Top of the Morning
As Canadians continue to obsess over the government’s recently announced change to the Employment Insurance program, the Globe and Mail’s Barrie McKenna reminds us that thinking small rarely yields big results:
Unfortunately, our love of the small isn’t doing the larger economy any good. It may even be causing harm by creating a perverse disincentive for small companies to grow.
Larger companies, and particularly fast-growing ones, are more competitive, invest more, offer better wages and benefits and are more likely to become exporters. And when they do that, they become job-creation machines.
Put simply: Growing companies, not small ones, drive economic growth.
Governments should want more of them. But our policies are sending exactly the opposite signal: Stay small. Don’t grow.
Businesses seem to be getting the message. There is a growing body of research that suggests Canada has a dearth of medium and large companies compared to the United States and most other developed countries. A 2012 study by the Business Development Bank of Canada, for example, found that 527 mid-sized firms (100 to 499 employees) vanished between 2007 and 2010.
On the Homefront
TSX 60 futures are tumbling ahead of the open after the composite index suffered its most severe loss since Feb. 3 on Friday.
The yield on the five-year Government of Canada bond has dipped below 1.70 per cent this morning.
The loonie is retreating this morning, trading around 0.91 against the greenback. Though last week was marked by USD strength, the Canadian dollar held up remarkably well and actually appreciated relative to its American counterpart.
No major mortgage rule changes in the offing. In a speech on Friday, Canada Mortgage and Housing Corporation President and CEO Evan Siddall said the Crown company expects home price appreciation to moderate going forward. If it doesn’t, more macroprudential measures to cool the market may be warranted, Siddall said, indicating that CMHC was evaluating its options. However, Finance Minister Joe Oliver says the government isn’t planning any major moves. The finance minister has stressed the government will aim to gradually reduce its exposure to the housing market. Earlier this month, there were rumours that banks might soon have to pay a deductible on mortgage insurance. Such a change would indeed be a substantial one, so taking Oliver at his word, it’s safe to say that this isn’t on the horizon.
Canada urges Europe to take its foot off the fiscal brakes. Multiple outlets have reported that Finance Minister Joe Oliver thinks Europe needs stimulus, an acknowledgement that growth — not fiscal restraint — ought to be the European Union’s top priority at the moment. Oliver notes that the continent is “perilously close” to deflation. It should be noticed that many members of the eurozone are already experiencing falling prices. If such a trend continues it will further weigh on consumer and business spending on the continent and raise the prospect of a “Lost Decade,” à la Japan. The finance minister’s comments mark a clear shift in the government’s stance, as it has long preached the benefits of budget-cutting. In fact, as Nomura’s Richard Koo points out, the global commitment to austerity was affirmed at the 2010 G20 conference in Toronto.
The central bank’s No. 2 has her coming-out party. Bank of Canada senior deputy governor Carolyn Wilkins will deliver her first public speech in Toronto beginning at 1 p.m. ET, a truly historic day for the central bank. There’s not much known about the first woman to have her name on a Canadian bank note, but an analysis of her written work suggests she has considerable expertise in financial markets and has performed research on topics very pertinent to practising monetary policy in Canada in the present day — in particular, dealing with potential asset bubbles and persistently low levels of inflation. Colleagues have described Wilkins as an excellent communicator and a cerebral thinker; we’ll see how much of that comes across during her speech. Governor Poloz’s second-in-command is set to discuss the new economic reality for Canada in light of the financial crisis and what this means for monetary policy-makers. The Royal Bank of Canada expects that Wilkins’s remarks “should help clarify the bank’s thinking around the idea of a lower terminal policy rate.” In March, Poloz announced that the aging population is “slowing us down,” and that as a result, the overnight rate would likely peak at a lower point this cycle than in previous ones. The Federal Reserve statement that was released shortly after that speech contained a similar phrase. Poloz also provided a more detailed explanation on what’s become known as the “new neutral” over the summer, and has indicated that the bank will present research on this topic in its October monetary policy report.
Poloz says uptick in inflation temporary. Regular readers won’t be surprised to learn the Bank of Canada is once again electing to “look through” higher-than-anticipated inflation, which saw the core rate jump to 2.1 per cent in August. “So much of the uptick in inflation that we’ve seen over the last five or six months has been in what we call one-off categories,” Poloz told Bloomberg’s Theo Argitis. The lingering output gap tells monetary policy-makers that inflation isn’t being driven by domestic pressures, and that the current level of monetary stimulus remains appropriate. The bottom line: monthly CPI reports don’t matter that much to monetary policy-makers at the moment, as such, market participants shouldn’t attach too much significance to them either.
Talisman still seeks asset sales to Repsol. Bloomberg’s Jeremy van Loon reports that Talisman Energy (TLM) is looking to sell assets to Spanish oil giant Repsol. While the Canadian company is certainly a willing partner, the buyer’s interest is less certain. In late August, the outlet indicated that the Spanish oil giant was no longer interested in purchasing Talisman in full, but remained interested in some of its assets in North America. Meanwhile, van Loon indicates that Talisman is looking to “unwind some international operations.” It appears as though there might be a disconnect between what Repsol wants to buy and what Talisman is willing to sell.
B.C. government to release LNG tax laws in October. The Globe and Mail’s Brent Jang reports that British Columbia will announce new tax laws affecting LNG companies that are likely to play a key role in determining how many projects are pursued. Jang previously wrote that LNG companies have formed an organization to lobby the federal government to treat them as manufacturers, a move that would benefit them from a tax standpoint.
Momentum traders ought to be ready for a reversal as people are poised to take profits, says IG chief market strategist Chris Weston. “It will be an interesting week for short-term-focused traders, with a number of markets that have recently seen better trending conditions exerting clearly overbought or oversold conditions,” he writes. “The sell-off that has materialized in the U.S. bond market of late is coming at a time when we have seen some fairly bearish dynamics in other economies.”
ECB President Mario Draghi will testify before the European Parliament’s economic and monetary committee in Brussels this morning as the central banker attempts to keep the eurozone from falling into a deflationary spiral. One of the European Central Bank’s new measures hasn’t had much initial success as European banks sought far fewer low-interest loans than analysts expected. The FT’s Izabella Kaminska notes that break-even inflation expectations are falling, and cites research from Deutsche Bank’s George Saravelos suggesting that this increases the odds of the central bank buying sovereign debt, a move that would infuriate many Germans.
Chinese economic growth is under pressure, admitted Finance Minister Lou Jiwei. However, he also talked down the possibility of further stimulus, saying that China wouldn’t make major changes to policy due to any one economic indicator. Slowing growth in the world’s second-largest economy would have a deleterious effect on the resource-heavy TSX, as Chinese demand has helped keep commodity prices elevated. Policy-makers are attempting to achieve a rebalancing of growth away from credit-driven sources and towards consumer spending. The flash reading of the HSBC Manufacturing PMI is scheduled to be released this evening, and will be watched even more closely than usual in light of Jiwei’s comments.
An update on the state of the U.S. housing market is due out at 10 a.m. ET, when existing home sales are expected to rise one per cent month-over-month to an annualized 5.2 million in August.