UPDATE 2-Canada sees surge in industrial capacity usage

* Gain in capacity use rate biggest on record

* Seen as more evidence that rate hikes needed

* Manufacturing leads rise in capacity use

* Canada recovery frothy while U.S. disappoints
(Adds analysts’ comments, U.S. contrast, market reaction,

By Louise Egan

OTTAWA, June 11 (BestGrowthStock) – Slack in the Canadian economy
is disappearing faster than expected, a report showed on
Friday, reaffirming expectations that the central bank will
continue to raise interest rates to slow growth.

Strong manufacturing growth in the first quarter drove a
record jump in industrial capacity use to 74.2 percent of total
capacity from 71.3 percent in the final quarter of last year
for the third straight gain.

The increases in the past two quarters were the biggest
ever registered as the economy rebounds sharply after the

The string of bubbly data out of Canada contrasts with the
United States where data on Friday showed that retail sales
fell unexpectedly in May, adding to fears the economic recovery
there is losing steam.

“Once again, Canada and the U.S. are headed in opposite
directions on this morning’s releases,” said Scotia Capital
economists Derek Holt and Gorica Djeric in a note to clients.

“That supports our view that the Bank of Canada needs to
continue tightening monetary policy at the July 20 announcement
on abundantly clear evidence of the need to move well off the
emergency rate near-zero (level),” they said.

The Bank of Canada nudged up its key rate on June 1 to 0.5
percent, making Canada the first of the G7 major industrialized
economies to raise rates since the onset of the recession.
Market players widely expect another quarter-point hike next

Yields on overnight index swaps, which trade based on
expectations for the central bank’s key policy rate, now
suggest there is a 75 percent chance of a 25 basis point hike
on July 20, up from 70 percent on Thursday. (BOCWATCH: )

The Canadian dollar fell on Friday on the weak sales data
in the United States, which buys about three-quarters of
Canadian exports. At 10:20 a.m., the Canadian dollar was at
C$1.0324 to the U.S. dollar, or 96.86 U.S. cents, compared with
Thursday’s North American finish of 96.97 U.S. cents.


Canada’s capacity utilization rate at the end of the first
quarter was still nearly 9 percentage points below the 83.1
percent peak of three years earlier.

But analysts, who expected a 73.4 percent rate in the
quarter, see additional slack being absorbed quickly in the
second quarter.

The Bank of Canada’s quarterly forecast in April suggested
the economy would return to full capacity in the second quarter
of 2011, three months earlier than it had previously forecast.

In the first quarter, capacity use in manufacturing
industries rose to 75 percent from 70.7 percent, led by
transportation equipment, primary metals, chemicals and

Mining led the increases in non-manufacturing capacity use,
up 8.2 percentage points in the quarter.

Stock Today

(Reporting by Louise Egan; editing by Peter Galloway)

UPDATE 2-Canada sees surge in industrial capacity usage