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Strategies & Market Trends : Technical analysis for shorts & longs -- Ignore unavailable to you. Want to Upgrade?

To: Johnny Canuck who wrote (40515)	12/23/2003 12:34:58 AM
From: Johnny Canuck	Read Replies (1) \| Respond to of 69245

Market Mover of the Year: Turning Deflation into Reflation - December 17, 2003 by Stephen S. Poloz, Vice-President and Chief Economist -------------------------------------------------------------------------------- And so ends yet another difficult year. 2003 will be remembered as a year when there were so many shocks that the underlying improvement in the world economy was difficult to discern. We began the year frozen in the headlights of the oncoming Iraq war. Our prognosis then was that the world would get back on track by mid-year and post 3.1% growth. Surprisingly, this forecast is still on track, despite all the shocks that could have thrown the world off course – SARS, corporate malfeasance, persistent tensions in Iraq and stubbornly high oil prices. The surprising strength in oil prices this year is clearly a candidate for shock of the year. Had we known that oil prices would remain so high our growth forecast for 2003 would have been lower. But other events have boosted growth and helped offset the impact of expensive oil, including U.S. tax cuts, Japan’s renaissance and the emergence of consumerism in the developing world, in places like China, India and Mexico. Oil prices should still edge lower as Iraqi and non-OPEC production increases; if not, then global growth might fall short of our forecast of 3.9% in 2004. For Canada, high energy costs are proving increasingly to be a net positive for economic growth, as we are a much bigger exporter of energy today than in the past. Consequently, persistence of high energy prices is one reason why the Canadian dollar might spend some more time above the 73-75 cent range where U.S.-Canada labour costs are equalised. Of the many shocks faced by Canada this year, including SARS, BSE, the power blackout and forest fires, the suddenness of the loonie’s appreciation reigns supreme. Digestion of that one will continue in 2004. But the prize for global market mover of the year will ultimately go to the shift at the U.S. Federal Reserve from inflation fighter to inflation promoter. The Fed now believes that the near-term risks of rising and falling inflation are balanced, but appears worried about entering a future recession with core inflation at only 1%. If it did, inflation could become deflation, a risk that transfixed markets in mid-2003. By allowing the U.S. economy to grow rapidly until excess capacity is used up, and then removing its monetary stimulus gradually, the Fed can engineer a modest increase in trend inflation – or a reflation – to, say, 2%, which will offer more room to manoeuvre in future. Financial markets have yet to acknowledge this shift in Fed strategy, but will do so in 2004. It is a risky policy manoeuvre, and will mean higher bond yields, choppy but stronger stock markets, and possibly more weakness in the U.S. dollar. However, other countries will resist a weaker dollar by following a similar accommodative tack, which means gold prices could remain on the high side until the reflation is complete. Once it is done, though, gold prices could ease back. The bottom line? Geopolitical tensions will linger. Corporate malfeasance is still at play. But the big story for 2003 will prove to be the end of the global disinflation trend that began back in 1980. Weekly Commentary returns January 7. Happy holidays, and best wishes for a prosperous 2004. Stephen S. Poloz Vice-President and Chief Economist Export Development Canada spoloz@edc.ca edc.ca