S&P downgrades Venezuela (Chavez to nationalize S&P?)
Michael Babad
RTGAM






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S&P downgrades Venezuela
Lucky for Standard & Poor's that it doesn't have an office in Venezuela. It would probably be nationalized if it did.

The U.S. ratings agency, in the midst of some controversy in the United States after its downgrade of U.S. debt, and among the agencies that aren't particularly favourites in Europe right now, no doubt irked Hugo Chavez as it downgraded Venezuela today to B-plus from BB-minus. That means it's more junk than it was before.

"In our opinion, changing and arbitrary laws, price and exchange controls, and other distorting and unpredictable economic measures have undermined private-sector investment and hurt productivity - weakening Venezuela's domestic economy," S&P said. "Furthermore, the recent developments regarding President Hugo Chavez's health could add to policy uncertainty."

Mr. Chavez has been nationalizing just about everything in sight, most recently announcing plans to nationalize the gold industry. Hugo Chavez goes for the goldTraders brace for Venezuela gold transfer

Flaherty, Carney speak on outlook
Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney aren't signalling doom and gloom at this point.

While both acknowledged the global turmoil this morning in testimony to the Commons Finance Committee, neither was ringing alarm bells over the fate of Canada's recovery.

Mr. Flaherty said that while the global economic turmoil will inevitably hit Canada, he's sticking to his deficit-cutting guns at this point amid what he sees as a solid domestic economy.

"Our economic and fiscal fundamentals are sound and sustainable," Mr. Flaherty told the Commons Finance Committee today, The Globe and Mail's Bill Curry and Jeremy Torobin report.

"We have experienced seven consecutive quarters of economic growth. Almost 600,000 more Canadians are working today than when the recession ended in July 2009. Both the IMF and OECD forecast that our economy will be among the strongest in the G-7 this year and next."

When pressed by Liberal MP Scott Brison as to what he would do if the economy worsens, Mr. Flaherty signalled he would be prepared to change course.

"If we were to see a dramatic deterioration ... then of course we would act to protect Canadians, as we have done before," said Mr. Flaherty.

Separately, Bank of Canada Governor Mark Carney said he was confident that the recovery will pick up steam in the second half of the year.

Business investment, household spending and high commodity prices should help the economy accelerate after a disappointing second quarter, he said.

Mr. Carney noted that the central bank has long recognized the risk Europe's financial troubles might pose to the global economy and that "some of that risk has been realized."

"The issue remains that this is a very delicate situation that has not yet been fully addressed," said Mr. Carney. Carney sees recovery picking upFlaherty confident deficit-fighting plan can weather economic stormStephen Gordon: Six questions for Flaherty, CarneyMixed signals weigh on policy makersAll eyes turn to Flaherty to calm markets downFlaherty faces pressure to explain stand on renewed stimulusBank of Canada governor to break silence on economic slowdown

What Flaherty didn't talk about
Mr. Flaherty is absolutely right to sing Canada's praises. The country is winning international recognition for its economic and fiscal policies. The labour market has rebounded smartly from the depths of the recession, and unemployment, while high and still above 7 per cent, is nowhere near as brutal as that of many other developed countries.

But here's the thing: There's the next generation to think of, and Ottawa to put more emphasis on ensuring it's not a lost generation.

Overall employment in Canada is up by almost 564,000 from the levels of July 2009 - Mr. Flaherty cited this fact today - and the ranks of the unemployed have fallen by about 231,000. The employment rate has moved up to 61.9 per cent from 61.4 per cent, and the participation rate has dipped to 66.8 per cent from 67.2 per cent.

(Among men 25 and older, the participation rate has slipped to 72.7 per cent from 73.6 per cent. For women 25 and up, it's at the same level, 61.8 per cent.)

Young people, defined by Statistics Canada as those in the 15-24 age bracket, have also gained jobs. Employment is up by almost 86,000 over the two-year period, and unemployment by has fallen by more than 55,000. And the employment rate is up, too, to 55.7 per cent from 54.5 per cent.

But unemployment remains terribly high among our nation's youth, still above 14 per cent although that's down from the 16.2 per cent two years ago. And the participation rate has dropped, to 64.8 per cent from 65.1 per cent.

That dip in the participation rate coincides with higher enrolment in Canada, which suggests many of our young people don't have high hopes of finding work.

"The declining participation rate among youth is very much a reflection of a tougher job market for youth, and they have the flexibility of going back to school or staying in school," said Michael Gregory of BMO Nesbitt Burns. "I'm sure you've seen a lot of university kids going back home to live with mom and dad, too." Jobs and the bleak prospects of the recession generation

Read Carney's lips: No new recession
Mr. Carney isn't alone in his views. Many, though not all, economists also don't see a second slump in the cards. Here are some of their comments:

"Renewed recession is possible, but not probable. More likely, the global economy is adjusting to a lower growth trajectory that is prone to periods of little or no activity. Ultra-low interest rates, low inventories, cash-rich businesses in many countries, and continuing gains in emerging economies are likely to underpin the global economy's forward momentum." Aron Gampel and Carlos Gomes, Scotia Capital

"Second-tier regional activity indicators like the Philly Fed don't ordinarily garner front page attention. Such was the degree of anxiety in markets that the index's shocking 34-point plunge to an 29-month low in August was being cited as near conclusive evidence that the U.S. economy was at recession's door - or perhaps back already in that state. Time will tell if that prognosis is correct and for now, we continue to believe a case can still be made for a modest firming in growth in the second half, based on the better than expected performance of several other indicators, including July industrial production and retail sales." Peter Buchanan, CIBC World Markets

"The latest turmoil in equity and bond markets shows that financial markets are ripe with recession fear. Last week's CNBC survey of 41 economists, analysts and strategists pegged the risk of a U.S. recession over the next 12 months at 34 per cent on average, a figure with which we would not quarrel deeply. If anything, the latest news on home sales and manufacturing activity has reinforced those fears. Even so, we still believe the most likely outcome for the North American economy is modest growth." Douglas Porter and Earl Sweet, BMO Nesbitt Burns

"Concerns that another recession is imminent were boosted last week by the plunge in the Philly Fed manufacturing index from +3.2 in July to -30.7 in August - a level last seen when the economy was in recession in early 2009. But we stand by our view, which we explained in detail two weeks ago, that another recession will probably be avoided." Paul Dales, Capital Economics

"The risk of a shallow recession is rising. However, we still feel that marginally positive growth is the more likely scenario at this point. This is because the actual data - the data we have through July - has yet to suggest otherwise. Once August data begins trickling in next month, we will have a better sense of the real economic damage wrought by this month's financial upheavals." Chris Jones, Toronto-Dominion Bank

Inflation rate dips
Overall inflation in Canada is cooling, pushed down partly by the fact that consumers in Ontario and British Columbia have lived with the HST for a year now, though the measure that guides the Bank of Canada is ticking up.

Consumer prices rose 0.2 per cent in July from June, Statistics Canada said today, and the annual inflation rate dipped to 2.7 per cent. That marks a cooling trend from the 3.1 per cent in June and 3.7 per cent in May.

The so-called core rate, which excludes volatile items and is a reading that plays more into monetary policy, also rose 0.2 per cent in the month, and climbed to 1.6 per cent for the year, compared to 1.3 per cent in June.

On a year-over-year basis, energy prices rose almost 13 per cent, but that's down from the 12-month pace of 15.7 per cent in June. Gasoline prices climbed 23.5 per cent, also down from the 28.5 per cent of a month earlier, and food prices increased 4.3 per cent. For the month, food prices rose 0.5 per cent.

Today's measure by Statistics Canada marked the fact that the impact of the Harmonized Sales Tax in Ontario and British Columbia was eliminated, having been introduced in July of last year, though many other prices are falling in response to the slack in the economy, subdued labour costs and, most importantly, the strong Canadian dollar , said senior economist Sal Guatieri of BMO Nesbitt Burns.

Retailers are under pressure to keep prices low as Canadians seek lower prices abroad, he said.

"Most of the decline in inflation stems from the HST effect dropping out of the yearly calculation," said senior economist Sal Guatieri of BMO Nesbitt Burns. "The direct impact of the HST introduction in Ontario and B.C, and the HST increase of 2 percentage points in Nova Scotia, in July 2010 was to add 0.7 [of a percentage point] to Canadian inflation in the past year."

There's little in today's report that will affect the Bank of Canada or the outlook for interest rates.

"Subdued inflation pressures will provide the Bank of Canada with wiggle room to keep interest rates low in the coming months to help insulate the economy to the growing external risks," said Derek Burleton, deputy chief economist at Toronto-Dominion Bank. "What's more, falling headline inflation will give Canadian households some much-needed breathing room." Inflation falls to 2.7% in July

Whither Canada's banks?
So far, Canada's banks have gotten a free pass from the mess for financial stocks.

Do our lenders deserve the kid-gloves treatment? No, argues a blog post making the rounds from Zero Hedge blogger Tyler Durden, who despite inexplicably naming himself after the Brad Pitt character in Fight Club often makes some pretty good points about financial markets and has a large following. Streetwise columnist Boyd Erman reports. Canada's banks: Next dominos to fall?

Why the Philly Fed matters
One of the factors playing into yesterday's market plunge was the plunge in the Federal Reserve Bank of Philadelphia's manufacturing index, which sank to a negative 30.7 for August from a positive 3.2 a month earlier. It was the lowest level since March 2009 for the index, which measures the mid-Atlantic region of the United States.

Generally, the Philly Fed index is a second-tier indicator, and regional at that, as The Globe and Mail's Jeremy Torobin reports today. But it's interesting to look at its historical showing, and how it compares to changes in employment, particularly given the jobs crisis in the U.S. now.

"On the seven occasions that the Philly Fed index has plunged as much as it did in August (to -30.7 per cent), non-farm payrolls have declined - which is the last thing a struggling consumer and housing market need right now," said BMO's Mr. Guatieri, who studied the relationship between the index and jobs.

"The employment sub-index also fell (albeit more moderately to -5.2), which often, though not always, flags a drop in payrolls. No doubt, U.S. business sentiment was chilled by the debt ceiling drama of early August, as well as the stock market decline."

For a look at Mr. Guatieri's findings, see the accompanying infographic or click here. Philly Fed factory activity index worst since March 2009Investor jitters grow as recession fears spread

Billabong sinks
Call it a wipeout for Billabong International Ltd.

The surfwear apparel company's stock plunged today as Billabong blamed the strong Australian dollar for helping to erode its profits for the year.

Billabong earned $119.1-million (Austrlian) in the year ending June 30, down from $146-million a year earlier. Revenue, though, climbed to $1.7-billion from $1.5-billion.

It wasn't just the Aussie currency that played into results, but also consumer jitters and the natural disasters in the world, including Australia's floods.

It also did away with an earnings forecast.

In International Business today
Bank of America is cutting 3,500 jobs this quarter according to an internal memo, as the biggest U.S. bank grapples with its $1-trillion (U.S.) problem-loan portfolio and growing economic concerns. Saeed Azhar of Reuters reports. Bank of America slashing 3,500 jobs

In Economy Lab today
What Professor Stephen Gordon of Laval University would have asked Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney. Six questions for Flaherty, Carney

In today's Report on BusinessHP plots new course in software and business servicesSun News gives up over-the-air licenceOxford Properties to buy Metro Toronto Convention CentreAn investor's road map to safety