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Traders to focus on central banks, heavy slate of economic data this week

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TORONTO - Central banks will be the focus of investors this week as markets look to see what the Bank of Canada plans to do about hiking interest rates down the road.

On one level, there is no mystery about what the Canadian central bank won't do and that is raise rates from one per cent, where they have been since September 2010.

"I still think it’s more than a year away before they actually do raise rates so we’re in a long holding period here," said Doug Porter, chief economist at BMO Capital Markets.

Still, traders will carefully scan the bank's announcement on Wednesday for clues about when the central bank might move.

Porter said it will be interesting to see if the central bank continues to flag concerns about low inflation being the number one concern, "given the fact that inflation has marched steadily higher."

"Headline inflation at least is now right on target."

Canada's annual inflation rate climbed to its highest level in two years, reaching two per cent in April, largely driven by an unusually big jump in energy prices.

The Bank of Canada announcement comes at a time when the Canadian dollar has shot ahead and is at close to a five-month high of just over 92 cents US.

"The bank is probably not all that thrilled about the comeback in the dollar," said Porter.

"And I think maybe where we see a subtle change here is the bank maybe highlights their concern over the export performance, how exports are continuing to struggle. Even with the better U.S. economy, we’re still not getting much oomph from the export side and that might be where the bank now trains its sights."

Meanwhile, the European Central Bank makes its next rate announcement on Thursday and traders are counting on ECB president Mario Draghi to embark on fresh measures to give a jolt to a lacklustre recovery and take measures to boost inflation and steer the eurozone economy from what could turn out to be a downward price spiral.

Hopes for such stimulus have been high since early May when Draghi started dropping hints that he was ready to move to counter low inflation, which was running at a paltry annualized rate of 0.7 per cent in April. Economists don't expect an improvement for May.

Those sort of numbers raise worries that the eurozone could slip into deflation, a downward price movement that has great potential to cause damage to an already struggling economy. The latest data showed gross domestic product in the eurozone growing at an annualized rate of 0.9 per cent.

"The markets really took to heart what (Draghi) said," said Bob Gorman, chief portfolio strategist at TD Waterhouse and you can see that in the movement of the currency.

"So that will be one of the more salient events (this week) and it will have ripple effects with currencies, gold and probably stocks across the board."

Analysts say Draghi could undertake a variety of measures, including cutting its key rate to 0.25 per cent from 0.5 per cent.

It's also a busy week for economic data with May employment figures for Canada and the U.S. both coming out on Friday.

Economists looked for the Canadian economy to have cranked out 21,000 jobs after having shed 26,000 in April, while the jobless rate is expected to stay unchanged at 6.9 per cent.

And in the U.S., it's expected the economy created about 219,000 jobs in May on top of the 288,000 created in April. Economists think jobless rate in the U.S. will tick up by 0.1 of a percentage point to 6.4 per cent.

On the earnings front, a trickle of remaining first-quarter reports come out this week.

Among them, investors will look to see how Hudson's Bay Co. (TSX:HBC) fared during the quarter.

The TD's Gorman is looking for an improved performance from a year ago.

"Hudson's Bay has been notching very good same store sales growth, up like six per cent last quarter — that's a very strong quarter," he said.

Gorman also observed that the first quarter is the post-holiday season and typically a money loser.

"And so Q1 a year ago for HBC, they lost 12 cents a share, which is not too surprising. The consensus forecast is better than that, maybe losing four cents a share (for the most recent quarter)."

The TSX lost 0.7 per cent last week, largely because of sliding mining stocks. The gold sector has fallen about five per cent over the past week while base metals have shed more than three per cent.

Gold prices in particular have been under heavy pressure this week, losing 3.9 per cent with markets feeling more comfortable about the Ukraine crisis and more concern about deflation rather than inflation, particularly in Europe.

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