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Former BOC governor says economy facing 'tripod of angst' – BNN



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When it comes to the state of the economy, particularly during a federal election campaign marred by the COVID-19 pandemic, a former Bank of Canada governor likens it to be a “tripod of angst.”

Stephen Poloz, who spent seven years at the helm of the central bank until 2020, said many Canadians are “understandably distraught” by the handling of federal finances. 

“There is a sort of tripod of angst among regular folks: high government debt, the possibility that we’ll have higher taxes, and higher inflation connected to that debt,” Poloz said in an interview Tuesday. “People need some reassurances.”

Still, Poloz debunks fears of runaway inflation, adding there is a reason why “this hasn’t been an issue for people for nearly 30 years and suddenly it is.”

While prices have in fact risen significantly over the past year, he said that’s only a natural trajectory and shouldn’t be conflated with woes of inflation. 

“Prices have risen, as they should when demand exceeds supply. Some wages have gone up, and that should also happen when demand exceeds supply,” said Poloz.

There are also supply chain concerns that add to price increases, given that Canada’s economy is “far more trade-dependent than almost every other major economy,” he added.

“We can point to specific things and we can explain them, but those things don’t add up to a persistent inflation. What they add up to is a higher price here and there.”

The consumer price index rose 3.7 per cent on an annualized basis in July, and Bay Street is estimating the gauge jumped 3.9 per cent year-over-year in August, according to data tracked by Bloomberg. The consumer price index for last month will be released Wednesday. 

“There are longer term issues that we need to keep an eye on, so I don’t dismiss inflation fears out of hand,” said Poloz. “It is a tricky thing to navigate, especially when you factor in other vulnerabilities. That doesn’t mean we don’t have many mitigating factors at play that are making things easier to handle.”

The commodities boom that has played a big role in stirring inflation fears also propelled the loonie earlier this year, pushing it as high as 83 cents against the U.S. dollar in June. That sort of move tends to raise alarm for export-related sectors, which are put at a disadvantage when the Canadian currency rallies. 

Asked about whether this should be cause for concern, Poloz said apart from the average “mindfulness from businesses,” the loonie isn’t much to worry about.

He said Canada entered the pandemic with an enviable position for most comparable nations and, for the most part, it’s kept that up during each wave of the virus. 

The biggest worry for the country’s economy has to do with whether another crisis is emerging at the tail end of the pandemic in Canada or elsewhere, said Poloz.

“Lots of countries can’t do the things we’ve done, but they’ve tried. So, they’ve put themselves in a much more strange situation. This is where I’m more concerned about inflation and how the global ramifications affect us,” he said.

“You take where we’re in now and layer on top another Asian financial crisis? Well, that would be a real setback.”

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Canadian dollar, TSX slide ahead of uncertain election outcome



Canadian dollar

The Canadian dollar fell to a one-month low against its U.S. counterpart on Monday and the Toronto stock market posted its biggest decline since January as Canadians headed to the polls and worries about China roiled global financial markets.

The loonie was trading 0.3% lower at 1.2810 to the greenback, or 78.06 U.S. cents, after touching its weakest intraday level since Aug. 20 at 1.2895.

Prime Minister Justin Trudeau may cling to power after the dust has settled from Monday’s election, but he is likely to lose his bid for a parliamentary majority.

Foreign investors have worried that the election could result in a deadlock that hampers Ottawa’s response to the COVID-19 pandemic and further slows the economic recovery from the crisis.

“No matter the result of the Canadian election, the winner may soon have to face the prospect of a sharp slowdown in China,” said Adam Button, chief currency analyst at ForexLive.

World stocks skidded and oil, one of Canada‘s major exports, settled 2.3% lower, as troubles at property group China Evergrande sparked concerns about spillover risks to the economy.

“It’s a very confusing time and that’s impacting the marketplace,” said Irwin Michael, portfolio manager at ABC Funds in Toronto.

Investors in equities are casting a nervous eye over some of the campaign promises made by Canadian political parties, including Trudeau’s vow to raise corporate taxes on the most profitable banks and insurers.

The Toronto Stock Exchange’s S&P/TSX composite index ended down 335.82 points, or 1.6%, at 20,154.54, its lowest closing level since July 22.

Financials, which account for about 30% of the TSX’s valuation, fell 1.8%, while energy was down 2.8%.

Canadian government bond yields were lower across a flatter curve, tracking the move in U.S. Treasuries. The 10-year fell 6.6 basis points to 1.216%.


(Reporting by Fergal Smith; Additional reporting by Gertrude Chavez-Dreyfuss in New York and Sagarika Jaisinghani and Medha Singh in Bengaluru; Editing by Peter Cooney)

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Gas price surge, just one more headwind for world economy – The Globe and Mail



Soaring gas prices that threaten to push up winter fuel bills, hurt consumption and exacerbate a near-term spike in inflation are another blow to a world economy just getting back on its feet after the coronavirus shock.

The gas market chaos, which has driven prices 280 per cent higher in Europe this year and led to a 100-per-cent-plus surge in the United States, is being blamed on a range of factors from low storage levels to carbon prices to reduced Russian supplies.

So high are tensions that several European Parliament lawmakers have demanded an investigation into what they said could be market manipulation by Russia’s Gazprom.

Whatever the causes, the surge carries major market implications:


Analysts say it’s too early to downgrade economic growth forecasts but a hit to economic activity looks inevitable.

Morgan Stanley reckons the impact in the United States, the world’s biggest economy, should be small. While more than a third of U.S. energy consumption in 2020 was supplied by natural gas, users were predominantly industrial, it notes.

Overall though, higher gas prices raise the risk of stagflation – high inflation, low growth.

“It is quite clear there is a growing sense of unease about the economic outlook as a growing number of companies look ahead to the prospect of rising costs,” said Michael Hewson, chief market analyst at CMC Markets.


Euro zone wholesale power prices are at record highs, potentially exacerbating inflation pressures inflicted by COVID-related supply bottlenecks. In Germany, 310,000 households face an 11.5 per cent increase in gas bills, data showed on Monday.

Noting German factory gate prices were already the highest since 1974, Citi analysts predicted 5 per cent hikes for electricity and gas prices in January, adding 0.25 percentage points to consumer inflation next year.

Higher food costs are another side effect, given a shortage of carbon dioxide which is used in slaughterhouses and to prolong the shelf-life of food. Cuts in fertilizer production could also lift food prices.

Goldman Sachs predicts higher oil demand, with a US$5-per-barrel upside risk to its fourth-quarter 2021 Brent price forecast of US$80 a barrel. Brent is trading at about US$74 currently.


Central banks are sticking with the line that the spike in inflation is temporary – European Central Bank board member Isabel Schnabel said on Monday she was happy with the broad-based rise in inflation.

But as market- and consumer-based measures of inflation expectations rise, gas prices will be on central banks’ radar.

“If we have higher inflation, transitory or structural, and have slower growth – it will be a very tricky situation for markets and central banks to assess, navigate and communicate,” said Piet Haines Christiansen, chief strategist at Danske Bank.

This week’s central bank meetings could test policy makers’ resolve. The Bank of England meeting on Thursday is in particular focus, given U.K. inflation has just hit a nine-year high.

With U.K. producer price inflation soaring, shipping costs showing little sign of cooling, commodity prices higher up and job vacancies tipping one million, there is a growing chance that higher prices will stick around for longer, said Susannah Streeter, senior analyst at Hargreaves Lansdown.

“If they do, more [BoE] members may move quickly to vote for a rate rise sooner than expected next year, but it would be an unpopular course of action with looming tax rises already hard to digest for many consumers,” she said.


Britain is considering offering state-backed loans to energy firms after big suppliers requested support to cover the cost of taking on customers from companies that went bust under the impact of gas prices. One firm, Bulb, is reportedly seeking a bailout.

France meanwhile plans one-off €100 (US$118) payments to millions of households to help with energy bills.

“The story emerging from the U.K. energy sector will soon be more relevant to the European market than Evergrande,” said Althea Spinozzi, senior fixed income Strategist at Saxo Bank.

And in a week packed with central bank meetings, she added that markets were “right to fret.”


Spain shocked the utility sector last week by redirecting billions of euros in energy companies’ profits to consumers and capping increases in gas prices. Revenue hits at Iberdrola and Endesa were estimated by RBC at €1-billion and shares in the companies sold off heavily.

Since the move, investors have fretted about contagion to other countries, Morgan Stanley said. While seeing those fears as overdone, the bank acknowledged there was a risk of margin squeezes at European utilities in coming months.

Sector shares are down for the third week straight

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Powell May Soon Have to Detail Fed Vision of 'Inclusive' Economy – BNN



(Bloomberg) — Federal Reserve officials say they want to use monetary policy to promote an inclusive economy, but so far they’ve shied away from describing what such an economy might look like.

For now, forecasters say they expect the U.S. central bank won’t begin raising interest rates until 2023, when national unemployment will have sunk to 3.6% and Black unemployment to 6.1% — roughly where those numbers were in early 2020, right before the pandemic struck. That’s according to the median estimates of the 16 economists who made predictions for both metrics in a recent Bloomberg survey.

But Fed Chair Jerome Powell, who is currently awaiting word from the White House about whether he will be reappointed when his term expires early next year, will get a chance to clarify whether those kinds of numbers would meet his definition of “inclusive” when he takes questions from reporters Wednesday following a two-day policy meeting.

“At some point, they can’t actually punt on the question of the Black unemployment rate,” said Claudia Sahm, a former Fed economist who participated in the survey. “The closer they get to liftoff, the more and more they are going to be forced to come up with something.”

It’s a key question for the year ahead as the U.S. central bank gears up to begin winding down the bond-buying program it launched at the onset of the pandemic in 2020, and then start raising its benchmark federal funds rate, which it slashed to nearly zero at same time. Two important developments since then have thrust Fed-watchers trying to predict where monetary policy is headed next into uncharted territory.

First, in August 2020 — following a 20-month internal review of its rate-setting strategy and a wave of protests against racial inequality across the country following the killing of George Floyd in Minneapolis — the Fed redefined the “maximum employment” mandate that Congress gave it in 1977 to be “broad-based and inclusive goal.”

In other words, a low national unemployment rate is no longer sufficient for declaring “mission accomplished” — Fed officials now want to see low-income communities benefiting from a strong economy too, something that only started happening at the tail end of the long economic expansion that preceded the pandemic.

The second development came a month later, in September 2020, when the central bank’s rate-setting Federal Open Market Committee announced that it expected to hold the funds rate near zero “until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment.”

That’s also different from the way the FOMC conducted policy in the past, when it sought to begin tightening monetary conditions prior to reaching maximum employment. The idea was to get out ahead of inflationary pressures that might be harder to subdue later on. In December 2015 — when it first began raising rates after cutting them to near zero during the 2008 financial crisis — the unemployment rate was 5% and Black unemployment was 8.5%.

But from 2015 to 2020, both overall and Black unemployment continued trending lower — Black unemployment fell as low as a record 5.2% in 2019 before bouncing back to 6% at the beginning of 2020 — and inflation remained tame. That experience led to regrets among Fed officials over misjudging the inflation threat and helped shape the outcome of last year’s policy review.

As of last month, national unemployment was 5.2% and Black unemployment was 8.8%. Both are expected to come down rapidly in the coming year as the economy recovers from the impact of the pandemic.

The big question now is whether monetary policy makers view the labor-market conditions that prevailed in early 2020 as representing the best possible outcome to hope for, all else equal, or if there is still room for improvement beyond that.

“Would they look back at February 2020 — with the Black unemployment rate at 6%, and the country at 3.5% — and say, that was an inclusive labor market? Because if that wasn’t an inclusive labor market, then that means, with monetary policy, when we get to February 2020 levels, we are not at ‘mission accomplished,’” Sahm said. “And if we are not at ‘mission accomplished,’ we should not be raising rates. But they haven’t told us.”

©2021 Bloomberg L.P.

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