Income Strategy September 8, 2006 :

The Bank of Canada decided to hold interest rates unchanged at 4.25% for the second meeting in a row. The announcement was not a surprise to the market as the Bank has been indicating that rates are at an appropriate level.

The Bank of Canada has received more data this week which has confirmed that the decision to leave rates at the current level was appropriate. Stats Canada released their Labour Force Survey which reported that the Canadian economy lost 16,000 jobs in August making this the third out of the last four months where job loses have been reported.

Part time jobs declined by 63,000 while full time positions increased by 47,000. The manufacturing sector continued to loss jobs in August bringing the total job losses for 2006 to 87,000 employment in this sector now at the lowest level since 1998.

For the year so far the Canadian economy has seen very strong job growth with 194,000 jobs created. The province of Alberta continues to lead the country in job creation with over 40% of all the jobs in Canada or 78,000 jobs created year to date and 8,000 in August alone.

Average hourly earnings have increased 3.7% over the past year a much faster pace than the increase in inflation which has seen a year over year increase of only 2.4%. This is the first time in over a decade that wages have increased in real, after inflation, terms.

The Bank of Canada will have to take into account the decline in job growth when making the next interest rate decision on Thursday October 12 th . There is now an increasing possibility that the Bank of Canada will move to lower rates in order to stem the decline in job creation.

Building permits declined 2.3% in July from June most of the decline in the non-residential sector which was down 12.7% from the June figure. The residential sector remains robust with permits up 2.7% in July continuing the trend of the last three years.

It will be interesting to see if the Building Starts data which will be released on Monday September 11 th will show a larger decline than forecast.

Investors should be preparing for lower interest rates as it now appears the start of a general decline in rates will begin sooner rather than later.