CIBC: "Week Ahead" - Mar 15-19th

CIBC: "Week Ahead" - Mar 15-19th

CIBC Economic's "The Week Ahead".

Key Highlights of this week’s article: “The Visible Hand”

In terms of job creation, the 'visible hand' of monetary policy and fiscal stimulus seems to be working for both the US and Canada. For the US, it should be measured against the "what if" of even larger employment declines. For Canada, more than half of the jobs growth has come from government-funded health and education sectors. Monetary and fiscal policy can take credit for the uptrend in construction, and a wave of infrastructure projects slated to start this spring. There has been no meaningful upswing in manufacturing although we know that the auto sector has more plants operating versus a year ago. This implies that other manufacturing sectors have shuttered or downsized, with a strong Canadian dollar adding pressure to this global recession. We must now wait to see if this jobs stimulus will project itself into the private sector, and the overall economy.

Key Numbers to watch this week:

· Canada – Consumer Price Index - February (Fri – 7:00AM) – Core inflation is expected to drop off to 1.8%. With excess capacity limiting the ascent in prices, the year-on-year core inflation rate is set to remain close to the BoC's 2% target, given the BoC ample justification to honour its pledge to keep rates unchanged until Q3.

· Canada – Retail Trade - January (Fri – 8:30AM) – Retail sales have been on a clear uptrend since the trough in Dec '08, with gains in 9 of the subsequent 12 months. This trend likely extended to January due to the pending expiry of home renovation tax credits and higher gas prices.

· Canada – Manufacturing Shipments - January (Tues – 8:30AM) – Higher industrial product prices likely allowed nominal factory shipments to grow roughly 1% in January despite soft export volumes.

· US – Consumer Price Index - February (Thurs - 8:30AM) – Inflation has been trending higher due to last year's record drop in energy prices, not a sign of a developing inflation problem. We look for both headline (2.2%) and core (1.3%) inflation to remain flat.

· US – Housing Starts - February (Tues - 8:30AM) – US homebuilders remain cautious as a shadow inventory of pre-foreclosed homes loom. Building permits are pointing to a modest further increase in starts after January's 2.8% increase.

Currency Currents:

· The narrowing US trade deficit was driven primarily by slumping imports. For remaining trade imbalances, US$ must depreciate against Pacific Rim and OPEC nations, not the C$ and Euro.

· A Yuan revaluation would be good for China as an effective tool for tackling inflation, stimulate domestic consumption, sustainable growth, and a reduced reliance on US treasuries.

· The current economic picture raises the probability that the BoJ will add further liquidity to tackle deflation and rekindle growth, which could takes some steam out of the Yen.

Equity Insight:

· As TSX earnings are recovering, dividend cuts are decreasing and dividend growth is increasing, although modestly.

· Despite the 2nd deepest recession since the 1960's, profit margins only fell by 2%. Reasons: Oil bottomed at approx. twice the levels seen in past economic slumps, timely and aggressive rate cuts by the BoC and decent-looking balance sheets.

· China's recent surge in inflation was driven by food prices. This bodes well for Canada's fertilizer sub-sector as long-awaited demand is finally coming back.