The end of the Fed’s unprecedented monetary stimulus is nigh

Your top financial and economic news for Oct. 29


Just like their gold-mining cousins, Canadian energy companies have to worry about cost containment more than ever, writes The Globe and Mail’s Jeffrey Jones:

Now, with crude prices skidding, if there’s one thing on which energy investors are laser focused, it’s operating cost.

In many cases, those expenses have been edging up over the past decade, especially as companies shifted away from natural gas and into more valuable oil, which involves higher operating costs.

So far, no one’s talking about shutting production off because of disappearing returns. But margins are getting squeezed, and executives will be forced to temper their plans for capital spending next year to match expectations for lower cash flow.

On the homefront

TSX 60 futures are lower ahead of the open after the composite index booked a triple-digit gain on Tuesday.


The loonie is continuing to build on yesterday’s gains relative to the greenback, trading above 0.897 this morning. “The Canadian dollar appears to be taking another run at 90 cents US, but this time from below, as safe-haven demand for greenbacks has waned and WTI oil has firmed (up 1% to $82.2 a barrel),” writes Bank of Montreal senior economist Sal Guatieri.


A check-up on the health of major Canadian companies. A boatload of quarterly results are expected to land today, including many from gold miners, headlined by heavyweight Barrick Gold (ABX). The highlight of the day, however, will be oil giant Suncor Energy (SU), which is slated to publish its earnings report late this evening. Ahead of the open, Teck Resources (TCK.B) posted adjusted earnings per share of $0.28 for Q3, well below levels seen during the same period in 2013 but above the consensus estimate. Revenues were in line with analysts’ expectations. Management also raised the lower end of guidance on full-year copper production as well as its estimate for full-year zinc output.


Top monetary policymakers to testify before the Senate. At 4:15pm (EDT), Bank of Canada Governor Stephen Poloz and Carolyn Wilkins will testify before the Senate Standing Committee on Banking, Trade, and Commerce in Ottawa. Due to the shootings in the nation’s capital last Wednesday, Poloz and Wilkins’ press conference and testimony before the House Standing Committee on Finance were cancelled. As was universally expected, the central bank kept its policy rate at 1 percent. Of note: the Bank sees the oil-fuelled decline in the Canadian dollar as a net negative for the economy, as the boost to exports will not fully offset weaker consumer and business spending. And while there was no hint as to whether the next move for rates would be up or down, the Monetary Policy Report provided a detailed explanation of why the Bank is keeping rates low – to facilitate as much healing in the labour market as possible.


Timmy’s-Burger King tie-up clears one hurdle. On Tuesday, the Competition Bureau declared that it doesn’t see any issues with Burger King’s proposed acquisition of Tim Hortons (THI). Another regulatory obstacle remains: Industry Canada is also reviewing this transaction to see it passes the “net benefit” test.


The Canada Revenue Agency doesn’t write too well. An internal evaluation found that letters sent to taxpayers from the Canada Revenue Agency are “poorly organized, confusing, unprofessional, unduly severe, bureaucratic, one-sided, and just plain dense,” writes CBC News’ Dean Beeby. This is bad news for both sides, as the recipients haven’t a clue what they’re reading, and the tax department has to waste resources clarifying its communications.


Rail news. This morning, Minister of Transport Lisa Raitt will announce further safety measures for railways stemming from recommendations offered by the Transportation Safety Board in the wake of the tragedy in Lac-Mégantic. Separately, in an interview with Reuters, Agriculture Minister Gerry Ritz indicated that the government would very likely remove the minimum quota for grain shipments at the end of November, as the supply glut has begun to dissipate.

Daily dispatches

The end of QE is nigh. The Federal Reserve will release its latest policy statement at 2:00pm (EDT) this afternoon, at which it is widely expected to announce that its asset purchasing program, commonly known as QE3, is over.nSt. Louis Fed President James Bullard suggested that the Fed could delay the end of quantitative easing, but this view does not appear to be the house view inside the central bank. Most economists also expect that language which indicates that rates will stay at current levels for a “considerable time” and emphasize that there is a “significant underutilization” of labour resources will remain in the statement. The drop-off in inflation expectations is, no doubt, a concern for monetary policymakers, as is the notion that inflation may be set to move lower rather than higher in the short term due to the drop-off in energy prices. However, CIBC chief economist Avery Shenfeld doesn’t think the Fed will sound too downbeat. “Unless the Fed’s world view is even more fickle than the market’s, there’s no room for a dovish surprise in anything the FOMC says,” he writes. “The risks are that any dose of economic optimism will move rates higher.” While regional Fed Presidents Charles Plosser and Dallas Fisher may dissent, it’s more important to get a handle on what the median (and modal) FOMC member’s position is – something we’ll get further clarity on once the minutes from this meeting are published.


Calmness in equity markets has returned, writes IG chief market strategist Chris Weston, and you can thank central bankers for that. “We have seen the Bank of Japan, Bank of England, European Central Bank, People’s Bank of China, and now the Riksbank in Sweden all coming out with dovish or equity-supportive actions,” he says. “This has given investors the confidence to put money to work in the equity market.”


Another positive reading out of Japan: industrial production rose 2.7 percent month over month in September, half a percentage point more than economists anticipated. This print marks the first time this metric has increased on an annual basis since July, however,  it’s worth noting that this data point is rather volatile.

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