Interest rates, corporate earnings in focus this week on North American markets

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TORONTO – Stock markets are likely in for another choppy week of trading as traders concentrate on Canadian interest rates and a number of U.S. earnings reports.

The Bank of Canada makes its next rate announcement on Wednesday and analysts fully expect the bank will leave its key rate where it’s been since September 2010 — at one per cent.

Central bank governor Stephen Poloz has struck a decidedly dovish tone with rates since taking over the top job last year and economists generally don’t expect any movement in rates until the second half of next year. They also don’t expect him to abandon that stance in favour of a more hawkish tone that would indicate higher rates are on the way.

“I don’t think they have enough confidence in the Canadian recovery to suggest that,” said David Watt, chief economist at HSBC Bank of Canada.

“And certainly recent numbers would suggest there is no reason for them to turn more dovish. So I do think they have to sort of stay in that neutral stance that they have been having and they have been trying to emphasize over the last couple of months.”

The bank will also deliver its latest monetary policy report Wednesday, with a news conference by Poloz scheduled for later that evening.

Watt said the item he will most closely look at is the bank’s outlook for exports as shipments have declined lately.

“In January, the (central bank) was looking for exports in 2014 to contribute 1.2 percentage points to GDP growth of 2.5 per cent — a fairly hefty contribution from exports,” he said.

“And if you look at the way numbers are unfolding right now, it looks like exports are actually going to be negative in the first quarter. So that makes it kind of tough to forecast a vigorous rebound in exports for the rest of the year.”

Watt added that inflation will also be in focus as it’s been rising lately and is set to come in higher than anticipated in the first quarter.

He is looking at inflation to rise 1.2 per cent in the quarter, higher than the bank’s forecast of 0.9 per cent.

“They will acknowledge that inflation is a bit higher but I think they will continue to highlight the downside risks to inflation in order to get away from the idea that they will move away from neutral,” said Watt.

Meanwhile, North American stocks could be in for more losses after losing ground last week as disappointing Chinese trade numbers for March raised a new round of concern about growth in the world’s second-biggest economy.

The TSX lost one per cent but New York markets were particularly hammered on worries about corporate earnings and stock valuations.

The Dow industrials fell 2.35 per cent, the Nasdaq fell 3.1 per cent, down three weeks in a row in its longest losing streak since November 2012. The S&P 500 moved into negative territory for the year to date, losing 2.65 per cent. Both the Nasdaq and S&P 500 posted their biggest weekly drops since mid-2012.

Biotech and technology sectors were particularly hard hit after registering big gains last year.

“There are very, very rich multiples on names like Facebook, Netflix and Twitter,” said Colin Cieszynski, a senior markets analyst at CMC Canada.

“And that‘s why they are so vulnerable in these kind of pullbacks.”

There are also worries about whether first quarter earnings reports can justify the strong runup last year where U.S. indexes jumped around 30 per cent.

“Heading into this earnings season, we have had stock markets going to all-time highs, which has built in very high expectations,” added Cieszynski.

“And the question is, will there be enough in the earnings to help markets carry higher or have they reached an interim top here that could last for a while?”

On the economic calendar, the major U.S. report of the week comes out Monday. Economists are looking for retail sales in March to have climbed about one per cent. Severe winter weather impacted consumers during February, when sales increased only by 0.3 per cent.

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