 3.6% after an upwardly revised 4.4% rise in March, which was previously reported as a 4.1% increase.

Durable goods orders are a leading indicator of manufacturing and the report suggested some cooling in factory activity as the auto sector deals with a shortage of parts following an earthquake in Japan.

Orders were pulled down by a 30% plunge in volatile aircraft bookings. Boeing took in just two aircraft orders, sharply down from the 98 it received in March, according to information posted on the plane maker’s website.

Motor vehicle bookings dropped 4.5%, the largest decline since August, likely tracking an 8.9% dive in auto production during that month. U.S. manufacturing contracted for the first time in 10 months in April as a result of supply chain disruptions in the wake of the March earthquake.

Excluding transportation, durable goods orders unexpectedly fell 1.5% after a revised 2.5% rise in March, previously reported as a 2.3% increase. Economists had expected this category to rise 0.5%.

The report showed weakness across the board, with big declines in orders for machinery, capital goods, defense aircraft, communications equipment and computers. However, orders for computers and electronic products rose.

Non-defence capital goods orders excluding aircraft, a closely watched proxy for business spending, fell 2.6% last month after an upwardly revised 5.4% increase in March. Economists had expected a 0.2% gain from a previously reported 4.3% rise.

Shipments of non-defence capital goods orders excluding aircraft, which go into the calculation of gross domestic product, fell 1.7%.

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