Author: Consultant

  • Oil Rallies On China Demand Optimism

    Oil Rallies On China Demand Optimism

    Oil prices rallied on Wednesday amid expectations of firmer fuel demand from China, as Shanghai formally ended its two-month citywide lockdown and a private survey showed China’s factory activity shrank less sharply in May than expected.

    Benchmark Brent crude futures climbed 1.5 percent to $117.35 a barrel in European trade, while U.S. crude futures were up 1.6 percent at $116.48.

    The upside comes despite reports that some OPEC members are exploring the idea of suspending Russia’s participation in an oil-production deal.

    Shanghai ended the lockdown for all of its 2.67 million businesses, prompting expectations of firmer fuel demand from the country.

    On the data front, the China Caixin/Markit manufacturing PMI rose to 48.1 in May from a 26-month low of 46.0 the previous month.

    Elsewhere, manufacturing expansion slowed in Australia and Japan’s manufacturing activity grew at the weakest pace in three months, underlining investor worries over the economic slowdown.

    In Europe, weak German retail sales and Eurozone manufacturing PMI data revived worries about a deepening slowdown.

  • The new federal First Home Savings Account is the only savings program that is truly tax-free

    First Home Savings Account

    In a cooling housing market, Canadians who are looking to buy their first home have a new tool at their disposal: the First Home Savings Account, or FHSA.

    Unveiled with the 2022 federal budget and set to be made available in 2023, this new savings vehicle is the only Canadian savings program that is truly tax-free – a fact that has flown largely under the radar.

    Incentivizing savings

    One way that governments around the world encourage and help people to save for goals such as buying a house or preparing for retirement is incentivizing them with tax breaks. Depending on the policy goal, the government will attach a tax advantage to some income flow in the savings process – whether it’s in the contributions, the returns on the invested assets and/or the take-home income generated by those savings at some point in the future.

    In principle, the money is always taxed at some point. But the 2022 federal budget’s proposed tax-free FHSA is the only Canadian savings program to truly not incur taxes – ever.

    Mind your ‘e’s and ‘t’s

    Using taxation to encourage savings is so universal that there is an international rubric to compare and contrast the saving structures across and within countries. There are three conventional categories – TEE, EET and TTE – where “T” represents “taxed” and “E” represents “exempt from tax” for contributions, investment income or withdrawals.

    International classification of taxation on savings 

    NAMECONTRIBUTIONSINVESTMENT INCOMEWITHDRAWALS
    EETExemptExemptTaxed
    TEETaxedExemptExempt
    TTETaxedTaxedExempt
    EEE (new)ExemptExemptExempt

    Source: Bonnie-Jeanne MacDonald 

    In Canada, for example, registered retirement savings plans and workplace registered pension plans exist “in order to encourage and assist Canadians to save for retirement. Contributions to these plans are deductible from income, investment income is not taxed as it accrues in the plan and withdrawals are included in income for tax purposes.”

    Otherwise known as “tax-deferred savings,” contributions and investment returns in these arrangements are exempt from taxation while they remain in the plan, but the money is taxed as ordinary income when withdrawn – meaning they are “exempt-exempt-taxed” or “EET.”

    On the other hand, contributions to tax-free savings accounts are less “tax-free” than they are “tax-prepaid.” Contributions are made with after-tax income, and there is no tax deduction – like you get when you contribute to your RRSPs.

    However, once made, TFSA contributions grow tax-free, and withdrawals don’t count as taxable income. This type of plan therefore falls under the “taxed-exempt-exempt” (TEE) category. Your primary residence also operates as a TEE scheme – finding this out is often an “aha!” moment, even for financial experts.

    Introducing the FHSA

    What’s special about the FHSA is that it’s a way for new homeowners to save that avoids taxes forever. As the budget explains, this program borrows the first “E” from RRSPs and the last from TFSAs, creating a new “EEE” tax savings category:

    “Budget 2022 proposes to introduce the Tax-Free First Home Savings Account that would give prospective first-time home buyers the ability to save up to $40,000. Like an RRSP, contributions would be tax-deductible, and withdrawals to purchase a first home – including investment income – would be non-taxable, like a TFSA. Tax-free in, tax-free out.”

    In this brave new “EEE” world, prospective first-time home buyers would have the ability to save $8,000 a year for five years, so up to $40,000 a person or $80,000 a couple. The investment returns are not taxable, and neither is the income used to purchase the house.

    Thinking beyond these savings to the house purchase, the capital gains on the house are also tax-free, as are the proceeds from its sale down the road, expanding this EEE program into a major long-term tax advantage. Think of it this way: Even if the initial $80,000 grows to $800,000 by the time of sale, there are no taxes on it at any point in the process.

    Will it help?

    How well this new vehicle will help Canada’s housing crisis isn’t clear. Tax breaks are just one of several ways to support home ownership, and one of the worst in terms of equity, some argue. Other ways to support the same goal include grants and new builds of lower-cost dwellings with special financing from the Canada Mortgage and Housing Corp.

    But for those who are looking to buy their first home, it’s a win-win-win and a great way to keep the tax man away from your front door.

  • Laurentian Bank posts most profitable quarter since 2018

    Laurentian Bank posts most profitable quarter since 2018

    Laurentian Bank of Canada LB-T +7.30%increase reported a second-quarter profit of $59.5 million, up from $53.1 million a year ago, its most profitable quarter since 2018.

    The Montreal-based bank says its net income amounted to $1.34 per diluted share for the quarter ending April 30, up from $1.15 per diluted share in the same quarter a year earlier.

    Revenue totalled $259.6 million for the quarter compared with $249.8 million for the second quarter of 2021, an increase of 4 per cent.

    Laurentian says its provision for credit losses amounted to $13 million for the quarter compared with $2.4 million a year earlier as a result of “releases of allowances on performing loans recorded in fiscal 2021.”

    On an adjusted basis, Laurentian says it earned $1.39 per diluted share in its most recent quarter, up from an adjusted profit of $1.23 per diluted share a year earlier.

    Analysts on average had expected earnings of $1.15 per share, according to financial markets data firm Refinitiv.

  • CAE’s fourth-quarter profit soars as revenues increase 25% excluding ventilators last year

    CAE’s fourth-quarter profit soars as revenues increase 25% excluding ventilators last year

    CAE Inc. CAE-T +5.32%increase says its net profit attributable to shareholders soared last quarter as revenues increased even excluding ventilators sold to the Canadian government last year for people suffering from COVID-19.

    The Montreal-based flight and health simulation company says it earned $55.1 million or 17 cents per diluted share in the fourth quarter of its fiscal year, up from $19.8 million or seven cents per share a year earlier.

    Adjusted profits increased 46 per cent to $92 million or 29 cents per share, up from $63.2 million or 22 cents per share in the fourth quarter of 2021.

    Revenues for the three months ended March 31 were $955 million, up seven per cent from $894.3 million a year earlier. However, revenues were up 25 per cent excluding the contribution from ventilators.

    CAE delayed the release of its results by nearly two weeks to allow external auditors to complete their work.

    The company was expected to earn 24 cents per share in adjusted profits on $958.1 million in revenues, according to financial data firm Refinitiv.

    “I am very pleased with our strong performance in the fourth quarter and for the year, having delivered double-digit growth with higher margins, excellent free cash flow, and record order bookings,” stated CEO Marc Parent in a news release.

    Civil operating income increased 43 per cent to $58.1 million on an 11 per cent increase in revenues, while defence and security swung to a $25.8-million profit on a 40 per cent boost in revenues.

    The health-care division’s operating income dropped 40 per cent to $9.4 million as revenues slumped 69 per cent without the $130-million contribution last year from ventilators. Revenues rose 27 per cent excluding ventilators.

    For the full-year, CAE earned $141.7 million on $3.37 billion of revenues, compared with a loss of $47.2 million on $2.98 billion in 2021.

  • Strong demand bolsters Canadian factory activity in May

    Strong demand bolsters Canadian factory activity in May

    Canadian manufacturing activity expanded at a faster pace in May as firms raised output to meet strong demand for their goods and inflation pressures showed some signs of easing, data showed on Wednesday.

    The S&P Global Canada Manufacturing Purchasing Managers’ Index (PMI) rose to a seasonally adjusted 56.8 in May from 56.2 in April. A reading above 50 shows growth in the sector.

    “Canada’s manufacturing sector has recovered well from the pandemic, registering output growth in almost every month for the last two years,” Shreeya Patel, an economist at S&P Global, said in a statement.

    The output index rose to 55.6 from 54.8 in April, helped by greater client demand amid easing pandemic restrictions, while workforces expanded at the fastest pace since December 2020 and the index measuring the quantity of input purchases notched a survey-record high.

    “Demand continues to flourish while firms are committed to growing their businesses through a variety of different ventures … As a result, companies have struggled to keep up with demand, though severe labour and material shortages can also be blamed,” Patel said.

    Inflation pressures, which have soared globally this year, weighed on firms’ optimism but measures of input and output prices both fell.

  • Bank of Canada announces half-point rate hike, says it is ‘prepared to act more forcefully’

    Bank of Canada announces half-point rate hike, says it is ‘prepared to act more forcefully’

    The Bank of Canada announced another oversized interest rate hike on Wednesday and said that it is “prepared to act more forcefully” going forward in an effort to bring inflation back under control.

    The central bank’s governing council voted to raise the policy rate by half a percentage point – its third interest rate hike this year. That brings the benchmark rate to 1.5 per cent, just a quarter point below the pre-pandemic level.

    The bank said that more interest rate hikes will be needed to cool Canada’s overheating economy and to slow the pace of consumer price growth, which hit a three-decade high of 6.8 per cent in April.

    “With the economy in excess demand, and inflation persisting well above target and expected to move higher in the near term, the governing council continues to judge that interest rates will need to rise further,” the bank said in its rate announcement statement.

    Wednesday’s widely-anticipated move follows rate hikes in March and April, the latter of which was also a half-point increase rather than the usual quarter-point move. This is the first time the bank has announced back-to-back 50 basis point rate increases since beginning fixed-date interest rate announcements in 2000.

    After holding borrowing costs at record lows for the first two years of the COVID-19 pandemic, the Bank of Canada pivoted abruptly this spring and is now moving aggressively to make up for lost time and to shore up its credibility as an inflation-fighter.

    It is particularly concerned that people will stop believing in its 2 per cent interest rate target, and it noted that “the risk of elevated inflation becoming entrenched has risen.”

    Higher interest rates are already reverberating through the economy, most notably in the rate-sensitive housing market. The number of home sales across the country fell 12.6 per cent from March to April on a seasonally adjusted basis, while the home price index slid 0.6 per cent, according to the Canadian Real Estate Association.

    The central bank faces a “delicate balance” as it tries to slow the economy without triggering a recession, Governor Tiff Macklem said after the last rate decision in April. At this point, however, Mr. Macklem and his team appear to be singularly focused on getting inflation down.

    The bank’s comment that it is “prepared to act more forcefully if needed” appears to open the door to 75 basis point hikes in the future. Mr. Macklem had previously said that he would not rule anything out, but that a 75 basis point rate hike would be “very unusual.”

    Central bank economists expect the rate of inflation to move higher in the near term, led by increases in energy and food prices. Inflationary pressures are also broadening out to a wider range of goods and services, making it harder for Canadians to avoid. Nearly 70 per cent of the components of the consumer price index are experiencing inflation above 3 per cent, the bank noted.

    Higher interest rates won’t do much to deal with international sources of inflation, which include persistent supply-chain bottlenecks, COVID-19 lockdowns in China, and surging commodity prices following Russia’s invasion of Ukraine.

    But higher interest rates do dampen demand in the economy. That can impact domestic sources of inflation tied to the service sector, housing market and ultra-tight labour market. In practice, this happens by increasing the cost of borrowing money, which shows up in things such as interest rates on mortgages, business loans and car loans.

    Despite the string of rate hikes since March, the bank’s policy rate remains low by historical standards and continues to stimulate the economy. Central bank officials have said they intend to get the benchmark rate to a “neutral” level relatively quickly. They estimate that this is somewhere between 2 and 3 per cent.

    Ahead of Wednesday’s announcement, markets were pricing in another half-point move in July, then smaller quarter-point moves at each of the bank’s remaining meetings this year. That would bring the policy rate to around 3 per cent by the end of the year.

    Some Bay Street economists have argued that this rate hike path is too aggressive, given how much of the Canadian economy is based on real estate and how sensitive Canada’s highly indebted households are to higher borrowing costs.

    Bank officials have said they aren’t on “autopilot.” Whether they stop raising rates once the policy rate reaches the 2 per cent to 3 per cent range will depend on how the economy reacts to higher borrowing costs.

    “The pace of further increases in the policy rate will be guided by the Bank’s ongoing assessment of the economy and inflation,” the bank said Wednesday. “The Governing Council is prepared to act more forcefully if needed to meet its commitment to achieve its 2 per cent inflation target.”

    Deputy Governor Paul Beaudry will give a speech on Thursday explaining the bank’s rationale for the decision.

  • TSX Snaps 7-session Winning Streak, Ends Notably Lower

    TSX Snaps 7-session Winning Streak, Ends Notably Lower

    After seven successive days of gains, Canadian stocks drifted lower on Tuesday as worries about rising inflation and fears of tighter policy measures by the Federal Reserve and other central banks triggered selling at several counters.

    The benchmark S&P/TSX Composite Index ended with a loss of 190.06 points or 0.91% at 20,729.34.

    Data released by Statistics Canada before the opening bell this morning showed the pace of economic growth in Canada slowed in the first quarter compared with the end of 2021.

    The data said real gross domestic product grew at an annualized rate of 3.1% in the first quarter, helped by business investment and household spending. That was down from an annualized rate of 6.6% in the fourth quarter of 2021 as export volumes dropped 2.4% for the quarter, following two consecutive quarterly increases, due in part to decreased trade in energy products.

    Energy stocks were the major losers as oil prices turned weak on reports that some members of the Organization of the Petroleum Exporting Countries (OPEC) are in favor of suspending Russia’s participation in an oil-production deal.

    The Energy Capped Index dropped 2.77%. Imperial Oil (IMO.TO), Canadian Natural Resources (CNQ.TO), Vermilion Energy (VET.TO), Enerplus Corp (ERF.TO) and Suncor Energy (SU.TO) ended lower by 3 to 4.2%.

    The Health Care Capped Index shed 1.55%. Bausch Health Companies (BHC.TO) ended lower by 5.3%, while Well Health Technologies (WELL.TO), Tilray Inc (TLRY.TO) and Aurora Cannabis (ACB.TO) lost 4.9%, 4.25% and 3.1%, respectively.

    The Information Technology Capped Index also shed more than 1.5%. Hut 8 Mining Corp (HUT.TO), BlackBerry (BB.TO), Softchoice Corp (SFTC.TO), Converge Technology Solutions (CTS.TO), Magnet Forensics (MAGT.TO), Nuvei Corp (NVEI.TO) and Docebo Inc (DCBO.TO) ended lower by 4 to 8.1%.

    The Materials Index drifted down 1.38%. Lithium Americas Corp (LAC.TO) tanked 14.6%. Stelco Holdings (STLC.TO), Fortuna Silver Mines (FVI.TO), Teck Resources (TECK.B.TO), Capstone Mining Corp (CS.TO) and Silvercrest Metals (SIL.TO) lost 5 to 6.5%.

    Quebecor Inc (QBR.A.TO), Nutrien (NTR.TO), Linamar Corporation (LNR.TO), Colliers International Group (CIGI.TO), Open Text Corporation (OTEX.TO), Dollarama Inc (DOL.TO) and Kinaxis (KXS.TO) gained 1 to 4.5%.

  • Russia widens Europe gas cuts and halts Dutch, Danish and German contracts

    Russia widens Europe gas cuts and halts Dutch, Danish and German contracts

    Russia widened its gas cuts to Europe on Tuesday with Gazprom saying it will turn off supplies to several “unfriendly” countries which have refused to accept Moscow’s roubles-for-gas payment scheme.

    The move by the Russian gas giant is the latest retaliation to Western sanctions imposed on Moscow following its Feb. 24 invasion of Ukraine, escalating its economic battle with Brussels and pushing up European gas prices.

    Gazprom said on Tuesday it had fully cut off gas supplies to Dutch gas trader GasTerra.

    It later said it would also stop as of June 1 gas flows to Denmark’s Orsted and to Shell Energy for its contract on gas supplies to Germany, after both failed to make payments in roubles.

    The announcements follow Monday’s agreement by European Union leaders to cut the European Union’s imports of Russian oil by 90% by year-end, the bloc’s toughest yet response to the invasion.

    NO THREAT TO SUPPLY

    GasTerra, which buys and trades gas on behalf of the Dutch government, said it had contracted elsewhere for the 2 billion cubic meters (bcm) of gas it had expected to receive from Gazprom through October.

    “This is not yet seen as a threat to supplies,” said Economy Affairs Ministry spokesperson Pieter ten Bruggencate.

    Orsted, which has also said there was no immediate risk to Denmark’s gas supplies, said on Tuesday it would turn to the European gas market to fill the gap.

    “The gas for Denmark must, to a larger extent, be purchased on the European gas market. We expect this to be possible,” Orsted Chief Executive Mads Nipper said in a statement shortly after Gazprom’s announcement.

    The benchmark front-month gas contract rose around 5% on Tuesday afternoon to around 91.05 euros/MWh but remained well below highs over 300 euros/MWh hit in early March.

    “While the market was largely expecting both companies to be cut off, this development will make the supply-demand balance that much tighter,” ICIS analyst Tom Marzec-Manser said on Twitter.

    Russian gas flows to Germany via the Nord Stream pipeline fell on Tuesday which analysts said was likely due to the Nederlands being cut off.

    Moscow had already stopped natural gas supplies to Bulgaria, Poland and Finland citing their refusal to pay in Russian roubles, a demand made in response to Western sanctions that have isolated Russia.

    German, Italian and French companies, however, have said they would engage with the scheme to maintain supplies.

    The supply cuts have boosted already high gas prices, turbocharging inflation and spurring European governments and companies to chase alternative sources and the infrastructure to handle them, including floating storage and regasification units (FSRUs).

    STORAGE

    Europe has been rushing to fill its gas storage sites ahead of winter, wary of Russian supply cuts, which typically provides around 40% of Europe’s gas.

    Dutch gas storage is now around 37% full, data from Gas Infrastructure Europe showed.

    The Dutch government last week said it would increase subsidies to 406 million euros to encourage companies to fill the Bergermeer facility, one of the largest open-access gas storage facilities in Europe.

    Danish gas storages are currently 55% full and will be able to supply all Danish and Swedish gas customers for five months if supplies from Germany get cut off, a letter from the Danish energy minister Dan Jorgensen to parliament showed.

  • GDP disappoints, but Bank of Canada unlikely to alter rate path

    GDP disappoints, but Bank of Canada unlikely to alter rate path

    Canada’s economic growth slowed in the first quarter of 2022, but an acceleration in demand showed why the Bank of Canada is unlikely to deviate from its course of rapid interest rate hikes.

    After adjusting for inflation, gross domestic product grew at an annualized pace of 3.1 per cent, slowing from 6.6 per cent in the fourth quarter of 2021, Statistics Canada said on Tuesday. While that growth was in line with the central bank’s expectations, it fell short of the median estimate from Bay Street analysts, who called for growth of 5.2 per cent.

    The weak spot in Tuesday’s report was international trade, with both exports and imports falling. However, economists were largely upbeat about other details – notably, that consumers and businesses are continuing to spend amid sky-high inflation. Final domestic demand rose 4.8 per cent on an annualized basis, with hefty gains in household spending, business investment and purchases of residential real estate.

    The Canadian economy also held up better than other major economies during a first quarter that was jolted by the Omicron variant of COVID-19. For instance, the United States and Japan posted GDP declines at the outset of the year, while growth was muted in the euro zone.

    “The relative resilience of the Canadian economy in the quarter may be a broader theme for 2022, aided by its heavy commodity component and a greater capacity to rebound in the service sector following two years of heavy restrictions,” Bank of Montreal chief economist Doug Porter wrote in a note to clients.

    Financial analysts said the GDP report was unlikely to redirect the Bank of Canada from its quickest pace of policy tightening in decades. The central bank is widely expected to hike its benchmark interest rate by half a percentage point on Wednesday, taking that rate to 1.5 per cent, as part of its bid to slow inflation, which recently hit a 31-year high of 6.8 per cent.

    The bank’s policies are “now geared almost exclusively on scalding inflation – so a modest growth miss is not going to divert coming rate hikes one iota,” Mr. Porter added.

    In various respects, the Canadian consumer appears to be in good shape. Compensation of employees rose 3.8 per cent in the first quarter in nominal terms, following a 2-per-cent rise in the fourth quarter. It was the largest growth in compensation since 1981, excluding the third quarter of 2020, when the country was rebounding from the first wave of COVID-19.

    Canadians also hung on to more of their money. The household savings rate rose to 8.1 per cent of disposable income from 6.9 per cent – and far above the quarterly average of 3.4 per cent during the 2010s.

    Households have amassed a bulk of savings during the pandemic, particularly those in higher income brackets, and that’s helping them to continue spending amid lofty inflation. Household spending rose at an annualized rate of 3.4 per cent, with strong purchases of durable goods.

    The flip side is that, because people are able to keep spending, that’s helping to fuel the rapid climb in consumer prices. After Wednesday’s rate decision, several analysts expect the Bank of Canada to hike by another half a percentage point in July – a rapid pace of increases that some households could struggle to adapt to.

    This cycle of monetary policy tightening has already led to weaker sales and falling prices in many of Canada’s exuberant housing markets.

    However, that shift hadn’t yet materialized in Tuesday’s GDP report. Investment in residential real estate jumped by 18 per cent, on an annualized basis, driven by expenditures on renovations and costs associated with home purchases.

    “Another large positive contribution from residential investment clearly won’t be repeated,” Andrew Grantham, senior economist at CIBC Capital Markets, said in a client note.

    While trade slipped during the opening months of 2022, Canada’s terms of trade – the ratio between the price of exports and imports – jumped to a record high, owing to the recent surge of commodity prices, such as crude oil and lumber.