The producer price index for June had a smaller than expected increase, the Labor Department reported Thursday, in the latest sign that inflation is calming in the United States.
The PPI for final demand rose 0.1%. Economists surveyed by Dow Jones were expecting a rise of 0.2%. PPI rose 0.1% when excluding food, energy and trade services, which was in line with expectations.
The producer report comes a day after the consumer price index showed a smaller-than-expected increase. The CPI rose just 3% year over year, its lowest since March 2021, bolstering hopes for investors that the Federal Reserve is near the end of its rate-hiking cycle.
The wholesale producer numbers have declined faster than the consumer inflation data. In May, the headline PPI number actually declined 0.4%, and was unchanged when excluding food, energy and trade services.
Dollar value of China’s exports plunged 12.4% in June from a year ago, a far bigger drop than expectations for a 9.5% decline in a Reuters poll and the 7.5% annual decline in May.
Imports declined 6.8%, in June from a year ago, also worse than expectations for a 4% decline and the 4.5% annual decline in May.
The Bank of Canada has increased its benchmark interest rate to 5 per cent and pushed out the timeline for getting consumer prices under control, warning that the downward momentum of inflation could stall over the next year as the economy proves surprisingly resilient to higher borrowing costs.
The quarter-point increase, which was widely expected by analysts, brings the policy rate to a level last seen in April, 2001. This will further squeeze Canadians’ finances and push up costs for mortgage holders.
In an updated forecast, the central bank said it expects the annual rate of inflation to remain around 3 per cent for the next year, declining to the bank’s 2-per-cent target by the middle of 2025.
“This is a slower return to target than was forecast in the January and April projections,” the bank said in its rate announcement. “Governing council remains concerned that progress towards the 2-per-cent target could stall, jeopardizing the return to price stability.”
The bank gave no hints about future rate decisions but left the door open to further hikes.
“We are trying to balance the risks of over- and under-tightening,” Bank of Canada governor Tiff Macklem said in a news conference after the decision. “If new information suggests we need to do more, we are prepared to increase our policy rate further. But we don’t want to do more than we have to.”
Canadian bond yields fell after the announcement, suggesting that markets were expecting a more explicit signal about further rate hikes.
Mr. Macklem and his team are grappling with the surprising strength of the Canadian economy. Many analysts expected the economy to be in a recession by now, squeezed by the most aggressive interest rate increases in a generation. However, consumer spending, job creation and the housing market have turned out to be less responsive to rate hikes than anticipated.
The bank raised its economic growth forecast for 2023 to 1.8 per cent from a previous forecast of 1.4 per cent. It expects GDP growth to slow to around 1 per cent in the second half of this year and first half of next year, but predicts the economy will avoid an outright contraction or recession.
The resilience of the economy has been good for many workers and businesses. But it’s become a headache for central bankers, who are intentionally trying to slow spending and investment to reduce upward pressure on prices and stabilize the purchasing power of the Canadian dollar.
“Today’s move can be characterized as a moderately hawkish hike, in that the BoC is certainly not closing the door on the possibility of further moves,” Bank of Montreal chief economist Doug Porter wrote in a note to clients.
“While we are not looking for further hikes this year, we are tweaking our rate call in light of the Bank’s view on growth and inflation – we now see rate cuts beginning only in the second quarter of 2024, one quarter later than our prior view,” he wrote.
The bank paused its monetary policy tightening campaign in January, betting that it had raised interest rates enough to bring inflation down over time. Interest rate increases work with a lag, and Canada’s highly indebted economy was thought to be more sensitive to rising debt-servicing costs than many other economies.
By June, this “conditional pause” seemed untenable. Consumer spending grew a massive 5.8 per cent in the first quarter and house prices began to rebound through the spring. Meanwhile, Canadian employers added almost 300,000 jobs through the first half of the year, keeping the unemployment rate near a record low.
“We have been surprised by the persistence of excess demand and underlying inflation in Canada and globally. We know that higher rates are having an impact, but how big their impact will be is uncertain,” Mr. Macklem told reporters.
Consumer price index inflation has come down significantly, reaching 3.4 per cent in May from a four-decade high of 8.1 per cent last summer. But most of this decline has come from year-over-year comparisons in the price of oil, which spiked after Russia’s invasion of Ukraine last year and has moderated since then.
Core measures of inflation, which strip out more volatile energy and food prices, have been stickier, with three-month rates averaging around 3.5 to 4 per cent. That suggests the next leg down in inflation could take longer than previously expected.
“With the downward momentum in inflation waning and our forecast suggesting inflation will be around 3 per cent for the next year, we are concerned that the progress to price stability could stall, and inflation could even rise again if there are upside surprises,” Mr. Macklem said.
The bank pointed to several factors behind the surprisingly strong demand in the economy, including high population growth, a tight labour market, accumulated savings and spending by federal and provincial governments.
The Bank of Canada raised interest rates to five per cent, hitting the economy with higher borrowing costs as new projections suggest it will take longer for inflation to fall back to two per cent. Bank of Canada governor Tiff Macklem said the bank’s assessment was that the cost of delaying action was larger than the benefit of waiting. (July 12, 2023)
Another rate increase means more financial pain for Canadian households, who face higher costs to service their debt.
So far, signs of acute financial strain remain relatively limited, the bank said in a special section of its quarterly Monetary Policy Report, published Wednesday. Delinquency rates are rising but remain below pre-pandemic levels, even for variable-rate mortgage holders who have been squeezed the most by rising interest rates.
But there are some pockets of concern, the bank said.
“Credit card data show that borrowers are using their credit cards more extensively than they have in the past,” it said.
“In addition, although overall delinquency rates on loans remain relatively low, the share of borrowers moving from 60 to 90+ days late on any credit product has risen and is now close to a historical high.”
Many homeowners have been cushioned against rising rates because their lenders have let them extend the amortization periods of their mortgages rather increasing their monthly payments. The bank noted that only one-third of mortgage holders have been affected by higher rates so far.
“As this share increases over the coming quarters, more households will face higher debt-service costs. Mortgage holders with variable-rate fixed payments could be particularly exposed,” the bank said.
The bank’s next interest rate decision is scheduled for Sept. 6.
Prices for sour crude oil have climbed globally this month after top exporter Saudi Arabia hiked prices and expanded production cuts of higher-sulfur oil in the first sign its efforts to prop up global prices is having an impact.
The de facto leader of the Organization of the Petroleum Exporting Countries (OPEC) this month deepened its production cuts to 1 million barrels per day in response to benchmark prices that fell to below $72 a barrel this summer.
“The kingdom’s curbs have had an outsized impact on the supply of medium-and heavy-sour barrels,” Mark Rossano, a partner at energy data provider Primary Vision Network, said.
The increases – seen among North Sea, U.S. and Canadian sour crude grades – have jumped as oil refiners in China, Europe and the U.S. bid up dwindling supplies from sanctions on Russia and Saudi Arabia’s cutbacks, according to traders and brokers.
Also pushing up sour crudes are U.S. government purchases to restock its emergency reserves, production outages from Canadian wildfires, and worries about potential for Atlantic hurricane season to cut production of U.S. sour crude.
Most of Saudi Arabia’s crude oils, such as Arab Light, Medium and Heavy, are sour grades, a type that requires more complex refining and typically trades at a discount to sweet crude, which has lower sulfur content.
But sour prices are no longer cheap. Norway’s medium sour Johan Sverdrup crude climbed on Friday to a record $3.50 per barrel premium to dated Brent, according to traders, compared with a more than $6 discount in December.
U.S. Mars sour crude prices on Thursday of last week also traded at a $2 per barrel premium to U.S. crude futures at Cushing hub, its highest in three years. It traded at a premium to light, sweet WTI Midland at East Houston terminal, something rarely seen before.
Mars also traded at a $3.70 premium to Middle East crude benchmark Dubai, significantly higher than spot Middle Eastern crude.
Western Canadian Select heavy crude, another widely discounted sour grade, traded at the U.S. Gulf Coast on Monday at a $2.30 per barrel discount, compared with a more than $8 per barrel discount as recently as March, according to brokerage CalRock.
Saudi Arabia’s price hike to Asia, the second month in a row, has pushed some Chinese refiners to seek cheaper sour crude alternatives from the spot market, traders and brokers said. This has lifted prices for other sour crudes.
U.S. Gulf Coast refiners, which are mostly configured to run sour crude, likely will purchase more Latin American barrels, said Rohit Rathod, an analyst at energy data provider Vortexa.
“OPEC+ players are pulling back supplies and we are already in a tight market at least for sour crudes.”
Oil benchmark Brent futures breached $80 a barrel for the first time since May on Wednesday after U.S. inflation data suggested the interest rate hike cycle in the world’s biggest economy is set to finally cool.
Data released on Wednesday showed U.S. consumer prices rose modestly in June and registered their smallest annual increase in more than two years as inflation continued to subside.
Markets expect one more interest rate rise, but that the U.S. rate-hiking cycle has likely peaked. Higher rates can slow economic growth and reduce oil demand.
“This is the lowest number since the pandemic … but it is important to keep in mind that this is still a transitory situation. But overall, traders are cheering this event,” said Naeem Aslam, chief investment officer at Zaye Capital Markets, describing the inflation figures.
Brent futures were last up 47 cents at $79.87 a barrel, having risen as high as $80.05 earlier. U.S. West Texas Intermediate (WTI) crude was up 56 cents at $75.39 a barrel.
A weaker dollar, optimism surrounding Chinese stimulus and U.S. stockpile data were also supporting the positive sentiment, said Fiona Cincotta, senior financial markets analyst at City Index.
Meanwhile, forecasts from the U.S. Energy Information Administration (EIA) and the International Energy Agency (IEA) point to the market tightening into 2024.
The IEA expects the oil market to stay tight in the second half of 2023, citing strong demand from China and developing countries combined with supply cuts from leading producers. New forecasts from the IEA are expected this week.
“The oil balance gets tighter either when supply is downgraded, or demand is revised up. If both happens at the same time the change can be seismic,” said PVM analyst Tamas Varga referring to the EIA’s outlook.
“Clearly, it is not worried about inflation-induced recession that could potentially dent global oil consumption.”
Top producer Saudi Arabia pledged last week to extend a production cut of 1 million bpd in August, while Russia will cut exports by 500,000 bpd.
Gold rallied Wednesday after new data showed inflation in the United States was cooling, suggesting the Federal Reserve may only hike interest rates one more time this year.
Spot gold last gained 0.79% to $1,947.39 per ounce, while U.S. gold futures added 0.81% to $1,952.70.
The consumer price index rose just 0.2% in June, compared with forecasts for a gain of 0.3%. On an annual basis, U.S. CPI advanced 4.8%, lower than market expectations for a 5% increase.
Friday’s slower than expected jobs report wasn’t a game changer, but helped shift the mindset of investors, with many now expecting July to mark the end of the current hiking cycle, Evangelista added.
The end to Fed’s current monetary policy tightening cycle is getting close, several U.S. central bank officials also said on Monday. That helps bullion as it does not yield any interest.
Harshal Barot, senior consultant at Metals Focus, said that while a July rate hike is largely priced in, “if we see core inflation still being higher than expected, then I think the expectations of another rate hike coming September will start gaining traction.”
Laurentian Bank of Canada LB-T +0.45%increase is up for sale, with larger rivals now circling the country’s ninth-largest lender in pursuit of a deal that would continue a trend toward consolidation in financial services, sources say.
Laurentian Bank confirmed in a press release that it is “conducting a review of strategic options” after The Globe and Mail revealed the lender is exploring a sale.
Laurentian’s board of directors recently hired financial and legal advisers to quietly shop the Montreal-based bank to potential buyers, according to four sources with knowledge of the process. Two of those sources said Laurentian is believed to have received a bid from an undisclosed rival bank that helped spur the sale process.
The Globe and Mail is not naming the sources because they are not permitted to discuss the confidential sale process.
Laurentian Bank is in the midst of a turnaround plan after its profitability and stock price significantly underperformed those of rival banks for several years. The bank has made some headway at revamping its fortunes under chief executive officer Rania Llewellyn. But it faces headwinds as growth in its loan book is expected to slow, profit margins are starting to come under pressure and Canada’s banking regulator is asking financial institutions to hold more capital.
Since late June, Laurentian has been in talks with several suitors, according to the four sources. Laurentian has hired JPMorgan Chase & Co., which ran last year’s sale of HSBC Canada for its British parent, three of the sources said. The bank has also hired Osler, Hoskin & Harcourt LLP as legal advisers, one source said.
Laurentian declined a request for comment beyond the contents of the press release. In its statement, the bank said that while the review is under way, its management team is continuing to pursue its strategy and priorities “with the full support and confidence of the board.”
JPMorgan Chase & Co. declined to comment.
Founded in 1846, Laurentian has 57 branches and $51-billion of assets, and its core business is commercial loans to clients in Quebec, Ontario and the United States.
Based on recent transactions, including the proposed sale of 130-branch HSBC Canada to Royal Bank of CanadaRY-T +0.46%increase, a Laurentian takeover could cost between $2-billion and $2.8-billion. The bank’s book value is approximately $2.8-billion, and the market value of the company’s shares was $1.45-billion as of late Tuesday, which is a steep discount to its book value.
One potential suitor is Bank of Nova Scotia BNS-T +0.44%increase because its executives have repeatedly said in recent years that it is a priority to expand its operations in Quebec and British Columbia, where the Toronto-based bank thinks it is underrepresented, especially in commercial banking.
Large Quebec-based financial institutions National Bank of Canada NA-T +0.38%increase and Desjardins Group could be considered natural contenders, but National Bank has signalled that it is more focused on expanding existing operations outside of Quebec. Bank of Montreal BMO-T +0.39%increase and Canadian Imperial Bank of Commerce CM-T unchno change could also consider bids. But BMO recently closed its US$16.3-billion takeover of California-based Bank of the West, and CIBC has said its first focus is on expanding its existing business as it looks to build up its capital reserves.
The country’s two largest banks – Royal Bank of Canada and Toronto-Dominion Bank TD-T +0.53%increase – are not expected to bid for Laurentian, the sources said. Royal Bank still needs approval for its proposed $13.5-billion takeover of HSBC Canada, the country’s seventh-largest lender. TD is focused on expansion in the U.S. market.
Spokespeople for Scotiabank and CIBC declined to comment. Spokespeople for the other four largest banks could not immediately be reached for comment.
Laurentian’s decision to look for a buyer follows the bank’s board conclusion that shareholders would be better served by owning a portion of a larger platform, rather than trying to compete against far larger rivals. According to one source, Laurentian’s board and Ms. Llewellyn were frustrated by losing out this year in the bidding war for mortgage lender Home Capital Group Inc., purchased in April by entrepreneur Stephen Smith for $1.7-billion.
Laurentian Bank is only slightly more than half way through a three-year turnaround plan that sought to reframe the lender as a nimble alternative to the country’s largest banks, and to move on from costly missteps in the preceding years.
In 2020, the bank abruptly changed CEOs, parting ways with François Desjardins midyear and hiring Ms. Llewellyn from Bank of Nova Scotia a few months later – a non-francophone who became the first woman to run a major Canadian-owned bank. At the time, Laurentian was suffering from a string of weak results and had slashed its dividend.
An ambitious plan to modernize the bank under Mr. Desjardins, which included overhauling digital banking systems and closing nearly half its branches, was ultimately scrapped as costs mounted and revenue stalled. Instead, Ms. Llewellyn mapped out a turnaround plan after a year-long review that would simplify the bank, focus more on specialized niches such as commercial equipment financing, and rely on outside partnerships to revamp its digital banking experience.
It wasn’t until late 2021 that Laurentian introduced a mobile banking app for smartphones, relying on technology from a partnership with a credit union.
Ms. Llewellyn acknowledged at the outset that the turnaround would take time. In a report published in June, analyst Darko Mihelic at RBC Capital Markets said Laurentian’s loan growth is slowing as interest rates rise, and this will reduce future profitability.
In 2021, Laurentian decertified what had been the only unionized work force at a Canadian bank. Analysts said the move made the bank a more attractive takeover target.
Laurentian has 3,100 employees and made a $226.6-million profit last year. The bank is a fraction of the size of rivals – Scotiabank has 91,000 employees, nearly 2,400 branches and made $10.7-billion last year.
As part of the sale process, Laurentian has set up a data room, where potential buyers can view confidential financial information, two of the sources said.
The federal banking regulator and federal Finance Minister would need to approve a takeover of Laurentian. If the bank is sold, with government approval, it would continue a trend of the six largest banks expanding by snapping up rival lenders, wealth managers and trust companies. TD Bank, for example, vaulted to the top ranks by size when it acquired Canada Trust 23 years ago.
A Laurentian takeover could also put pressure on other small rivals, such as Edmonton-based Canadian Western Bank, to consider selling themselves.
Gold prices climbed higher on Tuesday, lifting the most active futures contract to a near three-week closing high.
A weak dollar and lower Treasury yields contributed to the bullion’s uptick.
The dollar index, which dropped to 101.67, recovered to 101.97 around late morning, but retreated again and slid to 101.71.
The dollar fell, weighed down by comments from several Fed officials that higher interest rates are needed to reach the 2% inflation target, but the end to the current monetary policy tightening cycle is getting close.
Gold futures for August ended higher by $6.10 or about 0.3% at $1,937.10 an ounce, the highest close since June 21.
Silver futures for September ended down $0.064 at $23.281 an ounce, while Copper futures for September settled at $3.7660 per pound, down $0.0185 from the previous close.
Following last week’s mixed monthly jobs report, traders now await U.S. consumer and producer price inflation data this week for additional clarity on the rate outlook.
The annual rate of growth by core consumer prices, which exclude food and energy prices, is expected to slow to 5% from 5.3%.
Ahead of the inflation data, CME Group’s FedWatch Tool is indicating a 92.4% chance of another quarter point rate hike at the next Fed meeting later this month.
