BOC State of Play:Stronger Biz Confidence,Capu And Wage Growth

By Yali N'Diaye

     OTTAWA (MNI) - The Bank of Canada raised its overnight rate target by 25

basis points to 1.0% Wednesday and proved that data was the key consideration in

its move a month earlier than anticipated by most analysts, rather than

strategic communication that would have called for a wait until the publication

of the quarterly economic update in October.

     The central bank reaffirmed its data dependency, with a "particular focus"

on growth potential and labor market conditions.

     Based on that alone, economic data this week not only validated the central

bank's move in September, but could justify a further hike as soon as October.

     Data Friday showed that industrial firms operated at their highest capacity

in nearly a decade in the second quarter, when real GDP growth reached 4.5%, far

outpacing the BOC's July projection of 3.0%, likely to be upgraded in October.

Industries operated at 85.0% of their capacity during the quarter as a result of

"very strong growth in economy-wide production," Statistics Canada reported

Friday.

     Such rate was above the historical average of 83.1% for the second

consecutive quarter, and the highest since the third quarter 2007.

     Manufacturing also operated at its highest capacity in a decade at 84.0%.

While the capacity utilization rate increased for the majority of manufacturing

businesses, it was led by machinery.

     At the same time, Canadian businesses have not been that optimistic about

their investment prospects in two years, the Conference Board of Canada reported

Thursday, with three quarters of firms planning to increase investment spending

over the next six months.

     Such prospects for higher capex spending support the BOC's view of "more

widespread strength" in business investment, helping Canada's growth to become

more self-sustained... and thus less reliant on the current "considerable"

monetary policy stimulus.

     Business optimism might also eventually translate into greater price and

wage pressures, although the BOC pointed out Wednesday the latter remain "more

subdued" than what they should be at this stage of the recovery.

     Still, Statistics Canada reported Friday that average hourly wage growth

accelerated to 1.8% year-over-year in August from 1.3% in July, with the

unemployment rate edging down to 6.2%, its lowest level since October 2008.

     To be sure, the details of the report were not as strong as the headline

numbers suggested.

     While the economy created another 22,200 jobs in August, above the 15,000

gain expected by analysts in a MNI survey, full-time employment dropped 88,100,

the largest decrease since July 2010, with private employment down 2,100.

Besides, the number of employees decreased 10,400, with gains only recorded in

self-employment. Also showing the improvement was not in the best quality jobs,

hiring was concentrated in part-time positions, which soared 110,400, the

largest monthly gain since July 2010.

     Still, with wage growth picking up and still more jobs added, labor market

conditions are evolving towards more tightness than less, which could continue

given that businesses are becoming optimistic about investment plans and their

own financial conditions.

     Meanwhile, housing market data showed activity in the closely watched

Toronto area further slowed, a welcome development for the BOC. The Toronto Real

Estate Board reported that home sales in the Greater Toronto Area fell 34.8%

year-over-year.

     The value of permits issued by Canadian municipalities, an indicator of

future construction activity, fell 3.5% in July, led by Ontario, Statistics

Canada reported Thursday. 

     In particular, building permits in Toronto dropped 16.2% in July, more than

offsetting the 14.9% gain in June, and recording the largest decline since

November 2016, suggesting a slowdown in housing starts ahead. 

     Toronto Prices were also down in August.

     It remains to be seen how higher mortgage rates and the tighter housing

rules adopted by the province of Ontario in April will continue to shape the

housing market going forward.

     On that front, the BOC made clear it will monitor how the economy responds

to higher rates given the still elevated household indebtedness.

     The central bank will also likely watch the extent of the impact of the

appreciation of the Canadian dollar on inflation trends and exports, stressing

that along economic data, financial market developments will also inform its

decisions. In its September statement, the BOC did justify part of the CAD

appreciation by the strength of the Canadian economy. However, part of it is

related to the U.S. dollar's weakness, it said, and on that front, the BOC might

be willing to wait and see when the Federal Reserve will tighten next. The pace

of appreciation of the loonie will likely prove important as well in the overall

assessment of global financial conditions.

     Oil prices might also rise on the radar screen. But any hint the

acceleration of their pace of increase is considered temporary as a result of

the impact of hurricanes would mean the BOC is more willing to look through it

than not, and play down the economic impact.  

     By October 25, the central bank will have had two more CPI reports on

September 22 and October 20 to gauge how inflationary forces are playing out,

including exchange rates and oil prices.

     Perhaps more importantly, the outcome of the Business Outlook Survey will

be known on October 16, and by then, the central bank will already have an idea

of the firms' responses, playing an important role in its overall outlook.

     A strong survey, especially on the employment and wage fronts, as well as

investment prospects, could indeed further argue in favor of a rate hike the

following week, especially if other data show the third quarter growth slowdown

is shaping up to be less pronounced than anticipated.

--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com

[TOPICS: M$C$$$]