Canadian Economy speeds up
The economy picked up pace in February, expanding at a 0.4% pace, considerably faster than January’s 0.1% gain. The 3.6% annualized three-month running rate trounced the sub-2% pace in the final six months of 2006. The economy is now on track to meet our forecast for a 2.8% rise in the first quarter.
Employment slipped by 5,200 in April, disappointing expectations for the first time since last September. However, the lustre is not off Canada’s jobs market with gains still running at a strong 38,200 average monthly rate this year, faster than the average monthly pace of 2006, which was a very good year for employment.
Nominal retail sales rose 0.1% in February, but after subtracting inflation they fell 0.7%. However, recent gains in real manufacturing shipments, employment and real wholesale trade point to the overall economy expanding in February at moderate 0.1% pace and at a 2.3% annual rate in the first two months of the year.
Housing starts eased 1% to a 211,900 unit pace (annualized) in April from 214,000 units in March. Multiple-unit starts increased 2.3%, while single-unit starts slipped 1.2%. Starts will ease off their recent highs, but given the tight labour market, rising incomes and relatively low interest rates, they will remain solid this year.
Despite the unexpected narrowing in the merchandise trade surplus to C$4.6 billion in March from C$5.2 billion in February, exports outpaced imports in two of the three months of the year, meaning that the trade sector supported overall economic growth in the first quarter.
The all-items consumer price index rose 0.8% in March (2.3% year-over-year) largely on the back of a 12.5% surge in gas prices. The Bank of Canada’s core rate increased by 0.3%, keeping the year-over-year rate elevated at 2.3%, the third month in a row that the rate held above the Bank's 2% target.
Financial markets…
Bank of Canada to raise rates in late 2007 and 2008
p Upside risks to the inflation outlook will put the Bank of Canada into rate hiking mode later this year.
The economy is picking up pace with strong job gains supporting consumer spending and business investment.
The Bank of Canada has upped its inflation forecasts and trimmed back the growth outlook a bit.
We expect that the Bank of Canada’s core measure of inflation will remain above 2% and that economic growth will be stronger than the central bank assumes.
Interest rates will be range-bound in the near-term, but stronger growth and elevated inflation prints will see higher rates in the second half of this year.
Fed rate unlikely to cut rates now — two hikes likely in 2008
p U.S. economic growth was disappointing in the first quarter, but consumers and businesses continued to spend.
Firm labour market conditions and rising wages will offset the negative pull from the housing market correction.
Core inflation rates have slowed but still remain elevated above the Fed’s comfort zone.
Inflation expectations and input prices are rising — a worrisome development for policymakers. The inflation backdrop leaves the Fed with no wiggle room to lower interest rates even though the housing market correction continues to unfold.
Interest rates will hold to current ranges as investors grapple with the combination of somewhat slower growth and sticky inflation.
As the economy accelerates in the second half of the year, the case for the Fed to raise rates will become clearer. We expect the Fed to raise the funds rate by 25 basis points in the second quarter of 2008 and again in the third quarter, with the Fed funds rate peaking at 5.75%.
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A. Mark Argentino, Broker, P.Eng.,
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