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Canadian inflation excluding food and energy costs is expected to remain above 3 per cent until the fourth quarter of this year, the median forecast of seven economists recently surveyed by Reuters showed, which could dash hopes of an early Bank of Canada shift to cutting interest rates.
While Canadian inflation has cooled in recent months, much of the relief has come from lower energy prices, a volatile component that the BoC tends to exclude when making policy decisions.
The readings for core, or underlying, inflation, such as the widely-tracked Consumer Price Index excluding food and energy, are showing greater persistence than the headline rate after price pressures spread from goods into slower-moving items, such as wages and services.
“We suspect they (BoC) will only start trimming rates when they are convinced underlying inflation trends are set to move below 3 per cent,” said Doug Porter, chief economist at BMO Capital Markets.
A lengthy period of high rates could force an increasing share of highly-indebted Canadians to reset their mortgages at levels that squeeze their finances. Canadians added record amounts of mortgage debt during the COVID pandemic, while the mortgage cycle is relatively short – typically five years versus 30 years in the United States.
The BoC has made greater progress in slowing inflation than some major peers, including the Federal Reserve and European Central Bank.
It expects headline inflation to hit 3 per cent, the top of its 1 per cent-3 per cent target range, by the middle of this year, down from 4.3 per cent in March. The BoC’s ultimate destination for inflation is set at 2 per cent.
Still, the rise in inflation expectations could be another reason for the Canadian central bank to be cautious about easing rates.
“Even if inflation expectations come back to 2 per cent, they might not be anywhere near as anchored as they used to be,” said Stephen Brown, senior Canada economist at Capital Economics.
The BoC has played down the market’s pricing of interest rate cuts in 2023 and said it is prepared to tighten further if needed to restore price stability.
Investors appear to have taken note, betting on a continued period of steady rates followed by a possible easing in the fourth quarter of this year, rather than the shift to rate cuts in June that had been expected a few weeks ago.
Minutes from the BoC’s April policy meeting are due to be released on Wednesday. The central bank has left its benchmark interest rate on hold for two straight meetings after lifting it to a 15-year high of 4.50 per cent.
Those rate hikes have contributed to inflation, by driving up mortgage borrowing costs, but the main aim is to slow the economy.
“We really do need to see at least a further sharp slowdown in GDP growth, if not at least one quarter of negative growth, for the bank to have confidence that inflation won’t start rising again if it were to cut rates,” Brown said.
The Canada Energy Regulator said it was notified on Tuesday of a serious injury at a work site on the government-owned Trans Mountain oil pipeline expansion project near Chilliwack, British Columbia.
The regulator said work has been stopped at the job site, and inspection officers and the Royal Canadian Mounted Police are attending.
“Safety is always our top priority, including all workers and contractors on job sites,” the CER said in a statement posted to its website.
The Trans Mountain expansion will nearly triple the flow of crude from Alberta’s oil sands to the Pacific coast, but the project has been beset by years of delay and massive cost overruns.
Last month Trans Mountain Corp TRP-T -0.16%decrease said the cost had jumped 44 per cent from last year’s estimate to C$30.9-billion ($22.69-billion). The pipeline is expected to be in service by the first quarter of 2024.
anadian National Railway Co. CNR-T -0.40%decrease issued a downbeat outlook for the economy, adding to a growing chorus of companies that are warning of deteriorating operations as rising interest rates weigh on activity.
“Our current volumes reflect that we are in a mild recession,” Tracy Robinson, CN’s chief executive officer, said during a call with analysts on Tuesday.
“We are uncertain about how deep or how long it will go on, but what we are modelling is negative North American industrial production for the full year,” Ms. Robinson added.
The gloomy outlook detracted from the railway’s strong first-quarter financial results, released after markets closed on Monday.
CN reported a profit of $1.82 a share, up 39 per cent from the first quarter of 2022 and well above analysts’ expectations for earnings of $1.72 a share. As well, revenue rose 16.3 per cent year-over-year.
The railway also dazzled on a number of metrics: Trains ran faster during the quarter and fuel efficiency improved. Its operating ratio – or expenses as a percentage of revenue, where a smaller number is better – declined to 61.5 per cent.
Yet the share price fell nearly 4 per cent in Toronto on Tuesday, to $161.63, suggesting that investors are putting little stock in past financial results amid evidence of a shifting economy.
Central banks have been raising their key interest rates aggressively in a battle against high inflation over the past year. While the latest readings on inflation show that it is subsiding, many commentators expect that recessionary risks are building, with the U.S. regional banking crisis contributing to the dour outlook.
The yield on the 10-year U.S. Treasury bond fell on Tuesday by a substantial 10 basis points.The yield is now about 60 basis points below a recent high at the start of March (there are 100 basis points in a percentage point), potentially reflecting a darker outlook for economic growth.
What’s more, financial markets now expect the Bank of Canada will cut its key rate by a quarter of a percentage point by October, marking a shift for the central bank from dampening economic growth with rate hikes to promoting it with cuts.
CN appeared to give an indication that it sees a good year unfolding by raising its outlook for 2023. Management now sees profit growth in the “mid-single digit range” in 2023, which is an improvement from previous guidance of “low-single digit” growth.
Yet, this outlook was really just a response to the strong first quarter, which raised growth for the full year without signalling an acceleration over the next eight months.
Steve Hansen, an analyst at Raymond James, expects the new outlook points to flat – or even declining – profit at CN for the remainder of the year against a backdrop of deteriorating traffic trends in April.
Rail traffic, which reflects demand for hauling commodities used by producers, has fallen 4.8 per cent in the second quarter, according to Mr. Hansen, who believes the trends suggests that the economy is already in a modest recession.
“While we continue to admire CN’s long-term outlook, we reiterate our neutral rating based upon our sustained macroeconomic concerns, deteriorating traffic growth and the company’s lofty relative valuation,” Mr. Hansen said in a note.
Canadian railway stocks have generally traded in line with the S&P 500 over the past five years, based on estimated price-to-earnings ratios.
But CN and Canadian Pacific Kansas City Ltd. CP-T -1.25%decrease – the new name for CP after it completed its merger with Kansas City Southern this month – currently trade at a considerable premium. CN’s P/E is 20.5, according to Bloomberg, compared with 18.4 for the diversified index of U.S. stocks.
Still, analysts expect CN can navigate the current headwinds.
Bank of Nova Scotia analyst Konark Gupta expects the share price will trade at $169 within 12 months, suggesting a modest gain from its price on Tuesday. Kevin Chiang at CIBC World Markets has a price target of $175, implying a gain of 8 per cent, but he maintained a neutral recommendation on the stock.
Teck Resources Ltd. TECK-B-T +4.43%increase is not proceeding with its planned split, after evidently not gathering enough votes to secure the transaction.
The development is a huge win for Glencore PLC which has been campaigning to stop Teck’s shareholders from voting for the split, and instead accept its hostile takeover offer.
Teck needed to secure two thirds of votes cast by both its super voting A and its regular voting B shareholders.
Vancouver-based Teck made the announcement just before the start of trading on Wednesday.
Teck said it will not engage with Glencore and instead propose an alternative transaction that may win the support of its shareholders.
Teck CEO Jonathan Price said in a statement that Teck’s plan is to pursue another split of the company but a far cleaner one this time. Under the previous plan, Teck’s coal business would have had to pay 90 per cent of its cash flow to its metals business for about a decade.
Mr. Price said that Teck had “listened and heard the feedback that some shareholders would prefer a more direct approach to separation.”
Glencore has said that if the split proposal failed, it will be waiting in the wings with its US$22.5-billion takeover proposal, and that it is prepared to improve the terms.
Teck reiterated on Wednesday that Glencore’s approach is a “non-starter.”
Glencore has proposed acquiring Teck and subsequently splitting itself into one company holding its thermal coal and Teck’s metallurgical coal, and another company containing the metals mines of both companies, alongside Glencore’s energy trading business.
Teck has slammed that proposal as ruinous to shareholder value, arguing it would carry significant execution risk, degrade its ESG standing, and provide unwanted exposure to thermal coal.
A takeover of Teck by Glencore would be subject to a net benefit review and a national security review by Ottawa.
Any such review would be lengthy, and involve discussions with Canada’s allies, including the United States.
Ottawa has given early signs that it wants to keep Teck in Canadian hands.
“We need companies like Teck here in Canada – companies with a strong commitment to Canada,” Deputy Prime Minister Chrystia Freeland, Industry Minister François-Philippe Champagne and Natural Resources Minster Jonathan Wilkinson said in a Monday letter to the Greater Vancouver Board of Trade.
Teck will hold its annual meeting as planned on Wednesday afternoon in Vancouver, but the split proposal will not be on the ballot.
All other matters, including the election of directors, and whether to approve a sunset clause on the A shares will be voted on at the meeting.
Under the sunset clause, Teck’s A shareholders would convert their securities into B shares after six years.
The A shares are controlled by the Keevil family and Japan’s Sumitomo Metal Mining Co. and give them veto power over any proposed takeover transaction.
Norman B. Keevil, Teck’s chair emeritus and patriarch of the Keevil family told the Globe and Mail earlier this month that he would not exercise his veto power, if the board, management and the majority of B shareholders want to pursue a takeover of the company.
Teck shares were up by 4 per cent in early trading on the Toronto Stock Exchange, as investors wait for an expected bump in Glencore’s bid.
Glencore declined to comment for this story.
PUBLISHED TUE, APR 25 202310:07 PM EDT
Oil prices rose in early Asian trade on Wednesday after a U.S. trade group reported a significant draw in crude oil stocks ahead of the government’s data release.
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Shareholders looking for an update on TD Bank Group’s US$13.4 billion takeover of First Horizon Corp. were left with few answers at the bank’s annual meeting Thursday.
Facing numerous questions about the deal after U.S. banking turmoil has pushed down the value of Tennessee-based First Horizon, chief executive Bharat Masrani stuck to a statement that they are in negotiations about a potential extension of the deal past the May 27 deadline.
It’s the same message he gave in a March earnings call when the bank disclosed that they don’t expect to secure regulatory approval of the deal by the deadline, without providing details on what might be causing the delay.
Since then, the collapse of Silicon Valley Bank and Signature Bank have put pressure on the U.S. banking sector and led to calls from some for TD to walk away from the deal that it first announced in February, 2022.
Pressed by shareholders, Masrani said he sees the benefits of the merger, but notably absent in his comments was his March statement that the bank was “fully committed to the transaction.”
Outside of the deal, the meeting saw several shareholder proposals go to a vote related to climate change as well as on executive pay ratios and the financialization of housing.
This report by The Canadian Press was first published April 20, 2023.
