Canada's Hot Growth: What this means

The Canadian economy grew at a 5% rate: how will this affect interest rates, stock markets and the Dollar?

The Canadian economy boomed back in the fourth quarter of last year, pushing well past expectations and raising the likelihood that the Bank of Canada will start to raise interest rates this summer.”

Real gross domestic product grew at an annual rate of five per cent, a full point above what analysts had expected and the largest quarterly increase in nearly a decade, Statistics Canada reported Monday.

Buchanan predicted the bank will begin tightening interest rates in the third quarter of 2010, when Canadians can expect a rise in the key lending rate to one per cent.

The Bank of Canada and other central banks, particularly the U.S. Federal Reserve, have kept their key lending rates at, or near, the lowest levels possible in order to reduce the cost of borrowing and stimulate spending.

"I think the other thing that was a surprise was the continued strength of household spending and that's clearly a positive sign for the economy going forward and I think it shows that Canadian consumers... are in a bit better shape than their U.S. counterparts," he said.

From the beginning of 2010, we said that we believe the total return on Canadian equities — dividends/distributions plus gains — in 2010 will be higher than the total return on fixed income/Bonds and on cash. In other words, we are ‘somewhat’ bullish on Canadian equities for this coming year.

We are positive on Canadian equities because we believe that the Canadian economy will gain strength in 2010. Be careful about what that means. Our economy had started to recover by the end of 2009, and all indications that we see are that the economy will be more solid and stronger in 2010 than when it began its recovery.

With the economy being stronger at the end of 2010 than it was at the end of 2009, the TSX deserves to be higher at the end of 2010 than it was at the end of 2009. And higher by enough that its return will be better than the returns on fixed income or cash.

Now, be careful with what this means: I have written on several occasions before that logic and the stock markets are not always in sync. So while logic leads us to believe that with a higher GDP throughout 2010 should lead to a higher TSX by year end, “sentiment and emotion” of the markets can have a very different outcome.

Source: The Canadian Press - Rebound from recession: economy logs strong five per cent growth in Q4 2009



Saverio Manzo