If September is teaching us anything it is that the return of short-term volatility can make the weeks feel vastly different.  Case in point, this week equities rallied in North America on the progress the U.S. has made with respects to bringing down inflation.  Both the S&P 500 and NASDAQ started the week off choppy, but as of Thursday’s close were up 2.27% and 4.05% respectively on the week.  Caution abounds though, as the breadth and scope of this rally was concentrated primarily in the Magnificent 7 tech stocks and was not a broader based improvement in other sectors of the economy.  Canadian stocks also reflected this positivity, as the TSX rose 1.94% on a weekly basis.  Improving valuations in Canadian equities continue to be broader based and not specifically concentrated in one sector, contrary to the U.S..   There are still opportunities to put cash to work in the weeks ahead, as we continue to expect September to be a volatile month and valuations should remain attractive, especially outside of the U.S. tech sector.

 

As I noted above, the big news this week was the U.S.’s CPI print for August.  Headline CPI growth last month edged down to 2.5%.  This decline builds on July’s 2.9% print and came in just below market expectations for a 2.6% print.  What was notable is that CPI ex-Food & Energy on a month over month basis was up 0.3% from July, which annualizes to 3.6% and was well above market expectations for a 0.2% print. However, this monthly jump can be directly attributed to a 0.5% increase in shelter (housing) costs.  Food price inflation continue to slow – down to 0.1% MoM and energy prices fell 0.8% on MoM basis.  Given this print and the improved GDP data for Q2 – the decision by the Fed next Wednesday is all but assured to be a 0.25% rate cut in its overnight rate with a current probability of 72%.  This is reassuring, as a 0.50% cut would indicate that the Federal Reserve is concerned with a slowing economy and labour market – as opposed to maintaining the downward pressure on inflation.  (RBC U.S. Inflation Watch)

 

Here in Canada, the inflation story has improved and so has household debt – at least to a degree.  Despite recent rate cuts from the Bank of Canada, Canadians debt to income ratio remains unsustainably high at 15% nationally – around the highs we saw post-pandemic when the cost of borrowing was substantially less expensive.  The current debt-to-disposable income ratio in Canada is 1.76:1, though this has begun to improve as a higher rate environment has dissuaded Canadians from taking on more debt and as of March 2023 household disposable income growth has outpaced credit market debt accumulation.  However, this trend is beginning to reverse as wage growth has slowed, resulting in household debt payments rising faster than the pace of disposable income growth in the second quarter of this year.  Fortunately, the fight against rising inflation has been won and the Bank of Canada is focused on monetary easing through measured rate cuts.  If anything, headwinds currently faced by the Canadian economy will force the Bank of Canada to act more swiftly in lowering its overnight lending rate.  GDP growth in Canada continues to slow as does the labour market, and though we expect the economy to stick the soft-landing, that job remains squarely on the Bank of Canada and their ability to direct monetary policy to ensure inflation continues to fall within target and we avoid outright recession.  (BNN Bloomberg)

 

Over in Europe, the ECB continued its easing cycle on Thursday, lowering their deposit facility rate by 25 bp to 3.50%. This was their second such cut this year, and the move was widely anticipated by the market. ECB President Christine Lagarde noted that though domestic inflation and wage price growth remain high, headline inflation in the region continues to moderate as the ECB expects. The Governing Council left their outlook for headline inflation unchanged versus their June forecast at 2.5% YoY on average over 2024, 2.2% in 2025, and 1.9% in 2026. This is despite stubborn service prices which continue to exert upward pressure on core inflation. At the same time, the ECB revised their growth projections downwards slightly. The ECB now anticipates Eurozone GDP to grow at 0.8% in 2024, 1.3% in 2025, and 1.5% in 2026, each 0.1% lower than their June forecasts.  European equities have seen a meaningful pull-back since the highs we saw in late Spring/early Summer.  This has resulted in more attractive entry prices for equity positions that were priced higher earlier this year, though I recommend taking a more defensive stance in the short-term when investing in European equities.  (Reuters)

 

In China, the People’s Bank of China (PBOC) has gone from a fight on inflation to managing deflationary pressure and maintaining its GDP growth target of 5% for 2024.  The Chinese economy has struggled this year, putting this growth target at risk.  August lending slowed on a YoY basis, a result of borrowing costs remaining elevated.  There is also the threat of deflationary pressure becoming further entrenched, as the real estate market continues to slump with no end to the crisis in sight, which has curbed demand for credit on all fronts.  (BNN Bloomberg)  Japan is also experiencing growth concerns of its own, as Q2 GDP growth was revised down earlier this week to 2.9% YoY from 3.1%.  Higher inflation and the expectation for the Bank of Japan to implement a more restrictive monetary policy with future rate hikes is driving down consumer and business confidence. Private consumption in Q2 was also up only 0.9% - and as it stands today the Japanese economy has remained relatively static from a growth perspective since July of 2023.  (Reuters)