Earlier this week Canada’s Q4 GDP results were released, delivering an upsize surprise of 1.0% for the quarter (0.9% was expected).  This gives the Bank of Canada room to maintain the current rate environment, and we anticipate at their meeting next Wednesday that they will not deliver a rate cut.  With the economy still growing, albeit modestly, there appears to be no immediate rush to cut rates to stimulate growth.  This gives the BoC the opportunity to focus on inflation that in January alone returned to within it’s 2-3% target range – though far and away from it’s target of 2%.

 

However, the resiliency of the Canadian consumer may be at risk as a decline in productivity in Canada is threatening the ability of wage growth to keep up with inflation.  As has been the case in the U.S., the ability of Canadian consumers to spend has been greatly supported by a post-pandemic boom in wage growth.   With a tight credit market, businesses have been reluctant to grow due to the associated costs and this has had a knock-on effect on labour productivity.  Rate cuts are coming, but a tight credit market is only half of the story – as my colleagues at RBC Economics highlight in their most recent piece: Weak productivity is threatening Canada’s post-pandemic wage growth

 

In the U.S. this week, the status quo appeared to be maintained on the economic front while Congress was able to avert a partial government shutdown at the nth hour, kicking the can down the road a few weeks until a deal can be agreed to on both sides of the aisle.  Consumer confidence for February remained strong coming in at 106.7 but below expectation and falling 4.2 points from January.   A strong consumer is good news as core PCE for January came in at 2.8%, down 0.1% from December and in line with market expectations. The core PCE measure is the preferred metric used by the Federal Reserve to guide their monetary policy and given the result for January, in addition to strong consumer confidence in February, the Federal Reserve is unlikely to begin cutting rates in March.   As of Friday, there was only a 4% probability of a rate cut for the March 20^th Fed meeting priced into markets.  U.S. yields have also come down since last week, highlighting the expectation that rate cuts in June/July remain likely. 

 

In Europe, February preliminary CPI came in at 2.6% compared to January’s firm figure of 2.8%.  Core CPI is expected to come in at 3.1% which remains above the ECB’s target but is the lowest that Eurozone has seen the measure at since the spring of 2022.  Given inflation remains outside the ECB’s target, they can maintain their patience stance with confidence, as the job remains yet to do done and the expectations is that cutting early may be more detrimental than keeping rates elevated in the near term. Across the English Channel, U.K. manufacturing is experiencing a decline in it’s outlook as job cuts in the broader sector have resulted in a substantial decline in productivity.  Moreover, the outlook for employment levels in the manufacturing sector have declined to lows last seen in June 2020.  However, this has been offset by a rise in employment in the service sector in the UK.

 

Speaking of manufacturing, the official manufacturing PMI out of China for February came in at 49.1 (Note: A figure below 50 indicates contraction) and was the fifth straight month in a row where sentiment remained in contraction territory.  Like the EU and UK, the services sector remains resilient in China and saw a lift into positive territory in February with non-manufacturing PMI coming in at 51.4, the highest level seen since September 2023.  The negative result in the February manufacturing PMI was likely due to the Lunar New Year holiday, which saw productivity slow dramatically for several weeks as employees took time off to celebrate the holiday season.  Chinese EV and auto manufacturers may have cause for concern, as the U.S. announced earlier this week that it will be exploring import controls on vehicles manufactured in China.  The U.S. is concerned that the computer software in the vehicles could be compromised to relay sensitive data directly to the Chinese government.  It is worth noting that the same concern was raised by the Chinese government of Tesla vehicles having the same issue back in the summer of 2023.