Thursday, September 21, 2006

RBC Royal Bank Report: "Economny Shifts Gears" September 2006

RBC Royal Bank "Leading indicator points to positive, but slower, growth ahead"
Latest month available: August 2006

Release date: September 20, 2006

Fixed income and currency market reaction
The leading economic indicator rose by 0.2% in August. July's increase was revised up to show a 0.3% increase, (previously reported as 0.2%).

The rise in the leading indicator confirms that economy continued to exhibit decent momentum in the third quarter with seven of the 10 components recording increases in August.

The biggest decline occurred in the housing index, which fell 2.5% as a result of a decline in housing starts and a levelling off of house sales. The slowing in housing market activity restrained growth in furniture and appliance sales to 0.5%, their slowest increase this year.

Manufacturing new orders rose 0.1%, while the ratio of shipments-to-inventories remained relatively flat. Money supply growth increased while the U.S. Conference Board leading indicator fell 0.1%.

Today's release points to positive, but modestly slower, growth ahead in line with our forecast that real GDP growth will moderate in the second half of the year after increasing at a 2.8% average pace in the first half.

Real GDP... Second-quarter real GDP surprises on downside
Release date: August 31, 2006

Fixed income and currency market reaction
Canadian second-quarter real GDP surprised on the downside, rising at a 2% annualized pace, below market expectations of a 2.3% annualized increase and well below the forecast put forward by the Bank of Canada in their latest Monetary Policy Report Update. First-quarter GDP growth was revised down to a 3.6% annualized pace from 3.8%. On a monthly basis, the Canadian economy remained stable in June. The lower-than-expected second-quarter read will prove negative for the Canadian dollar and positive for bonds.

While consumer spending slowed slightly in the quarter to 4.2% from the first quarter's 5.1% pace, it continued to support the economy. Expenditures on durable goods decelerated sharply.

Residential investment declined 5.2% after growing at a solid 12.7% in the first quarter due to mild winter weather. Businesses continued to invest in plant and equipment, although the pace of the investment was slower than that registered in the first. A large business inventory investment was also evident in the second quarter.

Exports fell 1.2%, continuing the decline seen in the first quarter as manufacturing output weakened further. Auto exports fell for a second consecutive quarter. Imports rebounded from a weak first quarter as the Canadian dollar appreciated. The strength of business investment accounted for much of the increase as imports of machinery and equipment grew.

Wages and salaries grew by 1.3% in the second quarter, while nominal profits edged ahead 0.4%.

The details of the report are not all bad news as most of the components contributed to growth in the quarter.

The major drag was net trade. However, most of the drag in net trade came from imports, which were largely supported by strong business investment. Hence, the overall picture is not completely one of doom-and-gloom.

The report is consistent with no change in interest rates at next week's Bank of Canada meeting and tilts the risk towards no more hikes for the remainder of the year.

Source: "Financial Markets Monthly", Economics Departnment, RBC Financial Group.
Read this report and more from the Royal Bank of Canada at this link:,,cid-10676_,00.html

For more information please contact A. Mark Argentino

A. Mark Argentino Associate Broker, P.Eng.,
Specializing in Residential & Investment Real Estate
RE/MAX Realty Specialists Inc.
2691 Credit Valley Road, Suite 101, Mississauga, Ontario L5M 7A1

BUS 905-828-3434
FAX 905-828-2829

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