Author: Consultant

For the first time in months, the possibility of another Bank of Canada interest-rate hike appears to be on the table this week.

The central bank has kept interest rates steady since January. However, a run of strong economic data over the past month has raised doubts about whether borrowing costs are high enough to bring inflation under control.

A growing number of analysts and investors are betting on at least one more quarter-point interest-rate increase this summer, which would lift the central-bank’s benchmark rate to 4.75 per cent. Many now expect a rate hike in July. However, the more hawkish among them think it could happen this Wednesday.

“The bank needs to show it’s serious,” said Stephen Brown, deputy chief North America economist at Capital Economics. “And I don’t think you show you’re serious by waiting another six weeks, just in case. You show you’re serious by acting as soon as possible.”

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Interest-rate swaps, which capture market expectations about monetary policy, are pricing in a 40-per-cent chance of a quarter-point increase at this week’s rate announcement, according to Refinitiv data. Market odds are around 65 per cent for a rate hike in July.

Bank of Canada Governor Tiff Macklem has given no indication of what will happen on June 7. But he has stressed in recent appearances that he’s prepared to restart the bank’s rate-hike campaign if there’s an “accumulation of evidence” that inflation and economic activity aren’t slowing as much as expected.

The central bank’s aggressive tightening – which involved eight consecutive rate increases between March, 2022 and January, 2023 – was designed to bring economic growth to a standstill to reduce upward pressure on consumer prices.

Inflation has come down significantly since last summer, falling to an annual rate of 4.4 per cent in April from a high of 8.1 per cent last June. But the Canadian economy, broadly speaking, is proving remarkably resilient to higher borrowing costs.

Consumers continue to spend eagerly and businesses keep hiring workers, holding the unemployment rate near a record low. Housing-market activity, which slumped last year, has picked up in recent months, fuelling an uptick in home prices. In short, the recession many economists were predicting last year hasn’t materialized – at least not yet.

“We are seeing some signs of fragility in Canada as well as the global economy, but they just haven’t added up to the kind of slowdown that the Bank of Canada was seeking,” said Avery Shenfeld, chief economist with Canadian Imperial Bank of Commerce.

Strong economic growth and low unemployment are usually a good thing. But right now, they’re a problem for Canada’s central bankers, who believe the economy needs to stall to bring demand and supply back in line. If that doesn’t happen, they argue, inflation could get stuck above the bank’s 2-per-cent target.

Mr. Shenfeld expects Mr. Macklem and his team to hold rates steady on Wednesday while they wait for more up-to-date labour-market data from Statistics Canada. But they will need to sound hawkish, potentially signalling a rate hike in July, Mr. Shenfeld said.

“If they don’t give the economy a speeding ticket, they’re certainly going to issue a warning that both growth and the labour market are too hot, and that we will face higher interest rates if that doesn’t start to change soon,” he said.

The Bank of Canada’s governing council considered raising rates in April, according to a published summary of the deliberations, but opted to wait for more data. Since then, those numbers have consistently surprised to the upside.

Employers added another 41,000 jobs in April, and average hourly wages grew at the brisk annual rate of 5.2 per cent. Real GDP growth exceeded Bay Street and Bank of Canada forecasts for the first quarter, and showed momentum heading into April, Statscan reported last week.

Recent inflation data also showed concerning signs of strength. The annual rate of consumer-price-index inflation ticked up to 4.4 per cent in April, from 4.3 per cent in March, and several closely watched “core” inflation metrics rose month over month.

Central-bank economists expect inflation to fall to around 3 per cent this summer, as prices for goods level off and year-over-year oil-price comparisons drag down headline inflation. But they remain nervous about continuing inflation for services, which they say is driven by labour-market tightness and wage growth.

“In our baseline forecast, the labour market will soften as the economy slows. Wage growth will ease. Businesses will revert to more normal price-setting behaviour. And near-term inflation expectations will come into line with the inflation target,” Mr. Macklem said in a speech last month.

“But there is a risk that these adjustments will take longer or stall, and inflation will get stuck materially above the 2-per-cent target.”

Another rate hike – if it happens – could have a chilling effect on the real estate market, which has rebounded in recent months as interest rates have stabilized, according to James Laird, co-chief executive officer of Ratehub.ca, and president of mortgage lender CanWise.

“Because a rate hike is now a possibility, fixed rates [on mortgages] have already increased. Variable-rate holders who thought that rate hikes were over will be holding their breath to see if their rates are going to go up even further,” Mr. Laird said in an e-mail.

“If the bank does choose to raise rates further, this will put downward pressure on home values and housing activity as spring turns to summer.”

Saudi Arabia will reduce how much oil it sends to the global economy, taking a unilateral step to prop up the sagging price of crude after two previous cuts to supply by major producing countries in the OPEC+ alliance failed to push oil higher.

The Saudi cut of 1 million barrels per day, to start in July, comes as the other OPEC+ producers agreed in a meeting in Vienna to extend earlier production cuts through next year.

Calling the reduction a “lollipop,” Saudi Energy Minister Abdulaziz bin Salman said at a news conference that “we wanted to ice the cake.” He said the cut could be extended and that the group “will do whatever is necessary to bring stability to this market.”

The new cut would likely push up oil prices in the short term, but the impact after that would depend on whether Saudi Arabia decides to extend it, said Jorge Leon, senior vice president of oil markets research at Rystad Energy.

The move provides “a price floor because the Saudis can play with the voluntary cut as much as they like,” he said.

The slump in oil prices has helped U.S. drivers fill their tanks more cheaply and gave consumers worldwide some relief from inflation.

“Gas is not going to become cheaper,” Leon said. “If anything, it will become marginally more expensive.”

That the Saudis felt another cut was necessary underlines the uncertain outlook for demand for fuel in the months ahead. There are concerns about economic weakness in the U.S. and Europe, while China’s rebound from COVID-19 restrictions has been less robust than many had hoped.

Saudi Arabia, the dominant producer in the OPEC oil cartel, was one of several members that agreed on a surprise cut of 1.6 million barrels per day in April. The kingdom’s share was 500,000. That followed OPEC+ announcing in October that it would slash 2 million barrels per day, angering U.S. President Joe Biden by threatening higher gasoline prices a month before the midterm elections.

All told, OPEC+ has now dropped production on paper by 4.6 million barrels a day. But some countries can’t produce their quotas, so the actual reduction is around 3.5 million barrels per day, or over 3% of global supply.

The previous cuts gave little lasting boost to oil prices. International benchmark Brent crude climbed as high as $87 per barrel but has given up its post-cut gains and been loitering below $75 per barrel in recent days. U.S. crude has recently dipped below $70.

That has helped U.S. drivers kicking off the summer travel season, with prices at the pump averaging $3.55, down $1.02 from a year ago, according to auto club AAA. Falling energy prices also helped inflation in the 20 European countries that use the euro drop to the lowest level since before Russia invaded Ukraine.

The Saudis need sustained high oil revenue to fund ambitious development projects aimed at diversifying the country’s economy.

The International Monetary Fund estimates the kingdom needs $80.90 per barrel to meet its envisioned spending commitments, which include a planned $500 billion futuristic desert city project called Neom.

The U.S. recently replenished its Strategic Petroleum Reserve – after Biden announced the largest release from the national reserve in American history last year – in an indicator that U.S. officials may be less worried about OPEC cuts than in months past.

While oil producers like Saudi Arabia need revenue to fund their state budgets, they also have to take into account the impact of higher prices on oil-consuming countries.

Oil prices that go too high can fuel inflation, sapping consumer purchasing power and pushing central banks like the U.S. Federal Reserve toward further interest rate hikes that can slow economic growth.

The Saudi production cut and any increase to oil prices could add to the profits that are helping Russia pay for its war against Ukraine. Russia has found new oil customers in India, China and Turkey amid Western sanctions designed to limit Moscow’s crucial energy income.

However, higher crude prices risk complicating trade by the world’s No. 3 oil producer if they exceed the $60-per-barrel price cap imposed by the Group of Seven major democracies.

Russia has found ways to evade the price cap through “dark fleet” tankers, which tamper with location data or transfer oil from ship to ship to disguise its origin. But those efforts add costs.

Under the OPEC+ deal, Russian Deputy Prime Minister Alexander Novak said Moscow will extend its voluntary cut of 500,000 barrels a day through next year, according to Russian state news agency Tass.

But Russia might not be following through on its promises. Moscow’s total exports of oil and refined products such as diesel fuel rose in April to a postinvasion high of 8.3 million barrels per day, the International Energy Agency said in its April oil market report.

Member countries of OPEC and their allies are considering further cuts to oil production that could send oil prices soaring.

The group, known as OPEC+ to include allies such as Russia, will meet Sunday to discuss another round of cuts to production for member countries, this time as much as 1 million barrels per day, sources told Reuters.

The cuts would come on top of existing cuts of 2 million barrels per day and voluntary cuts of 1.6 million barrels per day that were announced in April, three sources told the outlet.

“We are discussing the full package [of changes to the deal],” one of the sources said.

That April announcement contributed to a spike in oil prices of about $9 per barrel to more than $87, though those prices quickly fell to $76 amid growing concerns about the global economy.

Members of OPEC+ and allies led by Russia are responsible for pumping about 40% of the world’s crude oil, with their decisions having a dramatic effect on global prices.

The cuts have drawn criticism from the Biden administration and Western countries, arguing that OPEC policies have sent energy prices soaring and that they have taken the side of Russia amid its ongoing invasion of Ukraine. Meanwhile, OPEC+ countries say Western money-printing over the last decade is driving inflation and forcing measures to protect their most valuable export.

Many Western countries have responded to the invasion by sanctioning Russia and scaling back or stopping purchases of Russian oil. But some Asian countries, including China and India, have refused to join the sanctions and have been Russia’s largest energy customers.

Oil prices could soar higher as Russia, others shrug off criticism from Biden administration | Fox Business

• OPEC+ ministers will meet to determine their next oil production policy steps on June 4 in Vienna.
• They face a market rattled by supply volatility, demand uncertainty and a prospective recession, which could throttle transport fuel consumption.
• Public signals have been conflicting following Saudi energy minister Prince Abdulaziz bin Salman’s late-May warning that oil speculators could face further pain ahead.

https://www.cnbc.com/2023/06/02/opec-prepares-for-weekend-meeting-after-saudi-warns-speculators-to-watch-out.html

Monday June 5

China, Japan and Euro zone services and composite PMI

Germany trade surplus

(9:45 a.m. ET) U.S. S&P Global Services and Composite PMI for May.

(10 a.m. ET) U.S. factory orders for April. The Street expects an increase of 0.8 per cent from March.

(10 a.m. ET) U.S. ISM Services PMI for May.

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Tuesday June 6

China trade surplus and foreign reserves

Japan household spending

Euro zone retail sales

Germany factory orders

(8:30 a.m. ET) Canadian building permits for April. Estimate is a month-over-month decline of 7.0 per cent.

(10 a.m. ET) Canada’s Ivey PMI for May.

Earnings include: JM Smucker Co.; Stingray Group Inc.

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Wednesday June 7

Germany industrial production

(8:30 a.m. ET) Canada’s merchandise trade balance for April.

(8:30 a.m. ET) Canadian labour productivity for Q1.

(8:30 a.m. ET) U.S. goods and services trade deficit (and revisions) for April.

(10 a.m. ET) Bank of Canada policy announcement.

(3 p.m. ET) U.S. consumer credit for April.

Earnings include: Brown Forman; Campbell Soup Co.; Dollarama Inc.; Transcontinental Inc.

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Thursday June 8

Japan and Euro zone GDP

(8:30 a.m. ET) U.S. initial jobless claims for week of June 3. Estimate is 238,000, up 6,000 from the previous week.

(10 a.m. ET) U.S. wholesale inventories for April.

(3:10 p.m. ET) Bank of Canada deputy governor Paul Beaudry presents the Economic Progress Report at the Greater Victoria Chamber of Commerce.

Earnings include: Enghouse Systems Ltd.; Major Drilling Group International; Saputo Inc.

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Friday June 9

China CPI, PPI, aggregate yuan financing and money supply

(8:30 a.m. ET) Canadian employment for May. Estimate is a month-over-month increase of 30,000 jobs with the unemployment rate rising 0.1 of a percentage point to 5.1 per cent.

(8:30 a.m. ET) Canada’s capacity utilization for Q1.

(10 a.m. ET) U.S. quarterly services survey for Q1.

The U.S. economy continued to crank out jobs in May, with nonfarm payrolls surging more than expected despite multiple headwinds, the Labor Department reported Friday.

Payrolls in the public and private sector increased by 339,000 for the month, better than the 190,000 Dow Jones estimate and marking the 29th straight month of positive job growth.

Jobs report May 2023: (cnbc.com)

Oil prices rose on Friday after a U.S. debt ceiling deal averted a default in the world’s biggest oil consumer, while attention turned to a meeting of OPEC ministers and their allies at the weekend.

Brent crude futures were up $1.21, or 1.6 per cent, to $75.49 a barrel by 1134 GMT, while U.S. West Texas Intermediate crude (WTI) was up $1.19, or 1.7 per cent, at $71.29. Both contracts were headed for their first weekly loss in three weeks.

Markets were reassured by a bipartisan deal to suspend the limit on the U.S. government’s $31.4-billion debt ceiling, which staved off a sovereign default that would have rocked global financial markets.

Earlier signals of a potential pause in rate hikes by the Federal Reserve also provided support to oil prices, not least by weighing on the U.S. dollar, making oil cheaper for holders of other currencies.

U.S. employment data, watched for pointers for upcoming Fed decisions, is due at 1230 GMT.

Investor attention is also fixed on the June 4 meeting of the Organization of the Petroleum Exporting Countries and allies including Russia, collectively called OPEC+.

OPEC+ in April announced a surprise cut of 1.16 million barrels per day, but the gains from that move have since been retraced and prices are below pre-cut levels.

Sources told Reuters fresh output cuts are unlikely.

On the demand side, the U.S. Institute for Supply Management (ISM) said its manufacturing PMI fell to 46.9 last month, the seventh-straight month that the PMI stayed below 50, indicating a contraction in activity.

Meanwhile, manufacturing data out of China, the world’s second biggest oil consumer, painted a mixed picture.

Suncor Energy Inc. SU-T will cut 1,500 jobs by the end of the year, as new CEO Rich Kruger forges ahead with his mandate to reduce costs and improve the company’s lagging financial performance.

Employees were given the news Thursday afternoon, in a companywide email from Kruger, Suncor spokeswoman Sneh Seetal said.

She confirmed the job reductions are new, and not part of the company’s previously announced plan to reduce the size of its contractor workforce by 20 per cent in an effort to improve safety and performance at its oil sands sites.

“As a company we needed to make changes that will strengthen our company for the future, and that includes our overall cost structure,” Seetal said by phone, adding the 1,500 job losses will be spread across the organization and will affect both employees and contractors.

The reductions amount to about nine per cent of the 16,558 employees that Calgary-based Suncor had at the end of 2022, according to the company’s annual information form. However, that tally does not include contractors.

Suncor has been under pressure from shareholders — including activist investor Elliott Investment Management — to improve its financial and share price performance, which has lagged its peers.

The company has also been under fire for a recent spate of operational issues and workplace safety incidents, including a string of deaths.

Earlier this spring, Kruger, the former CEO of Imperial Oil Ltd., was enticed out of retirement to take the reins of Suncor and try to turn around the oil sands giant.

In an interview with The Canadian Press last month, Kruger declined to say whether that would involve layoffs or not. But he said he would “look hard and long at the work people do” to ensure that everything that is being done at the company adds value to the bottom line.

Seetal declined to say whether the bulk of the layoffs would take place at head office or in the field. Suncor employs people across the country, in the U.S. and internationally, with its corporate head office located in Calgary.

But she echoed Kruger’s theme of needing to ensure people are doing the work that provides the most value to the organization.

“Work that doesn’t necessarily support regular day-to-day maintenance and operations of assets would be considered (for layoffs), but it’s not necessarily solely office workers,” she said.

Seetal said Suncor is committed to treating its employees with dignity and respect throughout what will inevitably be a difficult process.

She also emphasized the company will not make any cuts that could affect worker safety.

In the first quarter of 2023, Suncor earned a $2.05-billion profit. On an adjusted basis, Suncor’s reported first-quarter profit was $1.81 billion, a 34 per cent decrease year-over-year.

Can we shop our way out of a recession? Consumers in Canada are giving it their best shot.

The strong first-quarter growth in GDP that caught economists off guard was powered by two sectors, exports and consumer spending, with the latter rising 5.7 per cent on an annualized basis.

That growth was twice as fast as economists expected, and it pushed consumer spending to its highest share of GDP since records began in 1961.

South of the border, resilient consumers have been credited for helping stave off recession. But Canadian shoppers are outspending even their counterparts in the United States, where consumer spending rose 3.8 per cent.

None of this is good news for the Bank of Canada as it tries to cool inflation by discouraging people from buying stuff. Instead Canadians defied rate hikes and recession warnings to fork out for goods such as vehicles and services, including restaurants and hotels, at a frenzied pace.

The boom in services spending will have been particularly troubling to the bank. Governor Tiff Macklem warned in early May “the biggest upside risk to our inflation forecast is that services price inflation could be more persistent than we expect.”

Which is why some economists believe the bank isn’t done tightening. “This is just the latest data point reinforcing the strength of the Canadian economy, particularly the consumer,” wrote Randall Bartlett, an economist with Desjardins. The shopping spree “substantially increases the odds of another rate hike.”