The week ahead: Investors look to Bank of Canada rate decision

The cuts, which eliminated France and Austria’s triple-A status, deal a heavy blow to the currency union’s ability to fight off a worsening debt crisis. In total, S&P cut its ratings on nine eurozone countries.

The news wasn’t a complete surprise as S&P in December had put 15 eurozone countries on credit watch.

Greece was also back in the crosshairs as crucial negotiations between the Greek government and its private creditors on a bond swap deal needed to avoid default appeared close to collapse at the end of last week, with representatives of the bondholders saying they had been “paused for reflection.”

Economists widely expect the Bank of Canada to leave its key overnight rate unchanged at one per cent on Tuesday despite a still healthy Canadian economy because of worries about slowing economies elsewhere.

“Europe really remains the No. 1 concern for the bank,” said Doug Porter, deputy chief economist at BMO Capital Markets.”

The eurozone debt crisis has roiled financial markets for months and forced many countries to adopt tough austerity measures which have choked off growth, raising fears the region could slip back into recession.

The Canadian economy has recently racked up growth stronger than that contained in the Bank of Canada’s October forecast.

At that time, the central bank forecast growth of two per cent in the third quarter and 0.8% in the fourth quarter.

“The actual third quarter growth was a more robust 3.5%,” observed a commentary from RBC Economics, adding fourth quarter growth likely came in at around two per cent.

It is hard to find anyone who expects the central bank to move on interest rates this year, even though the bank would like to move them higher.

That’s because keeping rates at ultra-low levels, as they have been since the 2008 financial crisis, can cause a number of problems.

“It can encourage speculative activity, it can lull consumers into taking on debt that perhaps they can’t afford if rates do normalize,” said Porter.

“But I think most importantly, it absolutely hammers savings. There is no incentive whatsoever for people to save when rates are negative in real terms and of course causes havoc for pension funds.”

Porter also observed that the Bank of Canada is crimped by the U.S. Federal Reserve, which doesn’t plan on moving on rates until sometime next year at the earliest.

“If they started to raise rates while the Fed is locked on hold, we could see the Canadian dollar really begin to strengthen again, which I don’t think the bank wants to see at this point.”

Investors will also eye a full slate of fourth-quarter earnings reports from the U.S. this week.

The kickoff to the earnings season got off to a mixed start last week as markets were pleased to see almunim giant Alcoa Inc. beat on revenue and deliver a positive outlook.

But there was disappointment at the end of the week when No. 1 U.S. bank J.P. Morgan Chase delivered an earnings miss.

The earnings docket this week is weighted in favour of more financials, including Citigroup and Wells Fargo.

“There’s a couple of things weighing on financials,” said Jeff Bradacs, portfolio manager at Manulife Asset Management.

One problem is the difficulty for the capital markets side of the business because of market weakness.

“Also in Q4, we had another number of regulations go into effect that narrowed their fee-based business and they’re also affected by low bond yields affecting net interest margin.”

Outside of those reports, the prime report for the week will come from General Electric. GE is viewed as a bellwether for the overall U.S. economy since it is involved in many businesses, including jet engines and finance.

“GE touches really all areas of the economy and that’s a key earnings report for the market to watch and especially their guidance as they go into 2012,” said Bradacs.