Top of the Morning
In Project Syndicate, Nobel prize-winning economist Robert Shiller reminds us why economic growth is so important, drawing comparisons between the modern day and the world in 1937:
Now, as then, people have been disappointed for a long time, and many are despairing. They are becoming more fearful for their long-term economic future. Such fears can have severe consequences…
In his magnum opus The Moral Consequences of Economic Growth, Benjamin M. Friedman showed many examples of declining economic growth giving rise — with variable and sometimes long lags — to intolerance, aggressive nationalism and war. He concluded that, “The value of a rising standard of living lies not just in the concrete improvements it brings to how individuals live but in how it shapes the social, political, and ultimately the moral character of a people.”…
The hope that economic growth promotes peace and tolerance is based on people’s tendency to compare themselves not just to others in the present, but also to what they remember of people – including themselves – in the past. According to Friedman, “Obviously nothing can enable the majority of the population to be better off than everyone else. But not only is it possible for most people to be better off than they used to be, that is precisely what economic growth means.”
As the old adage goes, history doesn’t repeat itself, but it does rhyme. Shiller posits that perhaps the violence between Russia and Ukraine can be partially explained by the financial crisis, which derailed a rather impressive period of growth for both countries.
On the Homefront
TSX 60 futures are moving modestly higher ahead of the open. Canada’s benchmark index is coming off a down week in which it endured less severe losses than its American counterparts, and remains one of 2014’s best-performing major bourses.
The loonie continues to plumb five-month lows against the greenback, hovering around 0.902 USD this morning. The Canadian dollar took it on the chin last week, suffering its largest weekly loss since January.
Oil is taking a beating to begin the week, with WTI crude lingering at its lowest level since the beginning of the year. This doesn’t bode particularly well for the Canadian dollar or the oil-heavy TSX.
Bonds are rebounding, with the yield on the government of Canada five-year bond retreating below 1.69 per cent after peaking above 1.71 per cent overnight.
The skyward march of home values set to continue. At 9:00 a.m. (EDT), the Canadian Real Estate Association (CREA) is scheduled to release the latest figures on home sales and price growth for August. In July, resales soared seven per cent year-over-year, with the quality-adjusted MLS Home Price Index up 5.3 per cent. Based on the releases from major metropolitan real estate boards, it doesn’t appear as though the robust rate of price increases is set to abate. The Bank of Montreal is calling for sales to rise 4.5 per cent year-over-year, with the rate of annual home price appreciation edging up to 5.5 per cent. Home values aren’t surging in all cities, however; regional disparities persist. As a general rule, east of Toronto, housing markets are cooling, while home price appreciation continues to be fuelled by the performance of the nation’s biggest city, Calgary and Vancouver. The price gap between detached and multi-family homes continues to widen, with the condo markets in some major cities, including Montreal, looking downright frosty. “To sum up the current state of the housing market and household finances, it would appear that the party is still going, but households are nearing their limit,” writes TD economist Brian DePratto. “Real risks exist that bear close monitoring.” The ratio of household debt to income rose modestly to 163.6 per cent in Q2, but remains short of its record high.
UPDATE: Canadian home prices rose 5.3 per cent year-over-year in August, with the price gap between single-family homes and apartments narrowing modestly.
Good things brewing at Timmy’s. Iconic Canadian coffee and doughnut maker Tim Hortons (THI) unexpectedly announced its same-store sales figures for the nine weeks ending August 31. Compared to the same period in 2013, same-store sales are up 3.6 per cent in Canada and a whopping seven per cent in the United States. Management hopes that partnering with 3G Capital and Burger King will accelerate Timmy’s growth in the United States and overseas; but if these numbers are any indication, the company has started to gain traction on its own.
Parliament back in session. Members of Parliament return to Ottawa today. Though most of the attention will centre on Canada’s involvement in Iraq and the continued geopolitical strife in Eurasia, the government’s recent announcement that Employment Insurance premiums for small businesses will be cut by 15 per cent in 2015 may also draw some scrutiny. Several economists have criticized the move, pointing that it creates a disincentive for firms to grow — and, in some cases, an incentive for them to downsize. On Friday afternoon, the Office of the Superintendent of Financial Institutions (OSFI) published a report showing that the cumulative surplus for the EI program is projected to be $3.5 billion in 2015. Once one takes into account the forgone revenues in light of the reduction in EI premiums for small businesses, the cumulative surplus comes out to $3.25 billion by year-end 2015. The report shows that the government could have brought the program back into balance in 2015 and delivered a substantial reduction to EI premiums across the board if it so desired.
LNG hopefuls look for tax break. The Globe and Mail’s Brent Jang reports that the companies behind the Kitimat LNG, Pacific NorthWest LNG, LNG Canada, and Prince Rupert LNG projects have formed a consortium to lobby the federal government. This group, the B.C. LNG Developers Alliance, want their projects to be classified as manufacturing operations in order to receive preferential tax treatment. Far more projects have been proposed than are likely to be completed over the medium-term, as Jang notes, and the race to develop LNG terminals to reach fast-growing Asian markets has become a sprint, not a marathon.
A poor string of Chinese data will be top of mind for market participants this morning. Readings on retail sales, fixed asset investment, and industrial production all came in below the consensus estimate. According to IG market strategist Stan Shamu, the poor print on industrial production is the most worrisome. “This reading was the weakest since March 2009, with a big dropoff in ferrous metal smelting. This resulted in power and heat production falling 1.7 per cent,” he writes. “In the past, electricity consumption has been used as one of the most accurate indications of activity and this partial read will be a concern.” The weakness in oil to kick off the week is being blamed on this collection of underwhelming data.
The latest round of polls out of Scotland aren’t painting too clear of a picture just days before the Sept. 18 referendum, though the average survey suggests the No side (which favours unity with Britain) has a slim lead. “Scottish-exposed stocks have lagged in the past month amidst rising uncertainty. Canadian equities began to rally a few days before two Quebec referendums,” write CIBC economists Peter Buchanan and Nick Exarhos. “A ‘buy the dips’ strategy could make sense, based on that experience, with the latest polls showing the nays back in the lead.”
Two lower-profile pieces of U.S. economic data are due out this morning, with industrial production forecast to rise 0.3 per cent month-over-month in August, and September’s reading of the Empire Manufacturing Index also projected to increase from 14.7 to 16.
The most anticipated IPO of the year could also be the largest in history. Citing sources familiar with the matter, Reuters reports that Chinese e-commerce firm Alibaba is planning on boosting the size of its initial public offering due to heavy demand. If Alibaba’s IPO exceeds $22.1 billion, it will surpass the Agricultural Bank of China for the biggest IPO on record. Shares are expected to start trading on the New York Stock Exchange later this week.