Via Reuters:

08:59 01Jun10 RTRS-BANK OF CANADA RAISES KEY RATE BY 25 BASIS PTS TO 0.50 PCT, SAYS WILL CAREFULLY WEIGH FURTHER HIKES AGAINST DOMESTIC, GLOBAL ECONOMIC DEVELOPMENTS
08:59 01Jun10 RTRS-BOC SEES “CONSIDERABLE UNCERTAINTY” SURROUNDING OUTLOOK, CITES POSSIBILITY OF RENEWED WEAKNESS IN EUROPE
08:59 01Jun10 RTRS-BOC SAYS MOVE STILL LEAVES CONSIDERABLE MONETARY STIMULUS IN PLACE IN LIGHT OF SIGNIFICANT EXCESS SUPPLY, STRONG DOMESTIC SPENDING, UNEVEN GLOBAL RECOVERY
08:59 01Jun10 RTRS-BOC SAYS ACTIVITY IN CANADA UNFOLDING LARGELY AS EXPECTED, CPI IN LINE WITH APRIL PROJECTIONS
08:59 01Jun10 RTRS-BOC SAYS CANADA HOUSEHOLD SPENDING EXPECTED TO SLOW , PICKUP IN BUSINESS INVESTMENT IMPORTANT FOR BALANCED RECOVERY
08:59 01Jun10 RTRS-BOC-SPILLOVER TO CANADA FROM EUROPE HAS BEEN LIMITED TO MODEST FALL IN COMMODITY PRICES, TIGHTER FINANCIAL CONDITIONS
08:59 01Jun10 RTRS-BOC SAYS HOUSEHOLD, BANK AND SOVEREIGN DELEVERAGING WILL ADD TO VARIABILITY AND TEMPER PACE OF GLOBAL GROWTH
08:59 01Jun10 RTRS-BOC-RECENT EUROPE TENSIONS WILL LIKELY RESULT IN HIGHER BORROWING COSTS AND FASTER TIGHTENING OF FISCAL POLICY IN SOME COUNTRIES
08:59 01Jun10 RTRS-BOC-IN MOST ADVANCED ECONOMIES THE RECOVERY IS HEAVILY DEPENDENT ON MONETARY AND FISCAL STIMULUS
08:59 01Jun10 RTRS-BOC TO RE-ESTABLISH NORMAL OVERNIGHT MARKET OPERATIONS, WITH TARGET FOR O/N RATE AT MIDPOINT OF OPERATING BAND
08:59 01Jun10 RTRS-BOC SAYS WILL MAKE 0VERNIGHT STANDING PRA A PERMANENT PART OF FRAMEWORK, WILL CONDUCT SPRAS AS NEEDED

There appears to be a general consensus amongst Canadian economist that a 0.25% increase is imminent. The futures market is currently pricing in an 83.96% probability of the move. The bigger unknown is the language that accompanies the decision.

Should Mr. Carney take a more hawkish tone, one which the market anticipates further hikes soon, expect yields to jump across the curve.

Should Mr. Carney take a more dovish tone, given the turmoil in Europe, yields won’t fluctuate much from current levels, as the 25 point hike is already priced into the market.

Tomorrow will be the most interesting trading day on the Money Market in over a year. I can’t wait. Yay!

From the wire:

-BANK OF CANADA CUTS KEY RATE BY 25 BP TO 0.25 PCT; NARROWS OPERATING BAND TO 1/4 POINT FROM 1/2 PT

BOC - WILL PROVIDE FRAMEWORK ON THURS FOR NONCONVENTIONAL POLICY, DOESN’T COMMIT TO IMMEDIATE ACTION

BOC-OVERNIGHT TARGET RATE BECOMES DEPOSIT RATE, WHICH IS LOWER LIMIT OF OPERATING BAND

-KEY RATE CAN BE EXPECTED TO STAY UNCHANGED UNTIL END Q2 2010, CONDITIONAL ON INFLATION OUTLOOK
-BOC SEES GDP GROWTH -3 PCT IN 2009 (REV FROM -1.2 PCT IN JAN), +2.5 PCT IN 2010 (REV FROM +3.8 PCT)
-BOC SEES 2011 GDP GROWTH +4.7 PCT,  PRODUCTION CAPACITY REACHED IN Q3 2011 (REV FROM MID-2011)
-BOC SAYS REVISES DOWN POTENTIAL GROWTH DUE TO RESTRUCTURING IN SEVERAL SECTORS
-BOC-CPI TO TROUGH AT -0.8 PCT IN Q3 (REV FROM -1 PCT), RETURN TO 2 PCT IN Q3 2011 (REV FRM MID-2011)
-BOC-CORE CPI TO DIMINISH THROUGH 2009, RETURN TO 2 PCT TARGET IN Q3 2011 (REV FROM MID-2011)
-BOC-RISKS TO INFLATION PROJECTION ARE TILTED SLIGHTLY TO DOWNSIDE
-BOC TO ROLL OVER PORTION OF EXISTING TERM PRA AGREEMENTS AT LONGER TERMS TO REINFORCE OVERNIGHT RATE
-BOC TO TARGET BALANCE OF C$3 BLN IN SETTLEMENT SYSTEM INSTEAD OF C$25 MLN TO REINFORCE O/N RAT

I’ve highlighted the most important part of the Bank of Canada announcement. The fact that the bank will keep interest rates at 0.25% for over a year will have a significant impact on the marketplace. Already yields on short term investments have plummeted. If the government plans on quantitative easing (printing money to buy government bonds), then yields will drop on longer term investments.

This will have an eventual impact on mortgage rates, to the benefit of borrowers. So for all those thinking about switched from variable to fixed mortgages, wait a little while longer. Rates are deffinetely not going up any time soon.

In truth, it’s more like what can they do. With rates already at historical lows, another 0.25% cut will likely have a small impact on lending. Most economists are predicting the bank will stand pat and not cut. However, the futures market where people are placing bets on the decision tell a slightly different story:

Probability is the likelihood that the Bank of Canada will either increase or  
decrease the Overnight Target Rate.                                             
                                                                    
===========================================
 Meeting                 Implied     Implied      Prob. Of     Prob. Of       
  Date                       Rate            BP                 0.25%        0.50%          
—————————————————————————–
21-Apr-2009       0.3620      -13.80       55.21%       44.79%       

What we can decipher from the above table is that traders, or people who are willing to bet real money on where interest rates are headed, believe that there is a 55% chance that the Bank of Canada will cut interest rates 0.25% tomorrow, the opposite view of most economists.

Ultimately, cut or no cut, the main focus tomorrow will be on quantitative easing. In simple English, quantitative easing is simply when the governement creates (prints) more money and uses it to buy bonds. The result is often a jolt in the arm to the economy …… and inflation. For now inflation isn’t really a problem and the amounts of money needed to be printed will be modest. We’ll know more tomorrow at 9am Eastern when the Bank’s announcement is published.

Many individual investors are completely unaware that some of the industry’s most powerful and meaningful tools are available free online. One of those tools is bank written economic reports.

While most financial research written is intended for client use only, economic reports tend to be public. One of the major driving factors behind this is media exposure. Business journalists need access to economic reports to write stories and quote authors. The more an economist is quoted in the media, the more credible they become.

The payoff is that the bank can then bring their oft quoted on tv/radio/print economist to client meetings and leverage them one of the benefits of doing business with the bank.

While individual investors won’t get any face time with economists, they can still read the reports that are published online regularly. The information contained, while somewhat bland, often yields nuggets of perspective that can be beneficial on analyzing future expectations.

Below are links to the economic publications of Canada’s big 5 banks. If you have time this weekend, take a few minutes to go over the weekly reviews published every Friday. It’s time well spent.

Econ Reports:

• Bank of Montreal
• Scotiabank
  
• Canadian Imperial Bank of Commerce
• Royal Bank of Canada
• Toronto Dominion Bank

You might be wondering what the heck is this CreditCrunch? There has been a lot written on the subject, but not too much explained at a basic level. So here goes…..

The current issues with credit is that it has become more expensive. What does that mean? Well, essentially it means that the funding of lower credit investments have become more expensive. Why? Because people were afraid of risk and wanted only the safest investments. Treasury Bills (T-Bills). 

T-Bills are government issued short term investing products (less than 1 year) that are virtually riskless as they are backed by the taxation power of the government. There is also a limited supply available to investors. So when everyone wanted these products, the price skyrocketted and the rate of return dropped like a rock.

Now lets look at what happened to a lower credit investments. Lets use GICs or CDs (Cdn/US equivalents). Banks love to sell GICs and CDs. They provide great liquidity for loans and they are easy to sell to investors as they usually have some form of insurance. However, when less people want to invest in the product because they prefer T-Bills, banks have to compensate by offering higher rates, increasing the difference between the rate of return of a treasury bill and GIC/CD. Since they are offering a higher rate of return to investors, the bank will also have to demand a higher rate of interest from lenders.

But wait! You might be asking yourself: “If this is true, then why the heck are my GIC/CD rates been so crappy!

You have to understand that everything is relative. Look at the following sets of rates:

• Set A: T-Bill Yield 2.2%  - GIC/CD Yield 3.00%    
• Set B: T-Bill Yield 0.5% – GIC/CD Yield 1.7%

Normally the market should function with Set A’s rates. During a credit crisis, we find the market spread, or the yield difference between T-Bills & GIC/CDs has widened to almost double the prior amount. So even though your GIC/CD rate of return in Set B is lower than Set A, the premium interest you receive compared to a T-Bill has increased.

Did I make it simple enough for you?

If the world financial system is “over-inflating” prices as he put it, then we’re in a bubble. As bubbles don’t last forever, TD Bank is wise to begin planning for lower prices in order to protect itself from future losses.

His remarks are in stark contrast to the bullish predictions by market analysts who see prices going nowhere but up. If the head of a major international bank is weary of current prices, then maybe it’s time for you to review your portfolios…. Or maybe the analysts are right….What do you think? 

The first curious observation is that retail sales were up, even with the recent drop in consumer confidence numbers. This can partly be explained by strong sales in defensive retailers like Wal-Mart and Costco that were reported for the same period.

The second curious observation is not that car sales dropped, as that has to be a no brainer given gas prices and the auto industry’s snail pace at responding to changing market conditions.  It is that sales at filling stations also dropped. One would think that it would be very difficult to produce lower sales when your product is in-elastic and at record prices. This has to be the most compelling evidence that people are changing their driving habits. Specifically, they are driving less. Car companies should take note, as less driving will undoubtedly lead to even lower sales.

Year over year, new home prices are up 6.1%, a healthy number, although the market is appearing to slow down a bit as the increase this year is slightly lower than last year’s.

Overall this is good news. Continued strong sales in new homes will encourage developers to begin new projects, employing laborers and strengthening the economy. Eventually we’ll meet a point where we’d expect to see a decrease in sale prices as inventories of new homes pass the number of people looking to purchase them. This is normal in a market economy and there is no evidence to suggest the type of collapse that happened south of the border.

Today we learn that both Wal-Mart & Costco reported sales data that increased more than analysts estimated. How does this show that we’re in a recession? (or at least acting like we are)

When consumers believe that times are tough, they will make decisions that help them build an economic cushion. Luxury goods will be cut, frivolous spending reduced, and penny pinching will begin.

Where do consumers go to penny pinch? Wal-Mart & Costco!

These companies are often coined as defensive stocks because they tend to hold their own during economic downturns. People still need to consume, just at bargain prices.

So ultimately this shows that consumers are tightening their belts and therefore behaving as if times are tough. And that’s the bottom line, isn’t it? Do you need an economist of government official proclaim that you’re in a recession to feel it? No. All that maters is how you feel and currently, Americans clearly feel like they are.