It’s the Bank of Canada’s biggest day of the year

Your top financial and economic news for Oct. 22


Forget what you’ve heard: the herd is usually right. However, when it comes to what government bond yields would do this year, the consensus has been very, very off the mark.

Per MarketWatch:

Just about six months ago, a headline flashed across the top of MarketWatch’s home page. It read: “100% of economists think yields will rise within six months.”…

On Tuesday, the 10-year note traded at a yield of 2.21%, almost four-tenths of a percentage point lower than in April. Let’s not forget that the yield unexpectedly dipped below 2%, just last week.

That underscores the difficulty of calling the direction of interest rates. It also makes all 67 economists wrong

On the Homefront

Huge swings have become common fare on Bay Street. In fact, the last time Canada’s benchmark index failed to rise or fall by more than 100 points in one session came before the Toronto Maple Leafs played their first game of the year. On Tuesday, the TSX had its best day of the year, with virtually everything except gold miners posting gains, and attractively-valued energy stocks fuelling the index’s big day. TSX 60 futures are trading to the downside ahead of the open.


It’s the biggest day of the year for the Bank of Canada. At 10:00am (EDT), Canada’s central bank will publish its latest interest rate decision and updated economic forecasts. The Bank is universally expected to maintain the overnight rate at 1 percent for the 32nd consecutive meeting. However, since Governor Stephen Poloz recently indicated that the central bank would no longer be providing forward guidance, there’s a lot of uncertainty regarding how much the language in the statement (and in particular, the final paragraph) might change. In the Monetary Policy Report, the Governing Council will likely bump up its call on U.S. growth and revise its forecast for global growth downwards. As CIBC chief economist Avery Shenfeld quipped, the Bank is in an “on the one hand, but on the other” situation right now: Canada’s largest trading partner is holding up well, but the global economy appears to be losing steam, which, along with supply issues, is having a deleterious effect on commodity prices. Monetary policymakers are likely to bump up their near-term inflation forecasts to reflect past realities – especially the higher starting point for core inflation. Growth forecasts will probably remain largely unchanged. Poloz and Senior Deputy Wilkins will field questions from the press following these releases, and are scheduled to testify before the House of Commons Standing Committee on Finance in the afternoon. For a full primer on what to expect, see here. For a list of questions that Poloz and Wilkins ought to be asked, see here.


The Canadian dollar could be in for a wild ride due to the monetary policy communiqués, but so far, it’s holding steady around 0.89 against the greenback this morning.


Kinross cuts its losses on Ecuadorean mine. Kinross Gold (K) is selling its Fruta del Norte mine to Fortress Minerals, which will change its name to Lundin Gold after the deal is finalized, for roughly $240 million in cash and stock. The company has long battled with the government over tax issues in this jurisdiction, and has taken a massive writedown on this asset. The Fruta del Norte mine is being divested for only one fifth of what Kinross paid for it in 2008.


Another legal front in the Valeant-Allergan saga. Pershing Square, the hedge fund led by Bill Ackman that’s assisting Valeant Pharmaceuticals (VRX) in its quest to acquire Allergan, has filed a counterclaim asserting that the Botox maker make intentionally false and misleading statements about the Canadian pharma giant. “[Pershing Square] says Mr. Pyott [Allergan’s CEO] overrode a recommendation from another member of management who said that Allergan’s defensive campaign went too far and disregarded outside advisers by falsely stating that Valeant’s accounting was opaque and problematic,” writes Ross Marowits of The Canadian Press. A hearing on this matter is scheduled for mid-November, about a month before the special meeting of Allergan shareholders is slated to take place. This week, shares of Valeant have been on fire following the firm’s impressive Q3 earnings report and hike to its guidance.


B.C. government unveils LNG tax legislation. The provincial government in British Columbia rolled out a fresh proposal on how it plans to take liquefied natural gas projects on Tuesday afternoon. Compared to February, the ceiling for taxes has come down from 7 to 5 percent. However, the Financial Post’s Geoffrey Morgan and Yadullah Hussain report that “the B.C. LNG Alliance, an industry group representing six of the more advanced projects, wasn’t convinced the industry could be competitive,” calling the province a high-cost environment. Previously, this group had lobbied to receive the same tax treatment as manufacturing firms.


A spot check on the health of the Canadian consumer. Statistics Canada is scheduled to publish retail sales for August  at 8:30am. Economists at the Bank of Montreal are calling for a modest increase of 0.2 percent month-over-month after sales fell marginally in July. This rather muted growth suggests that “real GDP likely barely rose in the month,” writes BMO senior economist Sal Guatieri. Going forward, debt-laden Canadian households will continue to find relief from continued low interest rates and a drop-off in the price of oil (and in turn, gasoline).

UPDATE: Retail sales unexpectedly declined in August.

Daily Dispatches

11 European banks have failed their stress test, according to a report from Spanish newswire EFE. Business Insider’s Mike Bird notes that there was a market reaction to this revelation, with the euro falling against the U.S. greenback. PIMCO expects the number of banks that will fail these reviews, which will be formally announced on Sunday, will rise to 18.


Japan’s exports rose by more than anticipated in September, however, the island nation’s trade deficit remains immense.


Australian inflation was subdued in the third quarter, which gives the nation’s central bank all the cover it needs to maintain the status quo on interest rates. According to Bloomberg, annual trimmed mean inflation was running at 2.5 percent, two tenths of a percentage point below economists’ forecasts.


China’s modestly stronger than expected Q3 growth reduces the odds of further stimulus, but it’s also a welcome signal that less near-term support is needed. “China is more likely to continue with targeted stimulus measures and, if growth hasn’t completely been derailed by now, there is still a good chance the current measures will suffice,” writes IG market strategist Stan Shamu.

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