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Bank of Canada faces tough call as coronavirus complicates rate decision – Financial Post



The Bank of Canada knows something about “unusual shocks.”

In 2003, David Dodge was in his second year as governor when the central bank confronted the SARS epidemic, bovine spongiform encephalopathy (mad cow disease) in Alberta, a mass electricity failure across Ontario and severe forest fires in British Columbia — all at the same time.

Policy-makers in the fall of that year estimated that the combination of those calamities would slow the country’s annual rate of growth by nearly a percentage point in the second and third quarters. But, “given the temporary nature of these shocks, growth is expected to rebound in the fourth quarter,” the Bank of Canada said in its October Monetary Policy Report.

Economic growth did rebound, to an annual rate of almost four per cent, but the shocks from those events had taken a bigger toll than the central bank had realized heading towards the end of 2003. Dodge left interest rates unchanged in December, and then cut the benchmark rate by a quarter point in January, March and April. There were other variables at play by then, but one of the reasons for the stimulus was that the hole into which the Canadian economy had fallen was deeper than technocrats had realized in real time.

Timothy Lane, the longest-serving member of the Bank of Canada’s policy committee, was running around the world on behalf of the International Monetary Fund in 2003. For much of the next week, he will be spending time with Governor Stephen Poloz and the other deputies on the Governing Council to decide if they need to do anything to protect the Canadian economy from the coronavirus outbreak.

“Historical experiences are informative and we’ve certainly looked at that, but, of course, there are going to be differences in each episode,” Lane, who was named a deputy governor in 2009, said in an interview in Montreal on Feb. 24. “One obvious and major difference is that China is a vastly larger share of the world economy now than when we had SARS. But apart from that, it’s a question of how the behaviour might change and that’s something that might be different in different episodes and also depending on how the disease progresses.”

That answer might sound like a dodge, but consider how little headline trade numbers tell us about what’s happening on the ground.

Earlier this month, Statistics Canada said the number of Canadian companies exporting to China increased by more than 400 between 2016 and 2018. And yet, the 10 biggest exporters were responsible for half of those exports. Is Canada more exposed to China than it was two decades ago? Certainly. But what if most of that exposure is through a relatively small number of big, sophisticated corporations that possess the tools and financial might to cushion the blow? If that’s the case, then an interest-rate cut could be an overreaction.

“The historical guideposts are useful up to a point,” Lane said. “Ultimately, we are going to have to watch how things evolve.”

Lane was in Montreal to share the Bank of Canada’s latest thinking about digital currencies at a financial-technology conference hosted by CFA Montreal, and that’s what we talked about the most during a half-hour interview. (Watch this space.)

But with global financial markets plunging for a fourth day as COVID-19 spread to Europe and Iran, and as the Centers for Disease Control and Prevention warned Americans to prepare for an outbreak, a few questions on what the Canadian central bank is thinking about all this were unavoidable.

Poloz and his deputies will release their next interest-rate decision on March 4. Most indicators suggest the economy barely grew in the fourth quarter, and that was before anyone knew about the coronavirus. It was also before some First Nations and their supporters blocked key railways for much of February. No one is talking about a recession, but no one is feeling good about the economy’s short-term prospects either.

“The coronavirus spread could lead us to revise down quickly our Canadian 2020 annual forecasts,” Sébastien Lavoie, chief economist at Laurentian Bank, said in a research note on Feb. 25. “This risk is unambiguously tilted to the downside.”

Lavoie, a former Bank of Canada economist, now sees little prospect for significant economic growth until at least March. Still, he said he was unprepared to predict an “insurance cut.” Poloz and his deputies opted against one of those last summer during the worst of the trade wars, and there probably isn’t enough reason yet to risk contributing to the current panic.

At the same time, economists at a handful of the biggest Canadian banks already thought the central bank would be forced to cut interest rates at least once this spring to offset waning consumer demand and weak exports. The idiosyncratic events generating headlines so far in 2020 only strengthen their case. So do the most recent indicators. Factory sales declined for a fourth consecutive month in December, and retail sales were flat at the end of the year. (To be sure, hiring remained strong, albeit less robust.)

Nothing Lane said will settle this debate.

If the Bank of Canada had a message for the markets, it would have added a section on the economy in his speech — and it didn’t. This round of policy deliberations will be done without the benefit of a revised forecast, since those are done only once a quarter and the last one was published in January, when policy-makers opted to leave the benchmark rate unchanged at 1.75 per cent.

“There have been those various pieces of news,” Lane said. “On the other hand, we’ve also had economic data coming in which has been not too much out of line with what we had been predicting. These recent events are too recent to show up in the data, so it’s really a question about how do we think about the risks going forward?”

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Quebec pension giant Caisse takes $33.6 billion investment hit in worst markets in 50 years – Financial Post



Pension fund writes off $150-million investment in bankrupt Celsius

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The Caisse de dépôt et placement du Québec posted a negative return of 7.9 per cent for the first six months of the year, in what chief executive Charles Emond noted was the worst period for stock and bond markets over the past 50 years.

As of June 30, the Caisse had net assets of $392 billion, with the $28.2-billion decrease due to investment losses of $33.6 billion offset by $5.4 billion in net deposits. The losses included a full write off of the fund’s US$150 million investment in crypto lender Celsius Network LLC, which is now in Chapter 11 bankruptcy proceedings in the United States.

“The first six months of the year were very challenging,” Emond said in a statement. “The mix of factors we faced had not been witnessed in several decades: spiking inflation that triggered rapid and sharp interest rate hikes, rare simultaneous corrections in both stock and bond markets, fears of an economic downturn and the war in Ukraine with its many collateral effects.”

Over the same period, the Ontario Teachers’ Pension Plan Board reported a positive return of 1.2 per cent on Monday.

During a news conference Wednesday to discuss the Caisse results, Emond said the Quebec pension fund wrote off the Celsius crypto investment even though it is considering its legal options and intends to preserve its rights in the court-monitored U.S. bankruptcy proceedings.

“We decided to take it now” out of prudence, Emond said of the writeoff. “The last chapter hasn’t been written.”

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He said his team conducted extensive due diligence with outside experts and consultants. They were aware of management and regulatory issues at Celsius and underestimated the time it would take to resolve them, he said, adding the Caisse was keen on “seizing the potential of block chain technology” and perhaps the investment in Celsius had been made “too soon” in the company’s development.

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He noted that the investment was a very small part of a large venture portfolio that has produced 35 per cent returns over the past five years.

“In these disruptive technologies, there’s ups and downs…. Some big winners and many losers,” Emond said.

Although the Caisse posted an overall return in negative territory for the first six months of the year, the performance exceeded that of its benchmark portfolio — which posted a negative return of 10.5 per cent.

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“Over five and 10 years, annualized returns were 6.1 per cent and 8.3 per cent respectively, also outpacing benchmark portfolio returns,” the pension manager noted.

Emond said the Caisse is managing the “turbulence” with a combination of asset diversification and strategic adjustments made since the COVID-19 pandemic began.

“For the past two years, we’ve been working in an environment of extremes characterized by particularly fast and pronounced changes. These unusual and unstable conditions will persist for some time,” he said.

“In the short term, we’ll be watching what central banks do to contain inflation and how that impacts the economy.”

  1. The Ontario Teachers’ Pension Plan board eked out a 1.2 per cent return in the first half of the year.

    Ontario Teachers’ Pension Plan Board ekes out small return in ‘difficult’ markets

  2. The Canada Pension Plan Investment Board reported a 4.2 per cent loss, equivalent to $23 billion, for the three months ending June 30.

    CPPIB breaks winning streak with $23-billion loss amid ‘market turbulence’

  3. In July, crypto lender Celsius Network filed for Chapter 11 bankruptcy protection and owes users about US$4.7 billion.

    Canadian watchdogs join probe of Celsius’ multi-billion-dollar collapse, sources say

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During the first six months of the year, negative returns in equities and fixed income were partially offset by gains in the Caisse’s investments in real assets including infrastructure and real estate.

The pension giant posted a negative return of 13.1 per cent in fixed income, which beat the negative 15.1 per cent return for its benchmark portfolio. This represented nearly $3 billion in “value added” attributable to all credit activities, the Caisse said.

A negative return of 16 per cent in equities beat the negative 17.2 per cent return in the benchmark portfolio.

The Caisse’s real estate and infrastructure portfolios, meanwhile, generated a 7.9 per cent six-month return, “demonstrating their diversifying role which contributes to limiting inflation’s impact on the total portfolio.”

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The real asset class performance also beat the benchmark portfolio’s return, which was 2.4 per cent.

“So that asset class played its role. The two portfolios are doing well,” Emond said.

He said it is challenging to compare the short-term performance of Canadian pension funds because they have e different mandates and investment models. The Ontario Teachers’ Pension Plan, for example, has less exposure to equity markets than the Caisse and more exposure to natural resources and commodities, which performed well in the first half of the year.

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Air Canada says its baggage handling success rate is back to 98% – Yahoo Canada Finance



Air Canada travellers wait at the check-in area as baggage handlers at Pierre Elliott Trudeau airport walked off the job, causing cancellations and delay, in Montreal March 23, 2012. REUTERS/Olivier Jean (CANADA - Tags: BUSINESS EMPLOYMENT CIVIL UNREST TRANSPORT)

Air Canada travellers wait at the check-in area as baggage handlers at Pierre Elliott Trudeau airport walked off the job, causing cancellations and delay, in Montreal March 23, 2012. REUTERS/Olivier Jean (CANADA – Tags: BUSINESS EMPLOYMENT CIVIL UNREST TRANSPORT)

Air Canada says it has improved its service levels through the summer, reducing wait times and cancellations and bringing its baggage mishandling rate back to 2019 levels.

The Montreal-based airline provided an update on Wednesday on the operational improvement initiatives that have been underway as the company grapples with numerous challenges in the post-pandemic recovery.

Air Canada says that from the week of June 27 to the week of August 8, it saw the strongest improvement in baggage handling. While the company did not disclose its baggage mishandling rate, it says that the rate during the week of June 27 was 2.5 times the rate in 2019, before the pandemic hit. As of Aug. 8, Air Canada says the rate has returned to pre-pandemic levels, with a baggage handling success rate of 98 per cent.

The airline has also experienced a reduction in flight delays of more than one hour between, with 1,160 fewer flights per week facing longer delays. Air Canada also says delays are getting shorter, with the average arrival delay improving from 28 minutes longer than 2019 levels in the week of June 27, to 12 minutes longer than 2019 levels in the week of Aug. 8.

The number of flights cancelled fell 77 per cent between June 27 and Aug. 8. The airline’s flight completion rate reached 96.7 per cent, less than one percentage point lower than in the same week in 2019.

“We know how much our customers value travel and their reliance on us to transport them safely, comfortably and without disruption. This is always our goal and we share with them their disappointment that, coming out of the pandemic, the global industry faltered due to the unprecedented challenges of restarting after a two-year, virtual shutdown,” Air Canada chief executive Michael Rousseau said in a statement on Wednesday.

“While I am very satisfied with the progress to date… we all continue to work hard on behalf of our customers to complete our recovery.”

Air Canada says it currently operates an average of nearly 1,100 flights per day and it will operate 79 per cent of its pre-pandemic schedule through the summer. It now employs 34,000 workers, slightly below the 34,700 that were on staff before the pandemic.

Despite the improvements, Air Canada’s stock was trading down nearly 2 per cent on the Toronto Stock Exchange as of 1 p.m. ET.

RBC Capital Markets analyst Walter Spracklin says the improvements are a key positive for the airline, and reinforce that “the worst is behind them in terms of travel disruptions.”

“Taken together, these improvements should offer greater confidence to Air Canada’s customer base,” Spracklin said.

“Looking ahead, we hope to see capacity growth as the system gains resilience from the summer travel boom.”

Air Canada apologized to customers earlier this month for the operational instability seen in the post-pandemic ramp-up that came after travel demand surged for the first time in more than two years. The increase in demand strained the global air transport system and resulted in challenges for Air Canada and chaos at some of the country’s biggest airports.

The airline had pointed to challenges throughout the system as a key source of the issues, including resource challenges that impacted airport security screening, Canada and U.S. border customs processing, air traffic control, maintenance providers, equipment, supply chain, aircraft catering and fuelling partners. Air Canada also says a series of mechanical failures at airport baggage handling systems contributed to ongoing issues.

Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.

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Hudson's Bay resurrecting Zellers a decade after most locations closed – CBC News



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