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The Canadian dollar is in a “structural bear market” as it bears the brunt of the country’s stagnating productivity, says economist David Rosenberg in his morning newsletter.
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Read his full comment here:
“Real gross domestic product per capita in Canada has been down or negative sequentially in the past five quarters and has contracted 2.4 per cent on a year-over-year basis. Productivity in the third quarter declined at a 2.3 per cent annual rate, marking the sixth consecutive fall off. Definitive recessionary signs, but also evidence of an economic backdrop in structural decay, masked by booming immigration and population gains which, sadly, are not paying for themselves.
Productivity in Canada has completely stagnated now for the past six years. Dismal is not a strong enough word to describe the situation. Because of this, unit labour costs in Canadian dollar terms are up 6.2 per cent from year-ago levels and up 3.4 per cent in U.S. dollar terms. That currency-adjusted pace compares with a 1.6 per cent trend in the U.S. (where productivity is up 2.5 per cent year-over-year, in stark contrast to the trajectory north of the border).
It is a matter of pure math that to re-establish a more competitive cost setting in Canada, the loonie is going to have to bear the brunt and act as the antidote to this secular downward path in Canadian productivity, both in absolute terms, but most importantly in comparison to what is happening south of the border (exchange rates, after all, are simply “pair trades” that in large part reflect comparisons in economic success between two countries).
Barring any changes in relative productivity or wage compensation, the Canadian dollar likely needs further depreciation to equalize unit labour costs in common currency terms.”
David Rosenberg
The federal government is planning to launch a catalogue of pre-approved home designs to speed up the home-building process for developers.
Housing Minister Sean Fraser announced today the federal government will begin a consultation process to develop the catalogue in January.
Fraser says this brings back a policy from the post-Second World War era when the Canada Mortgage and Housing Corp. developed blueprints to speed up the construction of homes.
A report released this summer co-authored by housing expert Mike Moffatt came with a set of recommendations for the federal government that included developing such a catalogue.
Fraser says the initiative will start with low-rise builds and will then explore a potential catalogue for higher-density construction.
The Canadian Press
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Stocks, bonds and the dollar struggled for direction, with inflation data that only matched estimates reinforcing bets the United States Federal Reserve will keep rates elevated for a period to bring inflation back to its target.
The so-called core consumer price index, which excludes food and energy costs, increased 0.3 per cent following a 0.2 per cent advance in October. From a year ago, it advanced four per per cent. Economists favour the gauge as a better indicator of underlying inflation than the overall CPI. That measure ticked up slightly. From a year ago, it was up 3.1 per cent.
After falling in the immediate aftermath of the report, U.S. Treasury two-year yields reversed course and rose two basis points to 4.73 per cent.
Swap traders slightly trimmed their expectations for Fed rate cuts in 2024.
One Wall Street, the S&P 500 was down 0.04 per cent at 4,620.86. The Dow Jones Industrial Average was up 0.19 per cent at 36,477.86 while the Nasdaq composite was up 0.14 per cent at 14,453.30.
In Toronto, the S&P/TSX composite index down 0.6 per cent at 20,199.61.
Bloomberg
United States consumer prices picked up in November, reinforcing the Federal Reserve’s resolve to keep interest rates elevated in the near term.
The so-called core consumer price index, which excludes food and energy costs, increased 0.3 per cent following a 0.2 per cent advance in October, according to government figures. From a year ago, it advanced four per cent for a second month.
Economists favour the core metric as a better gauge of the trend in inflation than the overall CPI. That measure ticked up slightly after being little changed in October. From a year ago, it was up 3.1 per cent.
Tuesday’s data underscore the choppy nature of getting inflation back in line. While price pressures have largely retreated from multi-decade highs, a still-strong labour market continues to power consumer spending and the broader economy.
Fed officials begin a two-day meeting Tuesday that is expected to culminate with them holding interest rates steady again. Chair Jerome Powell will likely reiterate he and his colleagues want to see a more sustainable pullback in price growth before easing policy.
Treasuries erased gains, stock futures fell and the dollar pared losses after the release. Traders scaled back bets on a interest-rate cut in March.
Bloomberg
Canada’s tax on Netflix Inc. and other foreign digital services companies may be a major irritant for the United States tech sector, but Prime Minister Justin Trudeau says it doesn’t seem to be much concern to President Joe Biden.
In a year-end interview with The Canadian Press, Trudeau said “not once” did Biden indicate that the digital services tax, which is set to go into effect on Jan. 1, was a significant worry for the White House.
The prime minister said he was poised to defend the policy, which is widely opposed on Capitol Hill. David Cohen, the U.S. ambassador to Canada, warned in October about the risk of a “big fight” over the three per cent levy.
“I understand that Americans may not be very happy that we are going to do it, but we have promised to do it,” Trudeau said. He said he was prepared with “all sorts of responses” had Biden raised the upcoming tax.
The measure is aimed at ensuring foreign tech giants that are generating revenue from Canadian users are required to pay taxes on that revenue in Canada. The bulk of those companies are based in the U.S.
“I think that, in all the conversations we had with the Americans, not once did President Biden raise that as a priority, a concern, directly with me.”
Emilie Bergeron, The Canadian Press
Treasury yields and the United States dollar fell, while U.S. stock futures posted small moves before a crucial inflation report.
Equity traders were reluctant to make big bets ahead of this week’s heavy load of economic data and interest-rate decisions, with contracts on the S&P 500 and Nasdaq 100 keeping to narrow ranges.
Tuesday’s consumer price index will give Wall Street a sense of whether the disinflation trend is continuing, a day before the last scheduled United States Federal Reserve decision of 2023. The U.S. central bank is widely expected to hold rates, with most market focus on whether it will try to temper policy easing expectations after investors’ aggressive dovish repricing.
The S&P/TSX composite index closed down 13.18 points at 20,318.36 on Monday.
Bloomberg
We’ll get an updated look at inflation in the United States with the release of the consumer price index for November at 8:30 a.m. ET.
Expect earnings reports from Transcontinental Inc., Reitmans Canada Ltd. and DavidsTea Inc.
The Economic Club of Canada hosts an armchair discussion on the topic of “Examining Canada’s Current Economic Landscape.” Frances Donald, global chief economist at Manulife Investment Management; John Manley, former federal finance minister; and Stephen Poloz, former Bank of Canada governor, will participate.
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Additional reporting by The Canadian Press, Associated Press and Bloomberg
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