Traders look to next interest rate announcement, ongoing U.S. uncertainty

TORONTO -- The Bank of Canada is expected to announce this week that it is leaving interest rates unchanged and continue to give the impression that it's in no rush to move them off ultra-low levels.

No surprises are expected Tuesday with economists confident the central bank will continue to keep its key interest rate unchanged at one per cent. And the bank will likely leave the language in the announcement largely unchanged, indicating that a hike in rates is still far away amid worsening economic conditions around the globe.

Doug Porter, deputy chief economist at BMO Capital Markets, doesn't see the bank hiking rates until at least a year from now and adds that the risk is the bank may take even longer to hike rates.

"It's very difficult to see the bank raising rates before then. Growth is struggling to hit two per cent, inflation is struggling to stay above one per cent, the currency remains doggedly above parity, there's no obvious reason for the bank to be raising rates in that environment for quite some time."

The latest indication of weakness came on Friday when Statistics Canada reported there was no growth in gross domestic product during September following a 0.1 per cent dip during August.

That translated into third-quarter economic growth of 0.6 per cent on an annualized basis, versus expectations of 0.8 per cent growth as exports registered their worst decline in three years.

There will likely be another reading of weak growth Friday when the agency releases the November employment report.

"I think we will be fortunate to see any job growth in November," said Porter.

"We are seeing moderate job growth, just enough to keep the unemployment rate flat over the last year and I think that could be the story going into the next 12 months ... that we get just enough job growth to keep unemployment from rising but I think at this stage of the cycle we would do very well to do better than that."

U.S. jobs data also comes out Friday and expectations are fairly muted, largely because of the impact of superstorm Sandy in the northeast.

"We're looking for a gain of just a bit more than 100,000 in overall employment, which is a bit of a step back from what we saw in October," said Porter, who thinks job gains would be in the neighbourhood of 200,000 had it not been for Sandy.

The storm affected 24 states, with the most severe damage in New York and New Jersey as business was severely curtailed.

On a more positive note, the December number will look quite good because November figures could be adjusted upward.

Meanwhile, it's the fear of worsening economies that is expected to produce another volatile week on stock markets as traders look for some progress in avoiding a serious budget impasse in the U.S. that could result in steep tax increases and significant spending cuts at the start of 2013.

This is the fiscal cliff scenario and the worry is that those cuts and hikes would shock the U.S. economy back into recession.

The TSX and the Dow Jones ended last week essentially flat with markets whipsawed between positive and negative territory during the sessions, often depending on the latest take on fiscal cliff talks offered by a prominent Republican or Democrat.

But the market has avoided going into selloff mode as traders believe that the two sides will come together on an agreement that would at least be a framework for arriving at a complete deal later in the winter.

"We are confident they will work out a deal, (but) the history of this kind of negotiation has been taken right up until late in the 11th hour," observed Porter.

"Unfortunately, I think that that will mean a bit of drama for financial markets before we're through all that."

President Barack Obama is insisting on higher taxes for the top two per cent of earners.

Republicans have said they are open to new tax revenue but not higher rates.