Central bank expected to leave rates unchanged

TORONTO — Traders have the Canadian dollar in focus for this week as the Bank of Canada makes its next announcement on interest rates Tuesday while the latest reading on job creation comes out at the end of the week.

TORONTO — Traders have the Canadian dollar in focus for this week as the Bank of Canada makes its next announcement on interest rates Tuesday while the latest reading on job creation comes out at the end of the week.

At the same time, stock markets are likely in for further selling pressure after data out at the end of last week yielded a dreadful U.S. jobs report for May and signs of slowing growth in China.

The TSX lost 215.38 points or 1.86 per cent last week, on top of a slide of over six per cent during May. Losses would have been higher had it not been for a burst of buying in the gold sector.

The dollar ended last week at a five-and-a-half-month low of 96.21 cents US, losing more than five cents in a little over a month as nervous traders avoided risk and flocked to the U.S. Treasury and reduced expectations for a rate hike.

It is widely expected that the central bank will leave its key rate unchanged at one per cent. But Bank of Canada governor Mark Carney could also end up discouraging any thought of a rise in interest rates this year because of slowing economic condition, as well as worries about the future of the eurozone and the health of banks in the region.

“We have gone from almost the market thinking they’re going to raise rates to some probability they’re going to cut,” observed BMO Capital Markets senior economist Michael Gregory.

“The global economic situation is just too volatile now to risk changing policy.”

As recently as mid-April, the central bank was much more optimistic as it noted that economies around the world and in Canada are doing better than it previously thought and hinted that higher rates could be on the way.

At that time, the bank said that “some modest withdrawal of the present considerable monetary policy stimulus may become appropriate,” persuading markets that the bank would move to hike rates before the end of 2012.

“The market had in the days that followed priced in two rate hikes by the end of this year — two full rate hikes believe it or not (of 0.25 of a percentage point each) by the end of the year,” said Gregory.

“Now, in (an illustration of) how things have changed in a very short space of time, the market is pricing in slight chances, a 20 per cent chance of an actual rate cut by the end of the year.”

On the labour front, economists expect Statistics Canada will report the economy cranked out about 5,000 jobs during May, following two months of big gains, including a stunning 58,000 news jobs during April.

“This pace of increase is clearly unsustainable,” noted a commentary from TD Economics.

“And while it does help to make up for a lacklustre period of hiring earlier in the year, we expect job growth to slow in the months ahead.”

Economists expect the jobless rate to remain unchanged at 7.3 per cent.

Economic circumstances changed rapidly during May and for the worse.

The eurozone crisis worsened as officials openly discussed the possibility of Greece leaving the eurozone after an election May 6 was inconclusive with no party getting enough votes to form a government. But worryingly, parties dead-set against the austerity measures that have secured vital bailout money made strong gains.

Worries about the Spanish banking system also weighed on markets.The country’s banks are sitting on massive amounts of soured real estate investments. Rescuing the banks could overwhelm public finances, pushing the government to need international aid itself.

And just on Friday, Statistics Canada said economic growth for the first quarter met expectations, rising at an annualized rate of 1.9 per cent. But strength ebbed at the end of the quarter, with growth in March reaching 0.1 per cent, below the 0.3 per cent level that was expected.

Markets also digested a dismal report showing American employers added just 69,000 jobs in May, the fewest in a year, far away from the forecast gain of 158,000 jobs.

And the main Chinese purchasing managers index for the manufacturing sector fell 2.9 percentage points to 50.4 per cent in May. That’s just above the 50 level that signifies expansion.

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