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Expect a rate hike and more mellow BoC this week
Markets eye outlook as trade concerns ease, with benchmark projected to rise

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Monday, October 22, 2018 – Page B5

THE WEEK AHEAD Expect a more mellow Bank of Canada to raise interest rates again this week.

No, the mellow feeling won't come from last week's legalization of recreational marijuana, although that will affect economic growth marginally.

Rather, it will come from the recent deal among Canada, the United States and Mexico to overhaul the old North American free-trade agreement.

Wednesday marks the first rate decision since the three countries struck the new United States-Mexico-Canada Agreement, or USMCA, and the central bank is widely expected to raise its benchmark by one-quarter of a percentage point to 1.75 per cent.

Economists consider that increase in the Bank of Canada's overnight rate as a given.

What they'll be watching for are signals for the rate path and changes to the outlook in the statement, accompanying monetary policy report and news conference with Governor Stephen Poloz and senior deputy Carolyn Wilkins.

"I would think that at the very least, Poloz would sound more upbeat about the outlook," said Deutsche Bank senior U.S. economist Brett Ryan.

The central bank had, to this point, flagged trade as an uncertainty dogging the outlook. But those concerns have now eased markedly, although the USMCA still has to be ratified by the three countries.

"In our view, the BoC will raise its growth forecasts across the board for a couple of reasons," Mr. Ryan said.

"First, the BoC should increase its 2018 real GDP growth forecast by 20 basis points (to 2.2 per cent) as our Q3 tracking estimate points to 2.1-per-cent inflationadjusted output growth, a bit above the 1.8-per-cent projection that the bank had pencilled in previously," he added in a report.

"Second, we see the BoC raising its 2019 and 2020 growth forecasts by 20 basis points each to 2.4 per cent and 2 per cent, respectively, as they unwind most of the aforementioned negative drag from U.S. trade policy on the back of declining NAFTA risks."

Mr. Ryan added in an interview that he's not certain how far Mr. Poloz will go toward "removing that drag," but he expects at least some nod.

CIBC World Markets chief economist Avery Shenfeld and others agreed.

"Having imposed a roughly 0.2-per-cent deduction from GDP growth over a three-year period due to trade uncertainties, the Bank of Canada will now claim that at least some of that weight has been lifted off the economy's shoulders with the USMCA deal," Mr. Shenfeld said.

There are a couple of other things at play, notably the central bank's recent business outlook survey, which showed optimism among Canadian companies.

"Fourth-quarter GDP will receive a boost from the legalization of cannabis, while the bank's latest business outlook survey will only increase confidence on the governing council that the economic outlook is solid," said Paul Ashworth, chief North America economist at Capital Economics.

Where marijuana is concerned, having become legal a couple of weeks into the current quarter, Statistics Canada won't release its fourth-quarter measure of gross domestic product until early next year.

But that will come with revisions to historical GDP numbers that would incorporate estimates of the impact of illegal pot, which would mean better comparisons.

"Therefore, the impact on growth is expected to be relatively muted, but the level of GDP will be boosted," Bank of Montreal economists said in a report.

"And, even then, the slow rollout of legal retail dispensaries will spread out the impact over a few quarters."

Central bank watchers will be watching the statement to see whether Mr. Poloz, Ms. Wilkins and their colleagues drop or keep the reference to a "gradual" approach to raising rates.

Benjamin Reitzes, BMO's Canadian rates and macro strategist, sees this as "perhaps the biggest question" for the meeting.

"We don't believe the BoC should drop the word, but that doesn't mean it won't," Mr. Reitzes said.

"While trade uncertainty was a sizable overhang for the economic outlook, the impact on highly indebted households is arguably the most prominent reason for a gradual pace," he added.

"Credit growth has slowed and debt ratios have levelled off, but rising interest rates have pushed debt service ratios higher, and that's what matters most for current policy settings.

A key rationale for gradual hikes is that policy makers are giving time for income growth to keep pace, or at least not to lag too badly."

WHAT TO WATCH FOR THIS WEEK It would be a busy one even without the Bank of Canada, notably on the corporate earnings front.

As The Globe and Mail's David Berman reports, earnings season swings into high gear, key for markets already anxious over bond yields, the WashingtonBeijing trade war, slowing economic growth in China and Italian fiscal policy.

And earnings are expected to be strong, which should ease investor angst.

MONDAY Kicking off the earnings parade are Bausch Health Cos., Halliburton Co., Kimberley-Clark Co., TD Ameritrade Holding Corp. and West Fraser Timber Co.

TUESDAY Watch for quarterly results from Canadian National Railway Co., Caterpillar Inc., Lockheed Martin Corp., McDonald's Corp. and Verizon Communications Inc.

Watch, too, as Bank of England governor Mark Carney speaks at a Toronto conference.

WEDNESDAY Besides the Bank of Canada, there are global readings of purchasing managers indexes, plus the release of the Federal Reserve's Beige Book of regional economic conditions.

South Africa's new Finance Minister, meanwhile, delivers a budget speech that Capital Economics expects will "recommit to existing deficit targets."

Plus, Microsoft Corp., whose results "should give a decent indication as to whether the company is on track to deliver the 12per-cent revenue growth that investors are pricing in for this fiscal year," said CMC Markets chief analyst Michael Hewson.

THURSDAY The European Central Bank isn't expected to do a heck of a lot. For some time yet, for that matter.

But Italy's budget woes could well play a role in the news conference with ECB chief Mario Draghi.

"Indeed, the ECB will have plenty to talk about [this] week," BMO senior economist Jennifer Lee said.

"It is unlikely that any changes will be made to the [quantitative easing asset-buying] program, but the forward guidance on rates could be adjusted to reflect the more volatile environment."

Watch, too, for results from Twitter Inc.

FRIDAY The biggie is the report on U.S.

third-quarter growth, which is expected to show an American economy still sizzling, albeit at a slower pace from the second quarter's 4.2 per cent.

Observers project the report will show GDP expanded at an annual pace of between 3 per cent and 3.4 per cent.

Associated Graphic

Prime Minister Justin Trudeau, trade negotiator Steve Verheul and Minister of Foreign Affairs Chrystia Freeland make their way to a news conference in Ottawa on Oct. 1.


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