As expected, this week the Bank of Canada maintained their policy rate unchanged, citing progress in the direction inflation has moved in recent months but highlighting concerns with shelter and food costs which continue to remain above the Bank of Canada’s target range of 2-3%.  Fortunately, a decision to hold rates as they are reinforcing that the BoC views the current rate environment as sufficiently restrictive to maintain inflation’s downward trend toward their 2% target.   Once there are clearer signs of easing in core inflation readings, specifically for shelter and food costs, we anticipate the BoC will be confident enough to begin to slowly lower their policy rate – ideally by mid-year. 

 

Data released on Friday reflected that despite an upside gain in the employment, with 41,000 jobs being added in February, the growth was outstripped by an increase in the Canadian population by 83,000.  This resulted in an uptick in the unemployment rate to 5.8% and a resulted YoY increase of 0.7%.  Though this may raise alarm bells, it’s important to note that in the years preceding the pandemic the unemployment rate in Canada was declining to this level – reaching 5.5% in June of 2019 form a peak of 8.7% during the Great Recession.  Though there remain headwinds to economic growth here in Canada, an unemployment rate at this level does not support the thesis that economic growth is in decline.  A surge in business bankruptcies due to the scarcity of capital and elevated operating costs will likely drive the unemployment rate higher in the first half of this year.  However, if interested rates do fall as expected by mid-year this near-term concern could have only short-term consequences to the Canadian economy. 

 

In the United States, the job market remains considerably more robust with U.S. non-farm payrolls on Friday indicating the economy added another 275,000 jobs in February (estimated to be 200,000).  The notable sectors that added employees were government, food and services and health care.  Reflecting our experience here, the unemployment rate in the U.S. did tick up modestly to 3.9% from 3.7% the month prior – however this was largely attributed to youth unemployment (ages 14-24).   When looking at the unemployment rate for those 25 to 65 the figure remained unchanged at 3.2%.   The U.S. labour market continues to remain tight but strong, and consumer confidence remains positive – which is a good thing given the consumer has been a key driver to economic growth in the U.S. in 2023 and into 2024.

 

On the interest rate and inflation front, Jerome Powell concluded his two days of testimony to Congress on Friday.  His messaging remained consistent in that the Federal Reserve would not begin to cut rates until the board was confident that inflation was moving sustainably towards 2%.  He also added that they are not far from the level of confidence needed and suggested that it may be appropriate in the near-term to start cutting rates and reduce other quantitative tightening measures.  This resulted in short-term U.S. bonds rallying on Friday, as the expectation that rate cuts are coming drove up the value of existing short-term issues.  

 

Over in Europe this week, wage growth in Q4 2024 decreased to 4.6% YoY from 5.1% in Q3 which provides further support for the narrative that the ECB will be able to also introduce rate cuts earlier than they originally anticipated.  The expectation that has been set by many members of the ECB has been to ensure that nominal wage growth remains at or below 4% and headline inflation achieves an average of 2.5% for a few months in order to give them the confidence to cut.  Rate cuts later in 2024, but certainly earlier than the original expectation of 2025, appear to be in the cards for the Eurozone.  There also appears to be modest improvement in economic growth in the region, even with Germany stagnating earlier this year, however the sentiment in European equity markets has remained positive.