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    The Morning Brief - 05.30.19

    Posted by Bruce Carson on May 30, 2019 9:23:27 AM


    Economy—Bank of Canada on Interest Rates and the U.S. Fed—Vice President Pence meets with Prime Minister Trudeau and Minister Freeland, an Opportunity to Clear the Decks on two matters: the New NAFTA and China


    Bank of Canada and Interest Rates and U.S. Fed 

    As virtually unanimously predicted by financial analysts, the Governing Council of the Bank of Canada maintained its interest rate at 1.75% where it has been since last October. The communique issued by the Bank expressed optimism about the Canadian economy.

    According to the Bank the slowdown in 2018 and early 2019 is being followed by a pick-up in the second quarter as predicted in the Bank’s recent Monetary Policy Report. The communique set out that the oil sector is beginning to recover as production increases and prices are up; at least according to the Bank. Also there is strong job growth.

    Consumer spending is forecast to increase as well as exports in Q2. And “overall growth in business investment has firmed.”

    On the global economy the recent escalation of trade conflicts, the heightened uncertainty of trade restrictions from China is affecting the economy negatively. Exports of canola have been shut down and other agricultural products like pork may follow as a result of the detention of Ms. Meng of Huawei in Vancouver.

    The Bank sees the removal of steel and aluminum tariffs and the possible ratification of the USMCA as having positive implications for Canadian exports and drawing investment to Canada.

    The Bank is not concerned about inflation as it sees inflation hovering around 2%, slightly more or slightly less for the foreseeable future as it stressed the temporary nature of the economic slowdown.

    In the end, Governing Council believed that the current degree of accommodation should remain in place. And future decisions “will remain data dependent especially attentive to developments in household spending, oil markets and the global trade environment.” 

    Kevin Carmichael commenting on this decision in the National Post wrote there was “no sign an interest rate cut is on the table” and the Bank is feeling pretty good about Canada’s economic outlook. It seems the numerous references to the temporary nature of the downturn reinforced the Bank’s growth predictions, 1.3% for Q2.

    There was nothing in the statement to indicate when the Bank will resume the path to normalcy or whether a situation could arise where rates might be cut. However, in a recent interview, set out here yesterday, Poloz remains committed to achieving that goal.

    The U.S. Fed in the minutes of its April 30-May1 meeting stated that it would be following a patient approach to interest rate change and this would be appropriate “for some time.” The members believe the downturn in the U.S. economy has abated.

    However, this did not stop President Trump from criticizing the Fed during his visit to Japan for raising rates and in his opinion restricting growth.

    The Fed meets again on June 18-19 but the Bank of Canada does not deal again with rates until July 10 when it will once again release its Monetary Policy Report. Will the Fed cut rates and will the Bank of Canada continue to forecast growth in the Canadian economy?

    Vice President Pence in Ottawa to talk trade, and the situation with China

    The visit of Vice President Pence to Ottawa today, presents Prime Minister Trudeau with a golden opportunity to clear the deck for the approaching election on trade with the U.S. and the ongoing dispute with China which started with the detention of Huawei’s Ms. Meng at the request of the United States.

    It would be absolutely foolish for the prime minister to waste this opportunity by preaching his view of abortion rights to the U.S. Vice President. If Trudeau feels he needs to shore up his electoral base on this matter, find another venue and another target to attack. Right now the Canadian hostages held in China, canola farmers and those wishing to invest and do business in Canada deserve the prime minister’s attention.

    On the USMCA both Trudeau and Pence can update each other on the possibility for ratification of the deal in a timely manner. Does Trudeau want to be put in a position where he has to invoke closure or time allocation to get a trade deal through the House of Commons in the next three weeks and then what about the Senate? For those of us who were around in 1988 there is a certain irony that it is now a Liberal government pressing to get a trade deal with the U.S. through the House with uncertainty as to what the Senate may do.

    Pence should be able to inform Trudeau as to the state of negotiations with Speaker Pelosi and how the Trump administration will accommodate the requirements for support by the Democrats. Trudeau has already ruled out reopening the agreement so will the demands of enforcement provisions for the labour and environment chapters be covered off by side-letters? And will the technique of side letters be used for any other issues raised by the Democrats? Will there be a process by which these side letters are dealt with by the Mexican and Canadian governments?

    The main matter for discussion on the USMCA today should be the wording of the monitoring agreement on steel and aluminum imports which seems to have taken the place of quotas. The Morning Brief of May 21 set out criticisms of this proposal raised by trade lawyer Mark Warner. He referred to it as providing an “expedited safeguard” regime and Canada, should tariffs be reinstated, would not have the ability to impose retaliatory tariffs beyond steel and aluminum. The monitoring agreement really provides “snapback tariffs.”

    William Watson in an extensive piece in the National Post describes the need for certainty of access for Canada in a trade agreement with the United States. With certainty of access to the U.S., investment will come to Canada and remain as long as there is “free bilateral flow of goods and services” between the two countries. If this is the situation “investing in Canada is a low risk, high return proposition.”

    He argues that the monitoring agreement as described to date does not provide that measure of certainty. After consultations over the dispute, tariffs can “snapback” without “mediation, or arbitration or adjudication by a quasi-independent panel.” In this situation retaliation is limited to the affected sector.

    It is Watson’s view that such an agreement does not provide a securely open border and this is good news for the Trump administration which thrives on trade uncertainty where the default destination for investment will be the U.S. The extent and effect of this monitoring agreement must be clarified.

    On the situation with China, it is obvious from events in the last week that Canada is making little or no progress regarding the release of the hostages or resolving the canola dispute. Minister Freeland has been unable to connect with her counterpart in China and even Nova Scotia Premier McNeil who has a relationship with China’s ambassador to Canada and met with him yesterday, has refused to help; prioritizing his province’s needs and trade requirements with China. And the Parliamentary delegation has returned from China with no results.

    China’s Ambassador Lu Shaye said a few days ago that Canada-China relations have hit “rock bottom” and the key to returning to any degree of normalcy comes with the release of Ms. Meng. At least one key to that release is held by the U.S. and that should be the focus of the second part of today’s discussion with the Vice President..

    Trudeau, if he is wise, should leave the preaching for another time. It won’t help today, in fact it could be counterproductive.

    To Come 

    --today, U.S. Vice President Pence in Ottawa

    --today, Bank of Canada’s Carolyn Wilkins addresses the Calgary Chamber of Commerce

    --May 31, GDP numbers for March and Q1 to be released

    --June 3, report of the inquiry into Murdered and Missing Indigenous Women to be released in Ottawa

    --June 6, international trade numbers for April to be released

    --June 6, 75th anniversary of D-Day

    --June 7, job numbers for May to be released

    The Morning Brief returns on Tuesday, June 4 to continue with clearing the decks.--bc

    Topics: Morning Brief

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