Daily Economic Update

Canada's Current Account Surplus Narrows

(08-30-06) Canada’s merchandise trade surplus decreased $4 billion in the second quarter to $4.2 billion. The surplus was smallerthan the C$6.1 billion expected and the report should prove negative for the Canadian dollar, positive for bonds.

The surplus on trade in goods decreased $3.8 billion in the second quarter, following a similar reduction in the first.  This decrease is attributed to a second-quarter decline in exports and a rebound in imports. 

Exports of automotive products declined to its lowest level since 1998.  Machinery and equipment exports fell $0.8 billion in the quarter, with the decline being broad-based.  Exports of forestry products continued their two-year downward trend.  The value of energy exports improved as the price of crude petroleum rose substantially in the quarter.  On the import side, energy products imports rose $1.8 billion as a result of an increase in both the price and volume of crude oil. 

Canadians purchased 18.8$ billion of foreign securities in the second quarter, consisting of bonds and equities. Two-thirds of this investment was in foreign bonds.  Foreign direct investment totalled $8.4 billion in the quarter, down from the average of $14.4 billion in the past three quarters.  Foreign portfolio investment strengthened in the current quarter due to purchases of equities and money market paper. 

The larger-than-expected narrowing in the current account surplus is in line with the Bank of Canada’s view that trade would be a drag on economic growth given that most of the decline in the current account came from a lower surplus on trade in goods.  Nonetheless, with a tight Canadian labour market generating real wage gains, a relatively strong housing market and capacity utilization running above its historical average, inflationary risks remain and the Bank of Canada may be forced to hike again sometime in the future.

US GDP Report Confirms Slowing Economy

(08-30-06) Real GDP rose 2.9% in the second quarter, slightly below market estimates of a 3% gain and well below the 5.6% gain in the first quarter.  Given that the number was largely in line with market expectations, the reaction in the bond and currency markets is likely to be relatively muted.

• Consumer spending growth moderated to 2.6% from a first-quarter pace of 4.8% as spending on durables and non-durables slowed.  Personal consumption expenditures added 1.8 percentage points to GDP. 
• On the investment side, non-residential investment increased 4.7% after growing 13.7% in the first quarter, while residential investment declined 9.8%. 
• Exports grew at a 5.1% clip, while real imports put in a moderate 0.6% increase after posting a 9.1% first-quarter gain. On balance, net trade added 0.44 percentage points to GDP. 
• The real change in private inventories added 0.63 percentage points to second quarter GDP, a turnaround from the first quarter when it subtracted 0.03 percentage points.  Profits before-tax slowed, increasing $91.8 billion in the quarter compared to an increase of $142.3B in the first.
• The year-over-year growth in core personal consumer expenditures (PCE) was unchanged from the advance estimate, growing at a 2.3% clip, up from 2% in the previous quarter. The relatively elevated reading on core PCE inflation should prove unnerving for the Fed.