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Bank of Canada inching closer to a rate increase As expected, the Bank of Canada maintained the policy rate at 1.00% today; however, the Bank assumed a more aggressive tone with respect to the outlook saying that "some of the considerable monetary policy stimulus currently in place will be withdrawn." This is a step up from the May statement, which projected that stimulus would be "eventually withdrawn." On the outlook for the global economy, the Bank reiterated that the expansion is proceeding as it expected in the April forecast. On global inflation, the Bank maintained that global pressures have broadened as strong growth in the emerging markets keeps upward pressure on commodity prices. The Bank expects that commodity prices will remain at elevated levels. Importantly, the Bank's forecast assumes that the European sovereign-debt crisis will be contained. Recent data and the prospect of stronger growth going forward suggest that domestic conditions warrant higher interest rates. This is especially true in light of the stronger than expected inflation and employment numbers lately. The Bank's decision, however, to maintain the policy rate at 1.0% reflects lingering concerns about the pass through of external developments on Canada's economy. Uncertainty about U.S. and Eurozone fiscal policy, and the likelihood that there will be significant steps made toward the resolution of their fiscal challenges to placate financial markets is keeping alive the potential for global risk premia to rise. Even with its superior economic and fiscal fundamentals, it is unlikely that Canadian financial markets will be able to avoid coming under pressure should this occur. While these external risks bear watching, the Bank still expects Canada's economy to post stronger growth in the second half of 2011, supported by very stimulative financial conditions. Similar to the Bank, our base case forecast is that the global economy will avoid a replay of 2008's financial market crisis and ensuing economic recession. After growing at a projected 2% annualized pace in the second quarter of 2011, we forecast the economy will accelerate with real GDP rising at a 4% average annualized pace in the second half of the year. Backing out the Bank's second-half 2011 growth forecast based on its 2011 projection that the economy will grow by 2.8% in 2011 suggests that our forecast is for Canada's economy to grow at a stronger clip in the final six months of the year. More details of the Bank's quarterly projections will be in tomorrow's Monetary Policy Report. The Bank acknowledged that inflation has been running hotter than expected. The core rate is likely to average 1.7% in the second quarter of 2011 and the headline rate at 3.5%, with the June data to be reported on Friday sealing the second quarter of 2011. The Bank expects that headline inflation rate will hold above 3% in the near term, with core inflation now expected to "remain around 2% over the projection horizon." Persistently higher than expected services prices were attributed with the firmer than expected core rate. The Bank maintained its assessment that the headline rate will converge to the 2% target in the middle of next year. To that end, the Bank indicated that with the expansion expected to continue and excess slack absorbed, some of the current policy stimulus "will be withdrawn." Looking ahead, some of the key international issues are coming to a head in the weeks ahead and will give the Bank a clearer view about the global outlook when it meets again in September. Our expectation that the global economy will avoid another crisis sets the stage for Canada's domestic economy to reaccelerate and for the Bank to make good on its promise to withdraw "some of the considerable monetary policy stimulus currently in place" with the case for a September hike supported by today's statement. Dawn Desjardins, Assistant Chief Economist, RBC Economics

U.S. housing starts surge past expectations in June Privately owned housing starts in the US jumped 14.6% in June to an annualized pace of 629,000 units following May’s downwardly revised reading of 549,000 (previously reported 560,000). The level of housing starts in June represents the fastest past of new home construction since January and was well above market expectations for an increase in the level of starts to 575,000. Building permits rose as well, increasing by 2.5% to an annualized 624,000 units. The rise in permits was above market expectations for a 2.3% decline and represented the highest level of permits since last December. The strength in housing starts in May was seen in both the single and multi-unit components. Single-unit housing starts jumped 9.4% to 453,000 annualized units, the fastest pace of starts since November 2010.

The relatively volatile multiple-unit starts component rose a more robust 30.4% to 176,000 annualized units, fully reversing the declines seen in the last two months. Strength was broad based as both singleunit and multiple-unit starts in all regions posted increases in June. Increases were led by the Northeast (35.1%) and Midwest (25.3%), while the South (10.6%) and West (5.4%) posted moderate, but still solid, gains. Permits for new housing units rose 2.5% from the unrevised 609,000 annualized units seen in May to an annualized 624,000 in June. The increase in June mainly reflected a strong rise in applications for multiple-unit residences (6.9%) although single-unit permits also eked out a slight increase in the month (0.2%). Permits increased in the South (5.5%), Midwest (5.2%), and West (1.4%) while permits declined in the Northeast (-10.1%). Even with the stronger than expected increase in June, new home construction in the US remains in a holding pattern, effectively trending sideways within the relatively tight range between 500,000 and 650,000 annualized units since the beginning of 2009. We continue to see subdued demand for new homes as the result of strong price competition from the high volume of distressed existing homes available for sale in the market. This in turn is weighing heavily on homebuilder confidence, which despite the modest pickup reported yesterday, remains severely depressed. The recent increase in permits is somewhat positive; however, it still implies a generally depressed level of new home construction going forward, and we expect that there will not a material break from the recent range-bound trend in the near term. David Onyett-Jeffries, Economist, RBC Economics

To view the economic data calendars with trend charts, go to: (Canada) (United States) The statements and statistics contained herein have been prepared by the RBC Economics Research based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.

RBC Economic Research