Wednesday Night #1307 Jacques Clément Report

U.S.
The Federal Reserve, for the sixth consecutive meeting, maintained at 5¼%, a steady course today, but dragged the negative bias, given a weakening economy. The G.D.P. in the fourth quarter was revised down from 3½% to 2.2%, one of the steepest downturns in years, with cutback in business spending as the housing market is in recession and the auto sector into a major restructuring.Economic growth in the last half of 2006 has averaged 2.1% and first quarter 2007 may be weaker. Retail sales were flat in the first two months of the year. The manufacturing sector is receding. January factory orders were down 5.6% and durable goods orders, 8.7%, the biggest slide in business equipment in three years. Productivity for the fourth quarter was revised sharply down from 3% to 1.6%. The housing sector is slumping very badly. Housing starts, despite rebounding 9% in February, still declined nearly 5.5% since the beginning of the year after a 19% decline in the fourth quarter, the steepest decline in fifteen years. New home sales in January dropped 16½%, the largest in fifteen years. Existing home sales rebounded 3% (January) after a yearly 1% decline. Prices have declined for the sixth consecutive month. Housing permits were down 2½% in February for the twelfth decline in the last thirteen months and the builders’ sentiment was tumbling in early March. The sub-prime mortgage market has been crushed and is in distress. Late mortgage payments in the fourth quarter were at a three-and-a-half-year high. Foreclosures, estimated at two million, are at a record high and 1.5 million Americans could lose their homes. Moody’s has estimated that 100,000 jobs in housing could be lost and one thousand companies could go bankrupt. Mortgage defaults could reach three hundred billion dollars over the next two years against forty billion dollars in the last two years. Rising mortgage delinquencies have reached a four-year high. Corporate earnings, following a rise of over 10% in the fourth quarter for the fourteenth consecutive quarter, are expected to tumble to 4%-5% growth in the first half. Allan Greenspan has reiterated three times in the last month, threats of a “possible recession this year”, contradicting Ben Bernanke’s moderate growth outlook.Inflationary pressures are rising with producer prices in February rising by 1.3% and core C.P.I. up 2.7% (year), near ten-year high. Average hourly earnings have risen 4.1% (year) and labour costs at 6.6% annual rate in the fourth quarter. The U.S. dollar has weakened to over $1.33 U.S. for the Euro from $1.29 in early January. The trade deficit is hovering around $60 billion in the last two months and the current account deficit of nearly $857 billion was a record for the fifth consecutive year.On the positive side, consumer confidence (Conference Board) still had the highest optimism in five years and employment remained strong with a monthly average of 150,000 new jobs having been created in the last five months and 4½% unemployment at a near six year low.
The Dow Jones has lost 389 points since its peak of February 20 for a modest correction.

Canada
Bank of Canada remained steady at 4¼% on March 6 for the sixth consecutive meeting, “as the economy has been operating at or just above its production capacity”. Economic growth last year was 2.7% against 3% in 2005. They are expecting 2½% growth in the first half versus 2% – 2½% in the U.S, with February C.P.I. having increased sharply to 2% from 1.2% and core at 2.4% (year), the highest since early 2003 because of higher gasoline prices and housing costs, Alberta’s inflation having risen by nearly 5% (year), Bank of Canada’s projection of total C.P.I. averaging above 1% in the first half and core remaining at 2%, appears somewhat optimistic.
Hourly earnings rose 2.8% in February (year) and unit labour costs 2.6% (year) in the fourth quarter (9.6% in U.S. dollars?). Home owners’ replacement costs have risen over 7½% (over 35% in Alberta), housing starts (February) declining 21% to the lowest level in almost four years and existing home sales (February) declined 1% but the second highest level on record at near 30,000 with average selling prices up 10% (year). Manufacturing shipments declined 2.1% (January) after 4% climb in the previous two months. Productivity growth of only 1.2% in 2006 eased from 2.1% in 2005. It has averaged 1.3% annually since 1981 and Canada is next to last of nineteen countries, only coming ahead of Mexico (+0.6%), and outpaced by Italy, U.K., Portugal, Japan, Spain, Greece and three eastern countries. Canada is at 77.7% of U.S. labour productivity where tax rates on investments are the highest in the world. New vehicle sales tumbled 7½ % in the first two months of the year. Wholesale and retail sales were negative in January. After creating 140,000 new jobs in December-January, there were only 14,000 in February. The labour market remains extremely tight in the Western Provinces. The national unemployment rate is at a three-year low of 6.1%, and over 63% of Canadians are working. The Canadian dollar reached a three-month high of 86.54¢U.S. in January with a 1% rise in exports and 2.8% decline in imports. Canada’s current account surplus in 2006 was over $24 billion, declining $7.5 billion.
The dollar performed very well, considering that foreigners sold $3.8 billion of Canadian securities in January and as Canadians bought $7.8 billion of foreign securities for a twenty-fourth consecutive monthly increase. Capital spending in business machinery and equipment is estimated to rise 5.8% this year. Merger and acquisitions in Canada last year totalled $257 billion. Operating profits rose 7.3% and after-tax earnings by 5.2%. The T.S.X. has lost 188 points since its record high of 13,344 on February 25.

Near Term Trading Outlook

Canadian dollar: 85.5 ¢ U.S. – 87.5 ¢ U.S.

Euro: $1.32 U.S. – $1.34 U.S.

Gold: $650.00 U.S. – $675.00 U.S.

Crude: $58.00 – $60.00

T.S.X. : 13,000 – 13,250

Dow-Jones: 12,300 – 12,500