There was good news this week on the inflation front here in Canada. Bucking the trend that we have seen out of the U.S. in January, CPI declined in January to 2.9% from 3.4% in December which was quite a significant move. Surprisingly, energy prices fell 2.7% from a year ago, as did food which saw price growth slow to 3.4% from 4.7% in December. Unfortunately, the expectation is that shelter costs (housing and rents) will continue to face sticky inflationary pressure as interest costs remain elevated through the year. With per-capita GDP and consumer confidence in decline, the expectation is that inflation will continue this downtrend and we have seen a meaningful decline in the number of goods within the CPI basket that are trending above 5%. The number of goods that continue to experience inflationary pressure at or above 5% was 28% in January, down from 68% of all goods when inflation in Canada hit its peak in May of 2022. (RBC Economics)

 

Speaking of the decline in GDP here in Canada, we do expect that GDP results out next week for Q4 will reflect a further decline of -2.9%. Though this should be a modest improvement over Q3’s drop of -4.5%, and the current expectation is for real GDP growth to be positive for the quarter (0.5%) compared to Q3’s decline of -1.1%. However, if real GDP growth did decline than the assertion of recession taking hold at the end of last year will be validated, as two consecutive quarters of negative GDP growth is a technical recession. Despite this it is important to remember that markets are forward looking and there remains value in the Canadian equity space, as well as in Canadian fixed income to provide growth and stable passive income in your portfolio. (Forward Guidance: Our Weekly Preview - RBC Economics)

 

Despite a slow week for economic data of the U.S., continued jobless claims declined by 18,000 this week reflecting continued resilience in the U.S. labour market. (Reuters)  With a blowout jobs number in January, this week’s result is one indication that the trend could continue in February.  Keep in mind, that it has been a resilient U.S. consumer that has maintained the steady growth and move towards a soft-landing for their economy, resilience that has benefited from a robust labour market and wage growth. The U.S. consumer does continue to face challenges ahead, as big-ticket items like housing have seen a meaningful lift year over year of 5.1%. But this hopefully has been balanced by wage growth that sustained a 4.5-5% growth rate for several quarters in 2023 and the eventual decline in interest rates that will bring housing costs back to affordable levels in the U.S. Overall, the U.S. consumer remains resilient.

 

The big headline out of the U.S. this week was the outsized performance of technology stocks, namely Nvidia who announced their Q4 revenue tripled to $22.1 billion US (the street expectation was $20.4 billion US). (BNN Bloomberg) This caused a frenzy of buying on Thursday that saw the stock climb from $674.72 US a share to $785.38 US – a jump of 16.40%.   If you fear you have missed the boat, I would not be worried quite yet, it is early days for AI and the focus needs to be on diversification amongst these companies that have this exposure. Furthermore, it is worth mentioning the cautionary tale of the tech bubble burst in the early 2000s and Nvidia now represents 3.98% of the S&P 500 index based on market capitalization. This means that if there is a significant correction in tech stocks the index itself remains vulnerable. That is not to say you should not have tech exposure in your portfolio however our current recommendation for U.S. equity tech exposure is 27.5% of your total U.S. equity exposure. For a growth investor allocated 26% to U.S. equities, this would result in an appropriate allocation to U.S. tech stocks of no more than 7.15% of your total portfolio.

 

This week the Eurozone’s biggest economy, Germany, announced a downgrade to its outlook for economic growth in 2024 dropping their forecast for GDP growth to 0.2% from 1.3% which they had forecast in the fall. The government cited concerns over a prevailing increase in energy costs after the loss of Russian gas supplies following the invasion of Ukraine in 2022. Furthermore, the German consumers has become more reluctant to spend. Business sentiment has also remained sour in the country, citing concerns over a shortage of skilled labour, slower global trade and a higher interest rate environment that has elevated operating costs. (Associated Press)   The fact that inflation in the region has dropped meaningfully over the last several months may not be enough to stave off a deeper recession, given the current outlook for the economy – though this may be short lived given an expectation for positive GDP growth from the Eurozone largest economy.  It is also important to note that the Euro STOXX 50 Index is up YTD 7.77% - so clearly equity markets are looking past the short-term concerns to the opportunity ahead once rates decline.

 

China continues to face mounting problems in its real estate market, as well as in its mainland securities markets. (BNN Bloomberg)   Property foreclosures surged in China – rising 48% from a year earlier and a 9% jump from the yearly data out from December.  This clearly reflects the impact of slowing economic growth in the region which has resulted in debt-landed real estate investors to sell their properties at significant discounts – as much as 23% in January. Despite the robust news around Lunar New Year travel, optimism is already in the rear-view mirror as the country struggles to stave off a period of continued contraction in its real estate market.