MNI Canada Data Preview:Light Data Week Leaves All Eyes On BOC

--Strong Consensus That BOC On Hold

--Fall Budget Update Due October 24

By Yali N'Diaye

     OTTAWA (MNI) - The coming data week will be light for Canada, leaving all

attention on the Bank of Canada's interest rate announcement and economic

projection update Wednesday.

     Also on the calendar will be the finance ministry's Fall budget update

Tuesday, with analysts expecting smaller budget deficit readings than in March,

owing to a stronger-than-expected growth in the first half of this year, and a

smaller deficit than initially projected at the end of fiscal year 2016-2017.

     The BOC will announce its interest rate decision at 10:00 am ET Wednesday,

with analysts in a MNI survey expecting the overnight rate target to remain

unchanged at 1.00%, following two 25-basis point rate hikes in July and

September.

     Following the cautious tone struck by Governor Stephen Poloz in a September

27 speech, markets have priced down the odds of a third rate hike next

Wednesday.

     Analysts are mostly citing the slowing growth in the third quarter, revived

uncertainty about the fate of NAFTA, as well as the need for the BOC to wait

further to assess the impact of its cumulative 50 basis point rate hike on the

economy, especially given the still elevated household debt and tighter mortgage

rules to come into effect in January.

     After the U.S., Canada, and Mexico agreed to extend negotiations, the

latter "are only going to become even more precarious" in light of Mexico's

elections in July and U.S. mid-term elections in November 2018, commented

Capital Economics economist David Madani, who worries the new mortgage rules

will trigger house prices to drop and household consumption to suffer. Such a

scenario could even lead the BOC to abort its tightening next year according to

the bank.

     At Scotiabank, however, the expectation remains for a BOC rate hike in

December, although the chief economist has "reduced confidence" on that latter

hike.

     "I firmly believe the underlying growth and inflation fundamentals of the

Canadian economy in a status quo world for trade policies remain supportive of

continued policy tightening," wrote Derek Holt in a research note. "However, the

risk of NAFTA negotiations becoming a macro event that lessens growth prospects

has gone up appreciably of late from original expectations that negotiations

would have been somewhat smoother, especially between Canada and the U.S."

     Besides, added RBC economists, who also expect the status quo in October, a

third interest rate hike in four months would not be "gradual".

     With a strong consensus on a status quo, eyes will be on changes to the

economic projections, the BOC's reading of the latest NAFTA developments and the

estimated closing date of the output gap.

     On the fiscal side, the Fall economic update is due Tuesday, with analysts

expecting a smaller deficit than what was presented in March for the 2017

Budget, with no significant additional budget measures.

     "A robust growth backdrop has resulted in a significantly improved fiscal

outlook for the Federal government," according to TD analysts.

     They project a deficit of C$16.2 billion for fiscal year 2017-208,

including a C$3 billion risk adjustment, representing a C$12 billion

improvement.

     The finance ministry qualifies Canada's underlying economic and fiscal

fundamentals as "sound", adding in a press release Thursday that, "The

Government is committed to sound fiscal management as it continues to make

investments to support long-term economic growth and a strong middle class,

while preserving Canada's low-debt advantage for current and future

generations."

     The update will also benefit from a lower deficit than initially projected

for FY2016-2017, as the fiscal year ended at C$17.8 billion, below the -C$23.0

billion the government had estimated in its budget last March.

     "The government has scope to trim the projected deficit by $10 billion in

the current fiscal year," RBC Economist Josh Nye said in a research note,

penciling in the FY2017-2018 deficit at C$10 to C$20 billion instead of the

C$28.5 billion projected by the government.

     The March budget assumed a real GDP growth of 1.9% in 2017 and 2.0% in

2018.

     With the fiscal update on Tuesday and the BOC's announcement on Wednesday,

little attention will be given to August wholesale sales to be released Monday.

     The last key data prior to the BOC's decision were published Friday, with

inflation further ticking up in September and retail sales disappointing in

August, consistent with the central bank's scenario of a slowdown in the third

quarter.

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

[TOPICS: M$C$$$]