January 2008 Market Research

[BMironov]

Globe and Mail:Economy strong, business leery (Jan 15, 2008)
http://www.theglobeandmail.com/servlet/sto...PStory/Business

QUOTE The Bank of Canada`s latest business outlook survey suggests that the economy is still in overdrive, but that the high dollar is keeping inflation in check and companies are increasingly leery about what the future holds.

About 60 per cent of the companies that responded to the central bank`s quarterly survey said they were having difficulty meeting demand, especially in the services sector. That`s a record high for the survey - and a key indicator that the Canadian economy is facing capacity restraints.

"Pressures remain elevated in Western Canada and continued to rise in the rest of the country," the Bank of Canada said in its commentary yesterday. "Labour continues to be the most commonly reported constraint on production capacity."
...
"Expectations of solid domestic demand are helping to offset the dampening effect of the most recent appreciation of the Canadian dollar and a weaker outlook for U.S. economic growth on firms` sales expectations," the survey said. "Nonetheless, many firms reported increased uncertainty about the economic outlook."
...

By the numbers

42%Proportion of respondents who said they`d have `some difficulty` meeting an unexpected increase in demand. Some 18 per cent said they`d have `significant difficulty.`

41%

Respondents who said their company faced a shortage of labour, restricting its ability to meet demand.

You can load report at:
http://www.bank-banque-canada.ca/en/bos/20...er/bos0108e.pdf

 

[BMironov]

Globe and Mail:GM still weighing model lineup for Oshawa (Jan 14, 2008)
http://www.theglobeandmail.com/servlet/sto...NStory/Business

QUOTE General Motors Corp., is still studying which cars to build in Oshawa, Ont., alongside the new Camaro, because the U.S. debate on fuel economy means it`s difficult to assess the market for rear-wheel-drive cars, company chairman Rick Wagoner says.
...
GM is undertaking a massive redevelopment of its Oshawa car plants as part of the $2.5-billion Beacon Project, which received more than $400-million in financial assistance from the federal and Ontario governments.

One of the two car plants will be closed and the company will construct a leading-edge flexible plant that will allow it to assemble cars off more than one platform or basic underbody.

Sources said the original plan called for GM to manufacture as many as 500,000 rear-wheel-drive vehicles, including the Camaro, once the plant was running at full tilt by 2010.

 

[BMironov]

Globa and Mail:At GM, a greener car beats a smaller one (Jan 14, 2008)
http://www.reportonbusiness.com/servlet/st...y/Business/home

QUOTE The auto industry`s race to develop more fuel-efficient and environmentally friendly technology is being driven mainly by the reluctance of Americans to buy smaller vehicles, says General Motors Corp. chairman Rick Wagoner.

“Small cars? We`ve tried that and it doesn`t work in this country,” Mr. Wagoner said Monday. “It might work some day, but today it doesn`t. People are simply not willing to make that radical a trade-off.”

It`s an industry-wide issue, he declared, disputing the notion that GM and Toyota Motor Corp., the Detroit company`s rival for worldwide sales leadership, are engaged in a fierce competition of their own for environmental leadership as well.
...
“It`s not like, hey, Toyota beats GM with this hybrid, we beat them with fuel cells. Broadly thinking about this issue does require some sort of industry perspective and not just a relatively competitive perspective.”

But as the two biggest auto makers – Toyota is also the richest while GM is trying to return to profitability – they can afford to invest the billions of dollars required to bring new technologiesto market.
...
Electric vehicles, fuel-cell-powered cars and more hybrid propulsion systems are among the technologies currently under development.

“There is no single solution that can solve all the problems,” Toyota president Katsuaki Watanabe declared yesterday in a briefing to about two dozen journalists, adding that the Japan-based company is spending $1-million (U.S.) an hour researching and developing the cars and systems of the future.

Mr. Wagoner put GM`s costs in the hundreds of millions of dollars.

As it was said in many reports, Canadian auto industry is moving from assembly-type to research-type. Numbers in this article clearly show how much just 2 leading companies spend on R&D. At the moment GM has research facilities in Oshawa and in McMaster University (Hamilton, ON). Therefore, "green" technologies are great opportunity for Canada to capitalize in the light of flying-high Canadian dollar.

 

[BMironov]

RBC Economics:Provincial outlook (January 2008)
http://www.rbc.com/economics/market/pdf/provfcst.pdf

QUOTE Growth forecasts lowered for central Canada
We have lowered our 2008 growth forecasts for several provinces, but the changes were disproportionately skewed towards Ontario and Quebec. We expect Newfoundland, Prince Edward Island, Ontario and Quebec to be the slowest-growing provinces and to come in below the national average; the remainder of the provinces are expected to post above-average growth, led by Alberta, Saskatchewan, and Manitoba.

This is not to say that all is as rosy for resource-based provinces as has been the norm in the past few years. Cracks are appearing in the economies of British Columbia, Alberta (despite oil prices hitting US$100/bbl) and Saskatchewan that will result in softer growth this year. Recent developments, however, are causing us to be more bullish on prospects by the close of this decade than was previously the case for Newfoundland, New Brunswick, Nova Scotia and, particularly, Saskatchewan. If Saskatchewan plays its cards right, then its early fortunes could become an embarrassment of riches for a small population through the triple play of diamond mining, renewed interest in developing its rich uranium deposits and a quickening pace of development in the immensely rich but challenging Bakken formation thanks to high oil prices and better technology.

For Canada, a positive aggregate terms of trade advantage, largely as a result of high commodity prices that benefit our resource dependency, is insulating the economy against many other shocks. This is truer, however, for some regions than others. Furthermore, job markets remain stronger than stateside and this is aiding Canadian housing markets, which are getting a lift from the mortgage market liberalization that began when the federal government opened up the mortgage insurance market in early 2006. The fact that fiscal policy measures are far healthier north of the border and that Canada has a wealth of major capital spending projects in the works offer added comfort.

• British Columbia — Capital projects a modest growth support
• Alberta — High oil prices help offset downsides to growth
• Saskatchewan — Cyclical peak but great long-run potential
• Manitoba — Manufacturers bucking the national average
• Ontario — Forecasts revised downQuebec — Similar fate to OntarioNew Brunswick — Upside risks via proposed capital projectsNova Scotia — Deep Panuke finally on trackNewfoundland and Labrador — The path to "have" statusPrince Edward Island — Potato wart crisis averted so far

 

[BMironov]

CIBC World Markets:Did Canada Really "Lose" So Many Jobs In December? (Jan 11, 2008)
http://research.cibcwm.com/economic_public...oad/labourc.pdf

QUOTE There`s only one way to "spin" the Canadian employment report for December – it was weak – but the cup was half empty or half full for the more accurately measured 3-month and 12-month trends. For December, while the 5.9% jobless rate held steady, in nearly all of the key breakdowns for employment, there were minus signs attached. The 19K headline jobs decline was nothing compared to a 51K drop in private sector paid hiring, since all of the job additions were in self employment or the public sector. We were unable to get the more detailed data needed to update our employment quality index, but the tilt to what are typically lower paid self-employment positions will be a negative for that indicator.

Did Canada really lose 19K jobs in December? While that`s what the survey said, it`s doubtful. The same moderately sized sample told us that more than 100K jobs had been added in the prior two months. Remember, these monthly estimates for total employment, a number over 17 million, have a fairly wide statistical confidence band. The huge upside surprise in the jobs count in the prior two months may have been overstatements. Put the three months together, and the fourth quarter saw an average monthly jobs gain of nearly 30 thousand, a very healthy pace. Moreover, wages are accelerating, and have advanced at a nearly 5% pace in the past year, providing a substantial gain in purchasing power.

That`s the positive spin on the trend. The downside is that when you are looking for a temperature reading on the business cycle, you have to look at how cyclical industries are faring, and there the trends look decidedly soft. Manufacturing lost another 33K jobs in December to stand down a whopping 6.2% in the past 12 months. Construction is still hiring, but overall, the private sector has been adverse to expanding, with employment up a scant 0.4% since December 2006, as job shedding in financial services added to the weakness at factories That`s been masked by a 6.5% gain in public sector jobs, as governments, schools and hospitals beefed up staffing.

If national data on a monthly basis are statistically suspect, in percentage terms, the scope for error is even wider at the provincial level. The more meaningful 12-month trend shows that the national 2.2% employment gain was titled towards BC and Alberta, with New Brunswick a standout in Atlantic Canada. Great note about how to read Statistics Canada reports!

 

[BMironov]

Financial Post:Housing market cracks $100B sales record (Jan 15, 2008)
http://www.financialpost.com/story.html?id=239708

QUOTE The resale housing market cracked $100-billion in sales activity for the first time in Canada`s 25 largest markets, according to the Canadian Real Estate Association.The Ottawa-based group said 362,934 units sold last year, a 7.9% increase from a year ago. Annual sales records were set in Regina, Saskatoon, Winnipeg, Toronto, London and St. Thomas, Hamilton-Burlington, Kitchener-Waterloo, Ottawa, Montreal, Quebec City, Saint John, Halifax and Newfoundland and Labrador

"The statistics show just how dynamic the Canadian housing market was in 2007 in virtually all parts of the country," said Ann Bosley, president of CREA. "The record sales activity shows it remains a very affordable real estate market."
...
For the year, CREA said the dollar figure for sales in the country`s 25 largest market was $118.3-billion, a 19.6% increase from a year earlier. The large dollar figure was one part record sales transactions and one part record sale prices.

For most of this year it has been a seller`s market, says the real estate group. That has meant rising prices. The average price of a home sold in 2007 reached $326,055, a 10.8% increase from a year earlier. That was the largest annual percentage increase in 18 years.

"Resale housing demand remained high throughout 2007 due to job and income growth, the continuation of attractive financing and upbeat consumer confidence," said Gregory Klump, chief economist with CREA.

Mr. Klump expects 2008 will continue to be strong and is predicting sales will be the second highest on record, trailing only last-year`s pace.

 

[BMironov]

Toronto Star:Fast train pulls in, 18 minutes late (Jan 16, 2008)
http://www.thestar.com/News/article/294404

QUOTE GO was criticized in last month`s report by Ontario Auditor General Jim McCarter for poor on-time performance, which fell to 89.5 per cent the previous year, well below the 98 per cent notched by Montreal`s commuter train system.
...
The commuter rail service has blamed its tardy trains largely on malfunctioning old equipment and the fact that most tracks it uses are owned by other railways running freight and passenger trains.

The new locomotives are faster and more powerful, allowing them to pull an extra two cars on each train, adding capacity for 300 more passengers on each trip – the equivalent of 30,000 a year – which means fewer riders will be left standing, said Smith.
...
The new trains will enter service on the Lakeshore and Milton lines starting in March and other lines over the next two years. The total cost is $143 million.

"Bit by bit, we`re improving the system," Smith said, noting GO is now improving signals at Union Station, building a third track along the Lakeshore line and installing more hot air blowers to keep rail switches from freezing in winter – a frequent cause of late trips.
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McGuinty`s government has boosted funding to GO by $1.8 billion since taking power in 2003, including six new stations, 70 new rail cars to go with the 27 new trains and the track expansion program.

Of the 27 new trains, 16 are earmarked to replace existing engines.

"It`s great news for parents who are trying to get home quicker to their kids," McGuinty said. "It`ll get more people off the roads."

 

[BMironov]

Financial Post:Toyota plant tops GM Oshawa (Jan 16, 2008)
http://www.financialpost.com/story.html?id=241074

QUOTE For eight years, General Motors Corp.` s Oshawa, Ont., assembly facility just east of Toronto has produced the most cars of any factory in North America, cranking out Chevy Impalas and Pontiacs for willing buyers. No more.

Toyota Motor Corp. says its plant in Georgetown in northern Kentucky made more cars than Oshawa last year, making it the top-producing car-assembly factory on the continent. The news was not trumpeted in a media release, but communicated quietly to senior Toyota manufacturing staff on Monday via e-mail.
...
Toyota Georgetown built 514,590 cars in 2007 --most of them popular Camry sedans -- versus Oshawa`s 469,907.

Even allowing for the fact the Oshawa car plant shut down for one month in December for retooling (lowering yearly output by about 40,000 units, a GM official said), Toyota still comes out on top.
...
Toyota boosted vehicle and engine production in North America to record levels last year, building 1.67 million vehicles and 1.57 million engines overall, a 10% increase from the previous year. Plans are underway to boost output to 2.2 million units by 2010.

The company`s output has risen 39% over the past five years. It now makes 11 vehicle models on the continent.

A new Toyota plant in Woodstock, Ont., will open later this year to make RAV4 compact SUVs. Toyota`s plant in Cambridge, Ont., is readying new versions of the Corolla and Matrix cars.

The Canadian dollar`s rise in the past year has led to the company`s Canadian factories becoming among the highest-cost in the world to operate, Mr. Tanguay said. He said Toyota is trying to cut costs several ways, including sharing distribution and other resources between its Woodstock and Cambridge locations.

"Probably now the highest point on the agenda is how to remain cost competitive," Mr. Tanguay said. "We have to be competitive versus other Toyota plants. And that`s probably where I get the most pressure."

 

[RedlineBrett]

Red Hot Rents in Calgary level off, vacany rates remain very low

http://www.calgaryeconomicdevelopment.com/...as_she_goes.pdf

Rents stay the same... but vacancy rates still very low. New supply coming on stream in `08 and `09 but is largely pre-leased.

 

[BMironov]

Financial Post:Oilsands costs leap US$10 a barrel (Jan16, 2008)
http://www.financialpost.com/story.html?id=242217

QUOTE A typical Canadian oilsands project now needs long-term oil prices above US$60 a barrel - up 20% over a year ago - to be economic , an industry expert told an oilsands conference in Calgary on Wednesday.

Bob Dunbar said there is no evidence that input costs, which have soared over the past three years across the Alberta-based industry, are levelling.

"An attractive rate of return can be generated with a long-term West Texas Intermediate price in the range of US$60 to US$70 a barrel," Mr. Dunbar, whose company Strategy West, consults to many oilsands players and to the Canadian Association of Petroleum Producers.
...

Mr. Dunbar also offered up an aggressive production forecast for the industry by 2020, telling the fifth annual Insight Information oilsands conference that output could rise from one million barrels a day today to six million by 2020, if all projects announced so far get built.

The high case scenario would require $23-billion worth of investment annually over the next 12 years.

"That`s essentially a doubling of today`s investment rate," Mr. Dunbar said.

A "more manageable" production growth forecast would see bitumen production grow to four million barrels a day, requiring annual investment levels of $13-billion, he said.

 

[BMironov]

Statistics Canada:Investment in non-residential building construction (Jan 17, 2008)
http://www.statcan.ca/Daily/English/080117/d080117b.htm

QUOTE Investment in non-residential building construction set a seventh consecutive annual record in 2007, thanks largely to huge gains in the construction of office buildings in Alberta and British Columbia.

Investment in commercial, industrial and institutional projects hit $39.8 billion, up 10.8% from 2006. Furthermore, the outlook for 2008 remains positive with more than 12,000 of major projects under construction for a value of $21.5 billion, an increase of 4.0% compared with the same period of 2006.

In constant dollars, annual investment was up 1.5% from 2006 to a record high of $29.2 billion.

Two components contributed to the gain in 2007. Commercial investment rose 18.3% from 2006 to a record $23.8 billion, while institutional investment was up 3.9% to $10.4 billion, also a record. Industrial investment declined 3.4% to $5.6 billion.

Western Canada`s dynamic economy continued to spark the non-residential sector. Alberta and British Columbia alone accounted for more than 80% of the total increase in non-residential investment nationally in 2007. In both provinces, commercial projects dominated investment.
...
Overall, six provinces recorded fourth-quarter gains, but the biggest increases, in dollars, occurred in Ontario, Alberta and Quebec. In all three provinces, total investment reached record highs and was due mostly to the construction of major office buildings already underway.

Of the 34 census metropolitan areas (CMAs), 21 showed gains in the fourth quarter, with Toronto and Calgary showing the largest increases (in dollars). Both set a record high.

Other highlights:

• Commercial component: Heavy investment in Western and Central Canada
• Record fourth-quarter investment in institutional buildings Industrial component: Increases in the last three quarters

 

[BMironov]

TD Economics:THE FIVE FINGER GUIDE: ECONOMIC DATA THAT PROVIDE A HEADS-UP TO A U.S. RECESSION (Jan 17, 2008)
http://www.td.com/economics/special/bc0108_usrec.pdf

QUOTE Alongside the doomsayers are those, like ourselves, who believe the U.S. is not in a recession, but that doesn’t mean that the economy will avoid hardships. And, most analysts in this camp can agree that the risks are quite high for a U.S. recession, with our odds placed at 40%. So what might investors look at to gauge recession risks and the tipping point? There isn’t a single silver-bullet leading economic indicator that can perfectly predict recessions every time, but we’ve put together five indicators that have historical precedence in calling it right. These include: interest rate spreads, manufacturing ISM index, initial jobless claims, residential building permits, and private sector employment. Readers should note that these indicators are not meant to reflect an exhaustive list or perfect predictors of recessions. But, they do provide an easy-to-follow short-list that help gauge economic momentum. They are available with minimal delay and are not subject to great revisions (except in the case of employment data). In addition, each one contains a nugget of information or basic rule of thumb that has generally withstood the test of time. The recession markers used in this paper follow the official NBER definition, usually consisting of two or more quarters of declining real GDP, but not in all cases since they use a broader array of indicators than just real GDP.
...
Conclusion
All told, the mixed readings on the indicators are consistent with a considerable economic slowdown or possibly even a technical recession. Although we believe that the U.S. economy will slow to a 1.8% pace in 2008 – the worst showing in six years – most of that weakness is expected to occur in the first half of the year with the quarterly pace averaging 1.2% (annualized) following an equally weak fourth quarter in 2007. Since our predictions for the first half of the year are so close to zero, it wouldn’t take much for the U.S. economy to experience small contractions in one or two quarters, especially in the first quarter where we are currently predict only 0.6% growth. However, there is no need to run out and buy canned goods.

 

[BMironov]

CIBC World Markets:Does it matter? (Jan 18, 2008)
http://research.cibcwm.com/economic_public...load/sjan08.pdf

As is the case for crude oil, the US economy has made no contribution to the recent surge in global metal demand.

QUOTE If the US economy is in recession, it’s remarkable how little impact that has had on global commodity markets. US$90 crude prices and US$3.20 copper prices seem to be defying American economic gravity. In fact, broadly based commodity price indexes like the CRB continue to post new record highs. Either the US economy is not nearly as weak as financial markets perceive it to be, or the US economy is not nearly as important to the global economy as it once was.
...
But an even bigger factor in the strength of today’s commodity prices has been the US economy’s loss of importance to the global economy. Whereas in the late 1990s, American economic growth accounted for nearly 30% of global growth, today it accounts for only 10%. And that loss is much greater when it comes to impacting resource markets.
...
Whether the US is heading for a recession or just a mid-cycle slowdown remains to be seen. But the more important question for crude, base metals and other resource markets, is whether it really matters anymore.

This StrategEcon issue has 3 parts:
Delays Will Tighten Global Oil Markets
Are Canadian REITs Oversold?
Is the US Already in Recession?

 

[BMironov]

CIBC World Markets:Presentation: Outlook 2008
http://research.cibcwm.com/economic_public...ncome_jan08.pdf

 

[BMironov]

Globe and Mail:Alberta puts royalty relief on the table (Jan 21, 2008)
http://www.theglobeandmail.com/servlet/sto...PStory/Business

Province considers offering energy producers breaks over `unintended consequences` of controversial hikes

QUOTE The Alberta government is considered easing royalty increases in several major areas of the oil and natural gas business, responding to industry`s anger over "unintended consequences" that have led to spending cuts of more than $1-billion.

The key part of the sector that could receive relief is "high-cost, deep, high productivity [natural] gas wells," the type of multimillion-dollar efforts that are drilled to depths of several thousands of metres during the winter months when the rugged ground is frozen in the Foothills of the Rocky Mountains.

These wells produce large volumes of natural gas, accounting for the majority of the province`s gas royalties, and have been the main area of cutbacks by firms such as EnCana Corp., Canadian Natural Resources Ltd. and Talisman Energy Inc. after the province announced increased royalties.
...
The three other categories are all high-cost, deep, high-productivity wells: conventional oil, sour oil (which contains significant amounts of hydrogen sulfide) and natural gas drilling that involves multiple lateral spurs in the subsurface.

 

[BMironov]

Financial Post:What could rattle Canada? (Jan 21, 2008)
http://www.financialpost.com/analysis/stor...738&k=76431

QUOTE There was no end to horrible news out of the U.S. economy last week but as the Bank of Canada puts the finishing touches on its interest rate announcement tomorrow, it is the emerging market giants it should be closely scrutinizing.
...
Mr. Gampel points to a report from his colleague auto analyst Carlos Gomes as a reminder of just how quickly the middle-class is developing. Auto sales surged 20% in China and South America last year, more than offsetting lower volumes in mature markets. South America overtook China as the fastest-growing region, although China is still on track to overtake the United States as the world`s largest market by 2020.

Canada has the raw materials to help make that happen.
...
"Average levels of wealth are growing by leaps and bounds, and it is this new middle class in these countries that has become the price-setting group for most global commodities," he said in his recent issue of Basic Points. "That role was filled by North Americans and Europeans in all economic cycles of the last century."

Jeff Rubin, chief economist at CIBC World Markets and a commodity bull if ever there was one, simply asks: "Whether the U.S. is heading for a recession or just a mid-cycle slowdown remains to be seen. But the more important question for crude, base metals and other resource markets is whether it really matters anymore?"

 

[BMironov]

The Vancouve Sun:Metro`s economy will grow by 3.3 per cent (Jan 22, 2008)
http://www.canada.com/vancouversun/news/bu...8f-4f295578ab7a

Higher housing prices will depress starts, conference board says

QUOTE The Metro Vancouver economy will grow by a solid 3.3 per cent this year -- despite higher housing prices that will depress housing starts, the Conference Board of Canada reported Monday.

The board`s outlook of Canada`s 27 largest metropolitan areas puts the city`s growth rate in a tie for third place with Abbotsford, compared with 10th place last year when the Vancouver economy grew by three per cent.

"Increased prices will hurt housing demand, causing starts to drop by 10.1 per cent in 2008 [to 17,300]," the report said. "But non-residential activity will once again be the saviour of the construction sector, with a flurry of projects underway on both the Olympic and non-Olympic fronts."
...
Western Canada had the top five spots in this year`s growth forecast list -- with Calgary (4.2 per cent), Edmonton (four per cent), Winnipeg (3.4 per cent), Vancouver (3.3 per cent) and Abbotsford (3.3 per cent) leading the way.

The conference board said strong energy demand, furious construction activity and robust consumer spending growth will continue to drive Calgary`s outlook.

It said Edmonton is high on the list for many of the same reasons as Calgary, while a strong job market in Winnipeg is helping attract more immigrants.

Toronto placed seventh on the list, with a growth forecast of 2.8 per cent.

"Although the rise in the Canadian dollar has wreaked havoc on Toronto`s manufacturing sector, resilient consumer spending has helped the services sector pick up some of the slack," the board said.

Victoria is ninth on the list and Kitchener, Ont., is 10th, both with expected growth rates of 2.7 per cent this year. On the periphery of the top 10 are Ottawa-Gatineau at 11th and Saskatoon at 12th.

 

[BMironov]

Globe and Mail:Fed cuts rates by 75 basis points (Jan 22, 2008)
http://www.reportonbusiness.com/servlet/st...y/Business/home

QUOTE WASHINGTON — The Federal Reserve, confronted with a global stock sell-off fanned by increased fears of a recession, cut a key interest rate by three-quarters of a percentage point on Tuesday.

The Fed said it was cutting the federal funds rate, the interest that banks charge each other on overnight loans, to 3.5 per cent, down by three-fourths of a percentage point from 4.25 per cent.

The Fed action was the most dramatic signal it can send that it is concerned about a potential recession in the United States. It marked the biggest one-day move by the central bank in recent memory.

 

[BMironov]

Financial Post:RBC follows Bank`s lead with quarter-point cut (Jan 22, 2008)
http://www.financialpost.com/story.html?id=255876

QUOTE Royal Bank of Canada responded swiftly to the central bank`s announced rate cut by decreasing its prime lending rate by 25 basis points to 5.75%.

RBC is the first of the big Canadian banks to act following the Bank of Canada`s decision to cut the benchmark interest rate by 25 basis points to 4.00% on Tuesday, following a 75-basis-point cut to the U.S. rate by the Federal Reserve.

There had been some speculation that the commercial banks would resist the urge to follow the Bank of Canada by lowering rates. However, RBC`s announcement that it will cut its prime rate from Wednesday was quickly followed by the other big banks. Canadian Imperial Bank of Commerce, Toronto-Dominion Bank and Bank of Montreal also said they are lowering the prime lending rate by 25 basis points.

 

[BMironov]

TD Economics:BANK OF CANADA NOT DONE IN CUTTING RATES (Jan 22, 2008)
http://www.td.com/economics/comment/bc012208.pdf

QUOTE

• Bank of Canada cuts by 25 basis points Bank to cut 50bps on March 4th and 25bps on April 22nd

The Bank of Canada cut the overnight rate this morning by a quarter-point to 4.00%. This was broadly in line with market expectations; however speculation was building in the days leading up the meeting that the Bank might be more aggressive given that financial market confidence had been severely undermined by the prospects of a U.S. recession and the possibility of some contagion to the global economy. Speculation of a more aggressive Bank of Canada decision climaxed when the Federal Reserve caught financial markets completely off guard this morning with an inter-meeting cut of 75 basis points. Nevertheless, the Bank stuck to their guns with a more measured approach, reflecting their view that domestic demand on this side of the border is expected to remain strong. However, the Bank made it quite clear in this morning’s communication that they are prepared to deliver more rate cuts down the road when they stated that “further monetary stimulus is likely to be required in the near term to keep aggregate supply and demand in balance and to return inflation to target over the medium term”.
...
It is also important to remember that unlike their American counterparts, Canadians are not getting hit on both ends of their asset portfolios. Home prices remain on the upswing in most major urban centers, and there is little concern that the Canadian housing market will start to mirror the slump in the U.S. In fact, we believe national home prices will rise at a rate of 5-7% in 2008, compared to a U.S. market that will likely absorb losses of around 5% or more.

However, we believe that by the next meeting, data on the U.S. economy will provide a smoking gun, showing clear signs of a sharp economic slowdown. Given that inflationary pressures remain well in hand, a 50 basis point cut would provide much-needed insurance against the degree to which a U.S. economic downturn would lap onto Canadian shores. Certainly, inflation will not provide a barrier to a more aggressive Bank of Canada. The central bank has indicated that increased competitive pressures in the retail sector and the one percentage point GST cut at the start of the year will cause both core and total CPI inflation to fall below 1.5% by the middle of this year before returning to their 2% target by the end of 2009.