The trend for inflation here in Canada continues to move in the right direction - downward. CPI this week came in at 2.8% for February, down from 2.9% the month prior.  Of note, were price declines in food purchases from stores, and internet and cellular services. Grocery services fell a whole 1% on an annualized basis - 3.4% in January to 2.4% in February. This was the first month since October 2021 that grocery prices increased at a slower rate than inflation.  However, gasoline (+4.0% MoM) and travel tour costs (+4.8% MoM) rose, keeping inflation at the top end of the Bank of Canada's target band of 2-3%.  A downward inflation trend is continuing here in Canada, supporting the likelihood of the Bank of Canada gaining confidence to cut rates by mid-year.

 

In the U.S., the Federal Reserve this week kept rates unchanged.  This was the overwhelming consensus given the fact inflation in the country remains a full percentage point above target.  What had analysts and market observers on edge was the result of the Fed’s Summary of Economic Predictions, or dot plot for short, that outlines their expectations for economic growth and the direction of interest rates.  In sum, there wasn’t much of a change from their December release.  The Fed still believes they will need to cut rates at least three times this year, equivalent to 0.75%.  This estimate is on the short end of market expectations but given no meaningful material change in the dot plot over the last quarter U.S. markets were able to breathe a sigh of relief.  Moreover, the Fed continues to anticipate the U.S. economy will maintain a relatively strong growth position in the years ahead, with real GDP growth expected to be 1.4% in 2024, 1.8% in 2025 and 1.9% in 2026 with the Fed Funds Rate settling at 2.5% by 2026.

 

With the tech stock boom of 2023 beginning to slow down, albeit with notable exceptions such as Nvidia, investors are now trying to find a home for the growth that amassed in their portfolio.  Given the improving sentiment in Europe and opportunities in emerging market equities, firms like Bank of America in the U.S. have seen outflows from tech and into these region's equity markets. Not only is this good portfolio management from the perspective of rebalancing and mitigating concentration risk (having too much of one thing can be a detriment to your portfolio!), but it is also taking advantage of improved sentiment in both regions.  Take for example European equities, the EURO STOXX 50 index this week settled at 11.78% YTD and up 24.00% in the last year. This has been driven by improved consumer sentiment and inflation coming down in the region faster than the ECB and investors expected.

 

Eurozone inflation for February was down to 2.6% annually, in February 2023 that figure was 8.5% a year ago and all expectations were that it would take until early 2025 to see inflation fall to target. However, the story has improved dramatically and in Switzerland February CPI came in at 1.2% annualized. This helps to support their rational for cutting rates, now down to 1.5% and the Swiss National Bank does not forecast inflation rising above 1.5% in the country until the end of 2026.  The ECB and other central bank's monetary policy has successfully brought down inflation in the region, and this has directly resulted in the risk-on approach to European equities that we have seen and directly correlates to the market performance I noted above.

 

As I’ve mentioned before, China has been managing a years-long real estate crisis that has required significant government intervention.  To stimulate growth in other sectors and keep the real estate market afloat, Beijing and regional government spending increased 14% in the first two months of this year - a total of $66.8 Billion US (482.8 billion yuan). At the same time, Beijing has focused on shifting the responsibility of supporting economic growth to local governments. Their aim is to mitigate the risk of future regional debt mismanagement issues, which has underscored the current real estate crisis.  China is still targeting a 5% GDP growth rate for 2024, and this remains the consensus for most economist. However there remains considerable uncertainty in the domestic market, underscored by significant equity market volatility over the last quarter.