Carney’s interest rate dilemma

The Queen!

• Bank of Canada Governor Mark Carney is expected to leave the country’s benchmark interest rate unchanged this morning for the 14th time in a row, the longest span with no change since the 1950s. His challenge lies in acknowledging the deterioration of the situation in Europe, slowing growth in China and a stalled U.S. recovery while still cautioning the market that the next move in interest rates likely will be higher. Among his greatest concerns is the robust Canadian dollar -- which has declined in recent weeks, making it more likely that rates will be raised -- and being labeled a flip-flopper by Frances. The central bank adopted a more hawkish tone at its last policy-setting meeting, saying a rate hike “may become appropriate” amid improving domestic demand and signs of stability in Europe. But that was, like, a few weeks ago. Since then reports showing a weakening manufacturing economy in China and a contraction in Europe have dented optimism, and concerns about Spain’s banks have shuttered the credit markets to the Spanish government, prompting an emergency conference call this morning among G-7 finance ministers. I have dialed in a few times, but as soon as I say “hey guys! It’s me, Marty,” I get tone, if you know what I mean. Anyhow, the Bank of Canada rate decision comes at 9:00 a.m. ET. We’ll have instant analysis when it breaks and investment and portfolio strategy through the morning.

• Speaking of the G-7 conference call, we are looking for headlines but not expecting an official communiqué. Spain’s Treasury Minister said in a radio interview that his country has been effectively “shut out” of credit markets by the exorbitant rates demanded by lenders. The spread between the 10-year Spanish bond and equivalent German bund widened to a record 548 points on Friday. Spain will test the market on Thursday by issuing between 1 and 2 billion euros in medium- to long-term bonds. Ahead of that, the European Central Bank will hold its monthly rate-setting meeting Wednesday.

• Another factor the G-7 must consider this morning is the U.S. economy. Rather than paraphrasing and taking the credit, I surrender the floor to Bespoke Investments and their analysis of last week’s U.S. data: “We can't recall a worse week for US economic indicators. While it was only a four-day week, there were a large number of indicators released -- 21 to be exact… of the 21 releases, a whopping 18 came in weaker than expected! Just 1 out of the 21 indicators came in stronger than expected. With US economic data completely collapsing this week, and the euro and gold rallying on Friday as U.S. stocks tanked, have we just experienced a key pivot point in which the U.S. starts to underperform the rest of the world again?”

• But the U.S. dollar is rallying again today and gold is little changed. The dollar continues to enjoy its safe-haven status but what’s with gold? Yesterday, Canadian strategist for UBS George Vasic told clients to “take some summer insurance and increase exposure to gold stocks,” arguing that stresses in Europe will drive bullion higher and stocks are near historic lows relative to physical gold. But gold failed to build on its $60 US rally from Friday, instead notching a small decline of $8 Monday. Many investors continue to be mystified by gold’s performance in the face of Europe’s tribulations.

• BNN is live at the Canadian Telecom Summit today. Andy Bell has tucked in his shirt and will sit down at 10:10 a.m. ET with Leonard Katz, the acting chairman of the CRTC to talk about the challenges ahead for one of the most competitive industries in the country. We’ll talk about opening the domestic market to foreign ownership and a host of new telecom rules that could affect the profitability of the companies in your portfolio. Robert McFarlane, CFO at Telus, joins us at 10:30 a.m. to talk about the company’s new investment in Ontario and Quebec.

• Watch oil and pay attention to the energy stocks with the biggest exposure to the oil sands. This might not be their summer.

Every morning Managing Editor Marty Cej writes a "chase note" to BNN's editorial staff listing the stories and events that will be in the spotlight that day. Click here to have it delivered to your inbox before the trading day begins.