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Saturday, October 30, 2010

"The Week Ahead" - October 25-29th


  
CIBC Economic's "The Week Ahead".
 
 
Key Highlights
 
This week, the Bank of Canada took a step back and issued a new growth projection.   They indicate that growth in the years ahead will come from net exports and capital spending, less from consumer and housing activity.  How confident can they be that trade performance can ultimately fill the gap as fiscal policy tightens?
 
Key Numbers to watch this week:
  • Canada – Real GDP –August (Fri – 8:30AM) – Canadian GDP is poised to bounce back in August with indicators of economic activity showing a healthy performance for the month.  However, the services sector show a more modest growth expectation.
  • US –GDP (Q3 Advance) – September (Fri, 8:30AM) – The deepest recession since WWII basically began in the housing market.  Now the slump in sales and starts, brought on by the tax credit's expiry, insures that sector will revert to being a drag on Q3 performance
 
Equity Insights:
  • Four fifths of the 32% of S&P 500 members who have reported have topped the streets earnings estimates.  Could it be that analysts are underestimating a company's offshore activities and earnings?
  • AAII Consumer sentiment index has tested five-month highs recently.  Typically a high reading suggests less money "waiting on the sidelines".
  • China's Q3 GDP data shows that growth has moderated but remains healthy.   Resource markets have overreacted in the past to rumours of China – savvy investors may want to keep their eyes open on potential buying opportunities.
 
Currency Currents:
  • The C$ lost ground this week as the Bank of Canada's revised assessment of the negative output gap cemented a rate pause for the foreseeable future.   We may now see the anticipated gradual approach to rate hikes.
  • Our error-correction model has the C$ overvalued by roughly 7 cents (fair value – 1.10C$/US$).  However, when looking at PPP, the IMF estimates the loonie should be closer to 1.22C$/US$
  • China's authorities are taking steps to stem the nation's high inflation rate, now at 3.6%.  Authorities may favour a higher level to the yuan, rather than policy rate increases to promote an orderly disinflation in the Chinese property market.