What to expect from Jim Flaherty and Mark Carney this morning

Flaherty, Carney to speak
Markets are waiting to hear this morning what Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney have to say about the global financial turmoil.

The two officials are scheduled to appear before the Commons Finance Committee, which wants to know how the deteriorating outlook in the United States and the debt crisis in Canada could affect Canada.

Mr. Flaherty has oft said that there are risks but that Canada is well prepared to withstand additional headwinds. That comes amid data showing Canada’s economy had a weak second quarter, possibly one of contraction.

Markets will be watching Mr. Carney more closely, particularly given that he will be speaking for the first time since his U.S. counterpart, Ben Bernanke, said last week that the Federal Reserve’s benchmark interest rate will likely remain at an emergency low for two more years. That outlook ties Mr. Carney’s hands somewhat, though he was not likely to hike rates aggressively regardless.

Alongside Mr. Carney will be his senior deputy Tiff Macklem and, noted David Watt of RBC Dominion Securities, there has been much turmoil since the Bank of Canada’s “cautiously optimistic” Monetary Policy Report, or MPR, was released July 20.

“They are likely to express more caution, but won’t likely sound any alarm bells, taking solace from the fact that despite global markets’ wild ride, Canadian financial conditions remain favourable, if not as favourable relative to the spring,” said Mr. Watt, RBC’s senior fixed income and currency strategist.

“In the U.S., financial conditions have also worsened recently, but then they have not been ‘favourable’ for any sustained period since 2007. The reversal has not been as rapid as in 2010, but it still suggests a more challenging backdrop for the U.S. economy, contributing to the Fed’s extraordinary conditional commitment to leave rates exceptionally low until mid-2013.”

BMO Nesbitt Burns added that Mr. Carney is expected to note that the recovery has not lived up to the central bank’s previous forecast, and that the slumping American economy isn’t helping.

“Rather than growing 1.5 per cent annualized in Q2, as estimated in the July MPR, Canada’s economy probably stalled, with the weakness largely, though not solely, due to temporary factors such as higher gasoline prices, supply-chain disruptions and Alberta’s wildfires.”

Inflation rate dips
Overall inflation in Canada is cooling, pushed down partly by the fact that consumers in Ontario and British Columbia have lived with the HST for a year now, though the measure that guides the Bank of Canada is ticking up.

Consumer prices rose 0.2 per cent in July from June, Statistics Canada said today, and the annual inflation rate dipped to 2.7 per cent. That marks a cooling trend from the 3.1 per cent in June and 3.7 per cent in May.

The so-called core rate, which excludes volatile items and is a reading that plays more into monetary policy, also rose 0.2 per cent in the month, and climbed to 1.6 per cent for the year, compared to 1.3 per cent in June.

On a year-over-year basis, energy prices rose almost 13 per cent, but that’s down from the 12-month pace of 15.7 per cent in June. Gasoline prices climbed 23.5 per cent, also down from the 28.5 per cent of a month earlier, and food prices increased 4.3 per cent. For the month, food prices rose 0.5 per cent.

Today’s measure by Statistics Canada marked the fact that the impact of the Harmonized Sales Tax in Ontario and British Columbia was eliminated, having been introduced in July of last year, though many other prices are falling in response to the slack in the economy, subdued labour costs and, most importantly, the strong Canadian dollar (CAD/USD-I1.010.0030.26%), said senior economist Sal Guatieri of BMO Nesbitt Burns.