Bank of Canada raises rates, sees slower recovery
Comment of the Day

September 09 2010

Commentary by Eoin Treacy

Bank of Canada raises rates, sees slower recovery

Thanks to a subscriber for this article by Louise Egan for Reuters which also appeared in Yahoo News. Here is a section
Markets had seen Wednesday's rate hike as a close call because of rising fears of another U.S. economic downturn. Twenty-five out of 41 forecasters in a Reuters poll had predicted a rate increase.

After the rate announcement, markets were pricing in about a 68 percent probability of the bank leaving rates unchanged in October based on yields on overnight index swaps, according to a Reuters calculation.

A Reuters survey on Wednesday showed that most of Canada's primary securities dealers expect the bank to keep interest rates on hold for the rest of the year.

Ten of 12 dealers forecast no move by the central bank at its next policy announcement in October, while nine saw rates holding steady in December, and seven said they expect rates to remain at 1.0 percent through January 2011.

However, Doug Porter, deputy chief economist at BMO Capital Markets -- which said it still sees rates on hold for the rest of the year -- said he perceived a clear bias toward further increases and now suspected it would take a deeper slowdown in domestic spending to prompt the bank to stop raising rates.

"As it stands right now, our official call was for the Bank to remain on hold for the next few meetings, but that's obviously something we have to review in light of the statement and as economic figures roll in the weeks ahead," he said.

The Bank of Canada said the 1 percent rate is "consistent with achieving the 2 percent inflation target in an environment of significant excess supply in Canada."

The language was similar to that used in its last rate announcement on July 20. But the bank omitted any reference to weighing any further rate increases "against domestic and global economic developments."

Eoin Treacy's view This additional article from The Globe and Mail highlighting Canada's current trade deficit may also be of interest. Canada and Australia share a two-speed economic condition where the commodity related export sectors are booming but domestic economies are feeling the pinch from slower local growth and a decline in housing starts. Canadian monetary conditions, measured by the yield curve spread (10yr - 2yr) turned downwards in January indicating that conditions are unlikely to become more accommodative and subsequent rate increases have borne this out. However, conditions remain at very favourable levels and a number of stock market sectors are performing impressively. (Also see Comment of the Day on March 4th).

The important Financial sector has been ranging above 1450 since July 2009 and is currently testing lateral resistance in the region of 1600. The benefit of the doubt can continue to be given to the upside in the absence of a downward dynamic.

The Materials sector broke upwards from its 10-month range two weeks ago and a downward dynamic would be required to check potential for further upside.

The S&P/TSX Consumer Discretionary, Telecom Services and Industrials sectors are all trending steadily higher with unbroken progressions of higher reaction lows since March 2009. At the very least these sequences would need to be taken out to begin to question uptrend consistency. Consumer Staples has mostly ranged for the last 18 months but surged higher on consecutive weeks since early July. It is now overbought in the short-term but a sustained move below 1500 would be needed to indicate a return to supply dominance.

The Healthcare index which had trended downwards for the better part of a decade has come to life. It found support in late 2008, broke the progression of lower rally highs in August 2009 and has since found support in the region of the 200-day MA on a number of occasions. It is now somewhat overextended relative to the MA but given the commonalty in healthcare sectors globally, this is a serious medium to long-term recovery candidate.

The Utilities sector having pulled back sharply in May, moved to a new recovery high last week and remains in a consistent short-term uptrend. The Energy sector remains rangebound while the Information Technology sector continues to trend lower led by Research in Motion. Others in the sector such as Open Text and McDonald Dettwiler and Associates are going much better.

Overall, 7 of the 10 largest companies in the TSX index are from the Financial and Energy sectors. These 7 companies occupy 22.95% of the Index and since these sectors have been largely rangebound, the overall index has under represented the performance of most other sectors which have been and continue to be impressive.

Back to top