Before I get started this week, I strongly recommend reading this week’s Global Insight Weekly, where we discuss potential changes to U.S. government policy and which initiatives could have the greatest impact to the U.S. economy and your investment strategy. 

 

The last week has been a mixed bag for Canada, as CPI for October came in at 2%, up 0.3% from last month’s print of 1.7%.   This is well within the Bank of Canada’s target; however, shelter costs continue to be the greatest price pressure as mortgage and interest costs were up 16.7% YoY in October and accounted for 30% of the total CPI growth on annualized basis. Rents continue to be on the risk, up 8.2% over the same period.  Fortunately, the Bank of Canada remains on the path to easing monetary policy and cutting rates, which will bring these costs down.  We have already benefited form 1.25% in rate cuts this year, and the expectation of a lower rate environment is stirring up activity in Canada’s housing market.  Residential home resales jumped 7.7% month over month in October while prices have remained moderately unchanged, down 0.1% over the same period.   Although economic activity remains sluggish, things are starting to pick up and a growing Canadian economy is our baseline expectation for the second half of 2025.  Consumers continue to spend, albeit now at a slower pace than the pandemic, and equity markets are agreeing with this sentiment as the TSX Composite YTD return sits at 21.15% as of market close on Thursday.  If you have been sitting underweight in your Canadian equity exposure, now is certainly the time to re-evaluate your investment strategy here at home.

 

Over the last several weeks there has been a meaningful lift in U.S. equity markets, while the US dollar has continued you to strengthen as market expectations settle on a less expedient decline in interest rates.  In spite of this the U.S. economy remains resilient, though PMI data was mixed reflecting a contracting manufacturing sector, while sentiment in the service sector is robust and expansionary.  Inflation in October did tick up to 2.6%, however hourly wages remained unchanged with an annual growth rate of 4.0%.  The Purchaser’s Price Index (PPI) was also up last month, jumping to 2.4% annually from 1.9% in September.  Fixed income markets are split on the odds that the Fed cuts another 0.25% in December or keeps rates unchanged.  The dramatic shift in market expectations is supported by CPI remaining above the Fed’s 2% target, in addition to a resilient U.S. economy and labour market.  Meanwhile the unknown impact the next Trump administration’s tariff policy will have on inflation also supports an outlook for a slow down or even pause in rate cuts, though this remains difficult to price into markets given the degree of uncertainty.  I once again recommend reading this week’s Global Insight Weekly, as we discuss the potential impact of tariffs on the U.S economy and your investment strategy. 

 

Overseas, Europe has seen increase volatility in equity markets brought on by uncertainty in the German economy.  Firstly, there is the political risk associated with the recent snap election called for next February after Chancellor Scholz’s fired his finance minister, effectively dissolving his coalition government.  This came after months of debate on budget policy and the direction of the German economy, and now provides an opportunity for populist movements in the country to gain more traction among a frustrated electorate.  This could hamper efforts for further integration in the European Union, which would increase the geo-political risk in the region especially with the war in Ukraine on their doorstep.  Combine this with the political uncertainty in France, and potential U.S. tariffs on goods produced or flowing through Europe, and the overall outlook for the Eurozone becomes less optimistic for 2025.  We expect there to be a pull back in European equities in 2025, and therefore it is wise in the weeks ahead to review your exposure to Europe in your portfolio.  A tactical reduction may be to our benefit, re-allocating assets to North American where there continues to be upside opportunity into 2025.

 

Finally, China is now in the crosshairs as a Trump election victory all but guaranteed more restrictive tariffs on Chinese goods will be in place in 2025.  We have already seen foreign investors divesting positions in Chinese government bonds, which has had a negative impact on its currency and further exacerbating pressure on the economy.  The mainland and Hong Kong equity markets have also pulled backed meaningfully in the last several weeks, first as result of a Trump win and second on the recent disappointment in tech earnings.  China continues to face struggles both internally and externally, and we expect these issues to continue in to 2025 which will weigh down on the performance of emerging markets.