| |
|
Author: CIBC World Markets - Benjamin Tal
Article Date: August 2006
We are very close to the end of the tightening cycle. Recent data have confirmed what many already suspected: The Canadian manufacturing sector is in recession. One hundred thousand manufacturing jobs have been lost over the past 18 months due to the strong dollar and rising energy prices. Manufacturing output has in all likelihood declined in both the first and second quarters of the year. Note that the Canadian manufacturing sector is in recession despite a booming U.S. economy. But it is no secret that the U.S. economy is slowing very quickly. When the Federal Reserve raised rates a quarter point on June 29, it did not rule out another rate hike in August. However, the market took comfort in the fact that, for the first time, the Fed acknowledged the economy is slowing and inflation expectations remain relatively stable. "The manufacturing sector is in recession, but the rest of the economy is doing well." The question is, how will Canada’s already beleaguered manufacturing sector cope with reduced demand from a slowing economy south of the border? This leaves the Bank of Canada with difficult decisions to make. Yes, the manufacturing sector is in recession, but the rest of the economy is doing well. And recently we got some strong numbers from the labour market, retail sales and core inflation. However, by September, we believe the economy will be soft enough to prevent further rate hikes. For the next six months, we might see rates rise a bit, particularly the five year mortgage rate. But we expect those rates to start declining again by the end of the year or early 2007. Then by mid 2007, it’s possible the Bank of Canada will start cutting interest rates. The first to improve will be the five year rate, then the Prime rate. It seems that we are very close to the end of the tightening cycle.
|
|
