BMO Harris Private Banking

BMO Harris Private Banking

August 26, 2013 07:00 ET

BMO Harris Private Banking August Market Commentary: Central Banks Working Hard to Stimulate Economic Recovery

- Financial revival in Japan could boost demand for Chinese exports

- Positive 1.9 per cent surge in Canadian retail sales is welcome news

TORONTO, ONTARIO--(Marketwired - Aug. 26, 2013) - According to BMO Harris Private Banking's August Market Commentary, central banks and policymakers around the world are working diligently to achieve a common goal: the stimulation of economic recovery.

"The global impact of central monetary policy is evident everywhere as local economies continue to recover," said Daniel Theriault, Chief Investment Strategist, BMO Harris Private Banking. "Despite different tactics used, central bankers are introducing stimulus policies and are trying to keep interest rates low. With this in mind, the focus will now be on fostering better partnerships between businesses and governments."

Further highlights from the report include:

Canada Rolls Along

According to the report, central bank policy in Canada pitched growth forecasts slightly upward. Meanwhile:

  • Retail sales surged 1.9 per cent.
  • The oil-price increase helped drive up the Bank of Canada's commodity price index by more than 10 per cent so far this year.

"Canada's growth outlook doesn't depend on interest rates necessarily, but more so on what happens south of the border," said Mr. Theriault. "As a result, Canadian central bankers simply have fewer notes to play in their variation of monetary policy setting and intervention."

United States Shows Signs of Recovery

As the Federal Reserve prepares to wind down phase three of its quantitative easing program by mid-to-late 2014, Mr. Theriault noted that two outcomes are probable: Treasury bond yields will rise and volatility will increase.

The report reveals that this momentum is already underway:

  • Yields on 10-Year U.S. treasuries increased in July from 2.47 per cent to 2.56 per cent.
  • Unemployment dropped to 7.4 per cent.
  • Growth in U.S. real GDP was modest at 1.7 per cent in the second quarter.
  • The S&P500 index rose 6.1 per cent for the quarter and 19.6 per cent year-to-date.

"There are subtle signals that the U.S. recovery is firming," said Mr. Theriault. "After years of shunning excess corporate cash, U.S. banks are competing for funds. This could be a sign that banks are returning to their traditional role as lenders, or it could be a catalyst that will halt the slowdown in the velocity of money. If the latter holds true, we may be witnessing a major turning point for both financial assets and, ultimately, inflation."

China Seeks Balance

The report notes that China is continuing to try to balance a slowdown in investment with a boost in consumption. This difficult task has caused exports to slump 3.1 per cent year-over-year, and exports specific to Europe fell from 24 per cent to 18 per cent of total exports.

"There is a possibility, although slim, that the economic revival in Japan will boost demand for Chinese goods," said Mr. Theriault. "While the attention seems to have focused recently on the struggling export sector, we believe that economic growth in China will continue to underperform in comparison to past quarters."

Eurozone Looking Brighter

Europe's economy appears to be coming out of recession at last, and the European Central Bank's July 2012 promise to "do whatever it takes" to keep the euro afloat seems to be working. That statement, backed by an open-ended bond purchase plan, also seemed to help ease investor attitudes, the report revealed. Mr. Theriault noted that, while the results are encouraging, it will be challenging for the region to achieve growth in the next few years.

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