Up this week: Growth figures, bank earnings, U.S. bond yields

There's plenty to keep investor attention focused this week amid the latest growth figures from Canada and the U.S. along with earnings from most of Canada's big banks.

TORONTO – There’s plenty to keep investor attention focused this week amid the latest growth figures from Canada and the U.S. along with earnings from most of Canada’s big banks.

Traders will also be keeping an eye on U.S. bond yields, which have risen dramatically since May when U.S. Federal Reserve chairman Ben Bernanke first mentioned the possibility of the central bank starting to withdraw some of its economic stimulus.

The TSX finished last week with a modest rise as increases in financials and industrials were balanced by further deteriorations in interest-sensitive stocks such as utilities and telcos.

Those sectors have taken it on the chin as growing conviction that the Fed will let up on its monthly US$85 billion of bond purchases has pushed long-term rates higher.

The benchmark 10-year U.S. Treasury has surged about 120 basis points since May to as high as 2.94 per cent last week, although yields settled down to around 2.83 per cent at the end of the week. The utilities sector fell around two per cent last week.

Generally speaking, analysts are expecting another positive quarter for the banks with some dividend increases, even as the big financials grapple with slower loan growth.

“There is no question mortgage lending growth and consumer loan growth is slowing. People have been cognizant of the fact that they are pretty highly levered, notwithstanding the fact that carrying costs are quite low because rates are so low,” said Robert Gorman, chief portfolio strategist at TD Waterhouse.

“So the banks are all facing that, of course, (and) the rules surrounding mortgage lending have made things a little more rigid. So that is the big issue.”

Gorman sees earnings growth for the big banks coming in at an average of five per cent for the latest quarter.

Analysts also think investors could see dividend hikes from Scotiabank (TSX:BNS), Royal Bank (TSX:RY) and TD Bank (TSX:TD).

Scotiabank and Bank of Montreal (TSX:BMO) post results Tuesday while CIBC (TSX:CM), TD and Royal Bank report on Thursday.

The major economic reports for the week come out Friday.

Statistics Canada releases figures for gross domestic product growth in June and the second quarter on Friday and economists say they won’t be pretty.

“We’re pencilling in a drop of 0.5 per cent (for June) and there are more question marks than usual surrounding this number,” said BMO Capital Markets chief economist Doug Porter.

“Most indications suggest it was a very bad month for the economy for a variety of factors.”

The biggest drags on the Canadian economy that month were severe flooding in Alberta and a construction sector strike in Quebec.

The other major drop was in Central Canada.

“It was Ontario actually which posted some of the worst numbers of the month,” said Porter.

“There is no obvious reason for that and to put it in perspective, outside of a recession it is very rare for the economy to drop by 0.5 per cent. We actually haven’t seen that since, I believe, 2003.”

At that time, the economy was under pressured from a severe electrical blackout in Eastern Canada and the SARS outbreak.

The Canadian GDP data likely won’t help a Canadian dollar that has been driven lower by a U.S. currency that has risen steadily on the speculation about what the Fed may do about its asset purchases.

The loonie fell about 1.5 US cents last week and Porter thinks there is room for more declines.

“I think it will take some significantly positive surprises to turn the currency around and based on what we’re looking at next week I wouldn’t be surprised if it sags a bit further,” he said.

Better growth data is expected from the U.S. The second reading on second-quarter GDP growth comes out on Thursday and Porter expects that the original reading will be revised in a positive way.

“External trade came in a lot better than expected and . . . we think Q2 growth will get a nice upward revision,” he said.

“We think it will be a bit better than two per cent versus the original 1.7 per cent read. If that’s right, that every so slightly moves the Fed a step closer to tapering.”