Toronto Gold Bullion Newsletter Archive - Daily FX report dated 28/02/2011

Fears that Libya could send oil soaring to new heights and spark another global downturn had eased by the end of last week, but the unpredictability of upheaval in the region gives Mark Carney yet another reason to keep rates on hold for longer than most expect.

On Tuesday, the Bank of Canada Governor is expected to leave his benchmark interest rate at 1 per cent, where it has been since last September. The real question is whether he’ll drop any hints about when he intends to start tightening again.

Most economists say a strengthening labour market, greater investment by businesses and a resurgent export sector will push the central bank off the sidelines in late May or mid-July, and possibly sooner if the next inflation report from Statistics Canada shows higher energy and food costs seeping into other areas.

But a small group of outliers has been saying for months that Mr. Carney might stay on hold until October or later, a timeline that would mark the second pause of more than a year since the crisis started in 2008. Increasingly, it looks as if they may be right.

True, the accelerating rebound in the U.S. economy – Canada’s No. 1 customer – 'points to faster growth on this side of the border, too. A report from Statistics Canada on Monday will probably show that in the fourth quarter, the annual pace of expansion surpassed the 2.3-per-cent rate Mr. Carney estimated in January. Trade figures from December indicated tax cuts and other steps to boost the U.S. helped Canadian exporters clock their best month in three decades. And in January, employers hired four times as many workers as anticipated, a sign that momentum from late last year carried over into 2011.

However, the 7.8-per cent jobless rate is keeping a lid on wages, which is partly why inflation remains well within Mr. Carney’s comfort zone. The central banker aims to keep annual inflation around 2 per cent and pays closest attention to a measure of price gains that strips out things like gasoline, electricity and most groceries. In January, that so-called annual core rate was 1.4 per cent, a tick slower than the previous month’s pace.

Also, recall that at his last decision on Jan. 18, Mr. Carney held firm even while citing a slightly improved forecast for the economy this year and next. Europe’s debt and bank troubles continued to be a “significant” source of uncertainty, he said at the time and could easily still say today. And though things were looking up for the United States, the “cumulative effects” of a currency at par with the greenback and Canadian companies’ tepid progress in improving their productivity would restrain companies’ ability to reap the rewards, he warned.

That was before revolutions in Tunisia and Egypt unleashed the torrent of protest across the region which last week sent oil prices past $100 (U.S.) a barrel for the first time since 2008, when $150-a-barrel crude exacerbated the burgeoning global financial crisis.

By the end of last week, the general consensus seemed to be that while past oil shocks have led to recessions, all will be fine this time around as long as suppliers bigger than Libya, such as Saudi Arabia and Iran, don’t implode, too, and as long as prices don’t surge beyond about $120 for a long stretch. Indeed, as a net exporter of oil, higher prices aren’t necessarily bad for Canada, and of course are great for energy companies in Alberta.

Higher oil prices will make it harder for China, India and other rapidly-growing emerging markets to contain inflation without aggressive tightening moves that choke off demand, while also squeezing the ability of consumers in the United States and Europe to spend money on anything other than basics like energy and food.

The Canadian economy grew by a robust 3.3% annualized in the final three months of 2010, Statistics Canada reported Monday, as exports did the heavy lifting in the quarter.

The data suggested the economy ended the year with a bang, as real GDP advanced 0.5% in December on a month-over-month basis.

Overall, this was a strong reading, above market expectations of a 3% annualized gain in the quarter. The Bank of Canada had forecast growth in the fourth quarter of 2.3%.

As a result, the Canadian data indicate the economy grew at a faster clip than the United States, based on the headline number. Last week, U.S. figures showed the American economy grew at a 2.8% annualized rate, slower than previously calculated and less than forecast as state and local governments made deeper cuts in spending.

The GDP report was among the last pieces of data prior to the Bank of Canada’s interest rate decision on Tuesday. The data also paints a portrait of what drivers are expected to push the economy forward in 2011 – with net exports and business investment expected to pick up the slack for a weary, highly-indebted consumer.

Exports increased 4% in the fourth quarter, while imports slowed to 0.1%, the slowest rate of growth in six quarters, according to the data-collecting agency.

Business investment in plant and equipment increased 2.5% in the October-to-December period, its fourth consecutive gain. The main contributor was a 4.9% increase in investment in non-residential structures.

Despite the strong report, the Bank of Canada is expected to remain on hold with its interest rate decision on Tuesday, and might make reference to recent political events in the Middle East and North Africa – which has driven up oil prices and sparking fears of a global economic slowdown.

Consumer spending in the U.S. rose less than forecast in January as increasing food and fuel prices caused Americans to cut back on other goods and services.

Purchases increased 0.2 percent, the smallest gain since June. Commerce Department figures showed today in Washington, incomes climbed more than projected, reflecting the tax-cut compromise reached by President Barack Obama and Congressional Republicans in December, and inflation remained below the Federal Reserve's long-term forecast.

While tax savings and rising confidence in the recovery indicate households will keep shopping, purchases may be tempered by the highest gasoline costs in two years and 9 percent unemployment. After adjusting for changes in prices, the data signal the economy will get less of a boost from Americans’ spending in the first quarter than the prior three months.

“The consumer has become slightly more cautious,” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina who correctly projected the gain in purchases. “The extra money for gas prices is coming out of consumers’ pocket. Spending will be positive, but modest.”

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