Here in Canada this week we have made several observations of note, ones that clearly highlight the going concern for the performance of the Canadian economy in 2024. Firstly, the economic slowdown is not over quite yet as our economy continues to trail the performance of our peers. Though we have certainly benefited from the boost in foreign demand led by the U.S. in the last year, domestic demand in Q4 of 2023 was down. This drop in demand has been driven by the impact of a higher rate environment and we anticipate this to continue into 2024 as the full impact of the Bank of Canada’s monetary policy takes hold. A second observation is one I mentioned last week, business bankruptcies in Canada are on the rise and as expected business investment has decreased, two key components for an economic slowdown and indicator of recessionary pressure.

 

There is good news on the Canadian front, as inflation is slowing down, and this does continue to support the expectation that rate cuts are coming by mid-year. This would provide relief to both consumers and businesses as inflation and a higher rate environment have dampened affordability across the board. When looking at your investment portfolio and your Canadian allocations, equities in the Canadian energy sector continue to be undervalued and are beginning to improve in lockstep with the prospects for the global economy and rising demand. For fixed income investments yields were up across the curve this week, underscoring the opportunity that remains in the Canadian fixed income space. For example, an Ontario note maturing in 2032 is paying a coupon (interest) payment of 3.75% per year. Assuming you bought this bond at a face value of $10,000 and it was priced currently at its face value (called par value), a decrease in interest rates of 2% would result in the value of the bond increasing by 14.83%. So, in addition to the regular coupon income, you could sell this bond at a premium and realize the capital gain. For reference, a posted rate at RBC Royal Bank for a 10 Year Term GIC is 3.825% which at face value looks more attractive, however a GIC does not provide the liquidity or the benefit of capital appreciation I have highlighted above.

 

The story in the U.S. continues to be one of resilience, reinforced by a stabilization in the U.S. CPI print for February which came in at 3.2%. This was a month over month increase of 0.1% from January, however goods prices in the U.S. have shown signs of depreciation for the fourth month in a row. This is a reassuring sign given the cost of services remains firm. Furthermore, rent costs in the U.S. have begun to slow down and energy prices have remained lower from a year ago.  Overall, inflationary pressure has narrowed to several core cost measurements in the CPI which is also reassuring and indicates that the higher rate environment is filtering down into the economy.

 

In markets this week, there continued to be noticeable downward pressure on tech stocks in the U.S. This has paved the way for investors to realize more attractive investment opportunities in other sectors, such as the healthcare sector which has seen a recent pull back in valuations that make the sector attractive. The same story is playing out in U.S. fixed income as it is here at home. Yields lifted higher this week on the expectation that the Federal Reserve remains on track to keep its current fiscal policy after their meeting in March and rate cuts are certainly not in the cards until mid-year at best given the U.S. economy remains strong. Inflation is also above target and the Federal Reserve has communicated a clear intention to ensure it remains in sustainable decline before cutting rates. We still anticipate cuts to happen in the latter half of this hear, however the extent to which the Federal Reserve cuts remains up for debate with expectations ranging from 0.75% to 1.25% by year end.

 

There has been considerable sentiment improvement in the UK on the inflation front, as a Bank of England survey out this week highlighted that the British public’s expectations that inflation remains elevated through the remainder of 2024 have declined measurably. It is expected that the Bank of England will continue to stand firm next week and not begin to cut rates, however we also expect them to maintain a dovish tone as inflation in the country has improved dramatically in the last 12 months. January’s inflation print for the U.K. was 4.2%, down from 6.3% just three months prior. Both equity markets in the UK and on the mainland have also outperformed expectations, with the STOXX 60 Index ending the week near its all-time highest levels. Equity indices in the region continue to be on track for their longest rally since 2018. Monetary policy remaining tight through the year and the potential for inflation to rise again remain going concerns for the Eurozone, but for now all indications are that conditions have dramatically improved. Now is an excellent time to review and evaluate your exposure to European markets, especially given the lackluster performance we expect here at home in 2024.

 

In Asia, the Chinese housing market continues to be under stress, and next week’s housing report will potentially reflect an eighth monthly decline in real estate prices. Furthermore, it is expected that economic data for the first quarter of 2024 has been a slow growth period for the Chinese economy. In Japan, an increasing trend in wage growth like the experience elsewhere globally has resulted in the Bank of Japan admitting that prices are no longer experiencing deflationary pressure as they had been the last decade prior. This has increased the expectation that the Bank of Japan will be augmenting its monetary policy in next week’s meeting, ending its negative interest rate policy (NIRP) as the country has returned to a normal level of inflation.  For reference, Japan’s January CPI came in at 3.2% and prior to 2021 this figure had remained negative since 2011.