| A few topics our newsletter touches on this month:
Our Thoughts: Q1 Recap – Equity Rally and Inflation Slowdown Investors had lots to cheer for in the first quarter of this year. Equities posted strong returns, U.S. corporate earnings were strong, AI continued to excite and there was optimism that Fed rate cuts are getting closer. U.S., Canadian and global equities all climbed steadily through January, February and March to end the quarter with a fifth straight month of gains. U.S. and Japanese equities in particular posted record highs. Bond markets saw U.S. and Canadian yields rise through January and February on strong economic growth before moving lower at quarter-end after the Fed reaffirmed its commitment to rate cuts this year. U.S. job creation also continued to be resilient, although hourly earnings came in lower than expected. This paints a picture of a still healthy labour market but showing some signs of slowing, which would be welcome by the Fed in its inflationary fight. Canada’s job numbers showed a similar pattern, with headline job creation strong and unemployment slightly higher. U.S. CPI came in at 3.8%, up 0.4% since the turn of the year, but cooler from February onward. This is still significantly down from its 9.1% peak in the summer of 2022, a 40-year high, suggesting the Fed is achieving a “soft landing” for the economy where inflation falls without triggering a recession. Inflation was mainly driven by food and shelter costs, although transportation services also increased. Most other categories showed marginal improvement. The Fed kept interest rates at 5.25-5.5% and projected three rate cuts later this year. Fed Chair Powell added there still needs to be clear signs of declining inflation before reducing rates. Canadian CPI cooled through the quarter to 2.8%, back within the Bank of Canada’s 1-3% range and close to its 2% inflation target. Inflation slowed across the board, although food prices remain high and shelter costs, exacerbated by limited housing supply, remain problematic. As expected, the Bank of Canada held rates at 5%. The Bank of Canada wants to see a continuation of this downward trend before it considers rate cuts, but should be gaining comfort that inflation is sustainably moving towards its target.
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