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Microsoft, Loblaw report

By TERRY WEBER AND ROMA LUCIW

Friday, July 16, 2004

Globe and Mail Update

Economists are nearly unanimous in the opinion that the Bank of Canada will leave interest rates unchanged this week, but at least some also argue that the combination of recent data and past practices make the announcement a close call.

"Conditions are already in place for the BoC to begin tightening," J.P. Morgan economist Ted Carmichael said in a recent report.

"Though not expected by markets or most economists, a rate hike on Tuesday cannot be ruled out and would be appropriate based on recent data."

Earlier this year, the central bank cut interest rates three times, looking to stimulate flagging economic growth. The last cut came in April. Since then the Bank of Canada's key target for the overnight rate has remained on hold at 2 per cent.

The Bank of Canada's next fixed-date policy announcement is scheduled for July 20 at 9 a.m. EDT.

South of the border, however, the Federal Reserve has already started to raise rates, last month delivering its first increase in four years.

A July 15 a survey of primary dealer economists showed that all expected rates in Canada to remain on hold next week. Eight of the 12 surveyed — including J.P. Morgan — expect the central bank to start raising rates in September with a quarter percentage point increase to its key rate.

The remaining four, Mr. Carmichael said, expect rates to rise in October or later.

"One reason few expect a rate hike is that the BoC was easing just three months ago and has shown little concern about the need to tighten since then," he said.

However, he also noted that recent history suggests a hike Tuesday is possible. Since the end of 2000, this country's central bank has been the second most active among those in the world's 20 leading industrialized countries, after Brazil.

During that time, Mr. Carmichael said, the bank has acted 20 times, twice as often as the G20 (Group of 20) average.

"In addition, the bank has not shied away from quick policy U-turns when required," he said. After cutting by 3.75 percentage points in the year leading up to January, 2002, the central bank changed course and started raising again by April.

Similarly, last year the bank raised rates by 1.25 percentage points by April, 2003, only to start easing again in July.

Also factoring into the possibility that a surprise rate hike could emerge on Tuesday are current economic conditions.

For example, Mr. Carmichael said, the Canadian economy is now expanding more strongly than expected and inflation forecasts have been raised.

In April, the bank forecast second-quarter inflation at 1.7 per cent, while the annual rate of core inflation was pegged at 1.4 per cent. However, higher energy prices have pushed the headline inflation rate up to 2.2 per cent annually, while the second-quarter core rate is on track for 1.7 per cent.

"At a minimum, the BoC is expected to send a clear signal (on Tuesday) that tightening is imminent," he said.

Here's what's on for the week:

Monday, July 19

Tuesday, July 20 

Thursday, July 22 

 

Corporate preview

Earnings season heats up next week as 170 of the Standard & Poor's 500 companies open the books on their latest quarters, including 14 components of the Dow Jones industrial average.

Early on, the signs are good. Among the 82 U.S. companies that had reported as of Friday afternoon, 60 beat analysts' profit expectations, 16 matched, and 6 missed, according to data compiled by Thomson First Call.

Second-quarter profits for S&P 500 companies are set to rise 21 per cent on average and as much as 25 per cent once everything is said and done, a situation that a Thomson First Call analyst described as "stellar."

Third-quarter profits are expected to grow 14.8 per cent from a year ago while fourth-quarter earnings will rise 15.1 per cent.

Car makers Ford Motor Co. and General Motors Corp. are among the companies that will report next week. Analysts polled by Thomson First Call expect Ford to report a second-quarter profit of 50 cents (U.S.) a share, up from 22 cents a year ago. Sales are projected to fall 9 per cent to $36.6 billion.

GM is expected to post a profit of $2.24 a share, up 42 per cent from $1.58 a year ago. Sales are seen sliding by 17 per cent to $40.2-billion.

Chip maker Texas Instruments Inc. will shed further light on the health of the semiconductor industry. Analysts expect it earned 25 cents a share on average, up 263 per cent from 7 cents a year ago. Sales are forecast to rise 34 per cent to $3.23-billion.

Microsoft Corp. and Sun Microsystems Inc. are among the other major tech companies that will report their results next week.

North of the border, Celestica Inc., Canadian National Railway Co., Zarlink Semiconductor Inc. and Shoppers Drug Mart Corp. will start off Bay Street's earning season.

Analysts expect Celestica to report a second-quarter profit of 9 cents a share, compared with a loss of 7 cents a year ago. Sales are expected to climb 42 per cent to $2.3-million.

The raw materials sector will be in the spotlight as Inco Ltd. and Falconbridge Ltd. report on their latest quarters.

Companies set to report their financial results next week:

Monday July 19

Tuesday July 20

Wednesday July 21

Thursday July 22

Friday July 23

© The Globe and Mail

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