As their January meeting wrapped, the Federal Reserve indicated their concern that inflation could re-accelerate as the economy continues to run hot. However, inflation has seen to be slowing and the U.S. labour market has shown signs of moving into balance. (RBC Economics) There has been a meaningful decline in job openings in recent months, which appears to be achieving the same impact as an outright increase in the unemployment rate. With a pending slowdown in the U.S., we continue to expect that the unemployment rate will edge higher in the first half of this year. At the same time, inflation is expected to continue to ease back towards the 2% inflation target set by the Federal Reserve. On Wednesday afternoon, Jerome Powell said directly that a rate cut in March is "not the most likely case,” which caused markets at the end of Wednesday to fall dramatically as this pushed expectations for a rate cut to arrive no sooner than May.

 

Then Friday morning arrived and to steal a line from a legendary CCR song, the "big wheel keeps on turning."  The U.S. continued to show resilience, beating expectations with 353,000 jobs added to the U.S. economy in January. The consensus estimate was for 175,000 jobs to be added. (BNN Bloomberg) U.S. equity markets rallied on the news, as the continued growth in the economy undercuts Jerome Powell and Federal Reserve’s hawkish tone and reset the expectation for potential interest rate cuts in March.

 

Here at home, the story continues to be divergent from the experiences of the U.S. Firstly, 2024 is still likely to be a challenging year for Canadian consumers as elevated interest rates continue to trickle through the economy and push debt payments higher. (RBC Economics)   If central banks start to ease monetary policy by mid-year as expected, there is reason to believe that consumer spending headwinds will start to ease over the second half of 2024, but not any sooner.  With the Federal Reserve setting the way for other central banks to maintain a hawkish tone, we do not expect the Bank of Canada to cut rates any sooner than mid-year.

 

The labour market in Canada may be in for additional pain next week, as we expect the unemployment rate for January to have ticked up to 5,9% - that is a 1% rise from this time last year and closing in on the highest level we saw during the pandemic. (RBC Economics)  Further concerns arose this week as it was reported that the rental market in Canada has hit an all-time low for vacancies – hitting a 35-year low.  The affordability issue is still persistent in Canada, as the reality of higher homeownership costs is here to stay. With lagging supply of new homes and resales expected to be outstripped by demand given the boom in immigration that we foresee persisting through 2024. Though we expect interest rates to fall they will most certainly remain elevated above the low-rate environment we experienced from 2009-2021. The result will be a housing market that will recovery gradually – but as for renters they will also continue to feel the squeeze due to a lack of supply. For more on the housing front in Canada I invite you to read our most recent update: Canada's housing market outlook: A tale of two halves in 2024

 

Abroad, the hawks are still out regarding interest rate policy. The Bank of England indicated this week that though inflation remains on a downward trajectory in the country, they are hesitant to be the first to cut rates as there remains significant economic uncertainty, both at home and abroad. (BNN Bloomberg.)  In the Eurozone this week, preliminary January CPI came in slightly hotter than expected at 2.8% versus a consensus of 2.7%. (BNN Bloomberg.)  Fortunately, this was still a MoM decline from December’s 2.9% print and Core CPI was the lowest it has been since the spring of 2022. There continued to be deflationary pressure in energy prices, however services, food, alcohol, and tobacco all remained at more than double the ECB’s target. Despite the issues in the minutia of the data, markets remain optimistic that the ECB will cut rates at least by 0.25% in April. The inflation story in the Eurozone has certainly improved greatly compared to the expectations in mid-2023 when the ECB did not anticipate rate cuts to materialize until 2025.

 

Finally, earlier this week Evergrande, the company whose problems brought the China real estate crisis to the forefront in 2021, was ordered by a Hong Kong court last weekend to liquidate to cover the $300 billion US in liabilities it has amassed. (CNN Business)  Beijing is grappling with a lackluster economy, a property market slump, and a stock market wallowing near five-year lows, so any fresh shocks to markets and the wider economy could undermine policymakers' efforts to jump start growth.  There appears to be optimism as provincial governments this week reported their growth targets to be between 4.5% and 8% - averaging out to around 5% which would be in line with China’s GDP growth in 2023. Clearly there remains an expectation that the policy steps the Chinese government is taking will help to alleviate the downward pressure on productivity and growth in the economy.