Top of the Morning
The University of Oregon’s Mark Thoma provides excellent clarity on a phrase that’s often bandied about but generally not well understood: the concept of “economic slack.”
The amount of slack in the economy is essentially a measure of the quantity of unemployed resources. It represents the quantity of labour and capital that could be employed productively, but isn’t; instead, it is idle. More formally, it is defined as the difference between the economy’s productive capacity — the amount of goods and services that could be produced if all labour and capital were fully and efficiently employed — and the actual level of economic output.
When this gap is large, there is a lot of slack in the economy and monetary policy should be aggressive. But when the gap narrows, policy should ease to prevent overheating and inflation.
Unfortunately, measuring the economy’s potential is not an easy task….
On the Homefront
TSX 60 futures are moving higher ahead of the open after weakness in commodities weighed on the composite index on Wednesday.
The yield on the five-year Government of Canada bond is grinding higher this morning, hovering around 1.72 per cent.
The loonie has pared some of yesterday’s losses but remains stuck below 0.91 against the greenback.
Canadians come clean about past lies. Nearly 6,000 taxpayers have revealed previously hidden assets to the Canada Revenue Agency over the past year, writes Bloomberg’s Hugo Miller, citing a CRA spokesperson. That’s an increase of 400 per cent compared to 2006. The CRA has a “voluntary disclosure program” that allows taxpayers to come clean on past mistakes and/or transgressions in order to avoid the possibility of prosecution. This wave of honesty comes as the agency makes a concerted effort to root out people who move cash offshore in order to avoid paying their fair share of taxes. Roughly 800 of these cases come from clients of UBS, the largest bank in Switzerland — a well-known tax haven. On Wednesday, the agency announced that a Toronto taxpayer who admitted to filing fraudulent returns has been sentenced to a small stint in jail.
CN Rail facing fines. The Globe and Mail’s Eric Atkins writes that the Canadian National Railway (CNR) will be fined by the federal government for not shipping enough grain under the terms of the Fair Rail for Grain Farmers Act. However, CN’s management contends that there wasn’t enough product to move. CEO Claude Mongeau indicated that the glut of supply has been cleared, and that the railway hasn’t met quotas for grain shipments “for the last several weeks” because of a lack of demand. The railway faces fines of up to $100,000 for each week that it failed to ship 5,000 rail cars of grain. The iron horses were one of the few bright spots on the TSX on Wednesday, with CN Rail up 0.8 per cent and Canadian Pacific Railway (CP) adding 1.7 per cent.
Fertilizer giant may ramp up production. Bloomberg reports that Wayne Brownlee, CFO of Potash Corp. (POT), indicated that the firm is considering raising its operational capacity by about 20 per cent next year, citing growth potential in the offshore market. In 2013, the Belarus Potash Company — the world’s largest potash cartel, comprised of Uralkali and Belaruskali — broke up, as the firms elected to boost volumes rather than maintain high prices by working in concert. On Tuesday, the head of Uralkali said that there were no negotiations currently in the works to restore this partnership. When Potash Corp. released its Q2 earnings report in late July, management upped its guidance for potash sales volumes for the year, with CEO Jochen Tilk characterizing the level of demand as “robust.”
Double dose of data on deck. At 8:30 a.m. (EDT), Statistics Canada will release July’s figures for international securities transactions. Recent readings on securities transactions have showed that foreign investors are “searching for yield” in Canada — eschewing from purchases of government bonds while amassing a larger number of higher-yielding (but riskier!) corporate bonds and stocks. There are relatively widespread concerns that this “search for yield,” which is in some respects a desired and necessary outcome in light of the low-interest-rate environment, may be leading investors to take on too much risk. July’s Employment Insurance data will also be released in tandem with the reading on securities transactions. While the headline number for Employment Insurance provides information on the amount of people who receive benefits, the metric that gives us a better handle on how the labour market is doing is the number of people who file for benefits. Claims data is probably the best example of how Canada and the United States’ labour markets have been going in different directions: the former has seen monthly initial and renewable claims rise to their highest level since October 2010, meanwhile, U.S. weekly initial jobless claims have eclipsed their pre-recession lows.
Wealth manager to release quarterly results. This afternoon, Gluskin Sheff (GS) will publish its fourth-quarter earnings report for the three months ending June 30. The firm’s previous set of results marked an intermediate peak for the stock, as shares slid 17 per cent in the two weeks following the release of the Q3 figures. In early June, the wealth manager announced its plan to acquire Blair Franklin Asset Management, which specializes in fixed income, for $15 million in cash and 1.9 million shares (which were valued at roughly $57 million at that time). This transaction was closed at the beginning of August. Investors responded favourably to the announcement of the deal, sending shares six per cent higher that day.
The U.S. Federal Reserve’s Janet Yellen and her colleagues made waves on Wednesday with a new statement and set of projections for market participants to digest. The statement was considered to be moderately dovish, as retained two of the elements that showed a change in policy isn’t coming any time soon: the references to “considerable” time between the end of the central bank’s bond-buying program and the first rate hike, and the “significant” underutilization of labour resources, which indicates that there’s still a lot of slack. However, FOMC members’ projections for the future path of the federal funds rate (commonly known as the dot plot) was incrementally hawkish relative to the previous set released in June. More monetary policy-makers now see the first rate hike coming in 2015, and the average dot for the policy rate at year-end 2015 and 2016 edged higher. During the press conference, Janet Yellen stressed that there is no mechanical, formulaic definition of “considerable time” and downplayed the importance of the dot plot. At the end of the day, U.S. stocks were up (with the Dow Jones closing at an all-time high), bond yields rose, and the greenback went on a tear.
The poor performance of China’s real estate market will continue to raise questions about whether policy-makers can engineer a soft landing. Citing data from the National Bureau of Statistics, Xinhua reports that in August, new home prices fell in 68 out of 70 cities surveyed on a monthly basis, with existing home prices declining in 67 of 70 cities relative to July. This marks the fourth consecutive month of price declines. On an annual basis, resale prices were down in roughly half of all cities surveyed.
Japanese exports dropped by 1.3 per cent year-over-year in August. However, this was a smaller decline than economists were expecting. In addition, the decline in exports was fuelled by a drop-off in shipments to the United States. Considering that the American economy is starting to pick up steam, this part of the reading may be an anomaly.
Today, residents of Scotland head to the polls to vote on whether they want independence from Britain. The pre-election polls show that the No side, which supports unity, has a slim lead. Voting should be done by the time the Eastern time zone ends its work day, but the results may not be official until 2:00 a.m. (EDT). “Essentially, a Yes vote is likely to weigh heavily on the sterling and equities. A No vote should result in a relief rally and is likely to be positive for the sterling and equities,” writes IG market strategist Stan Shamu. “However, even if we get a No vote, I feel the recovery will be capped by the fact this whole situation is likely to give rise to further structural issues in the not-too-distant future.”