On Wednesday this week the U.S. Federal Reserve began its much-anticipated cycle of rate cuts.  After 14 months in restrictive territory, the Fed delivered a 0.50% rate cut to its overnight rate, bringing it down to 4.75%-5%.  As I mentioned over the last two weeks, markets were anticipating a rate cut and several Fed chairs had gone out of their way to assure that a rate cut was coming, but whether it was going to be 0.25% or 0.50% was up for debate and sat at 50% probability for each outcome as of Tuesday evening.  Markets over the last 48 hours have reacted quite positively to the news, and short-term bond yields in the U.S. declined on a week over week basis again.  What was more enlightening was the Federal Reserve’s release of its updated projections for the next three years.  A notable change from June’s projections was the addition of 0.75% more in cuts from now to the end of 2025 – 2% of cuts in total.  Despite the anticipated uptick in the pace of cuts, Chairman Powell in his press conference on Wednesday afternoon went to great lengths to highlight the Federal Reserve was not concerned about the health of the U.S. economy, stating that the economic backdrop was “solid.”  Instead, the outsized cut was reflected of the beginning of a “recalibration” cycle by the Fed.  Some analysts viewed this cut as making up for lost time, as perhaps the Fed felt they were a little late to start cuts and should have done so in their July meeting – resulting in a 0.50% cut to make up for lost ground.  Whatever the case may be, it was an impactful policy decision and we expect to see another 0.50% in cuts from the Fed by the end of the year. (RBC Economics)

 

Here at home this week, we received August’s CPI print and the results were better than expected.  Canada's CPI rate has finally fallen to the Bank of Canada's 2.0% target for the first time since February of 2021. This has come at a cost, as a higher rate environment has put pressure on consumers when it comes to their shelter costs, and any other borrowing costs they may have had since rate hikes began in March of 2022.  With the Bank of Canada now focused on staving off recession and further cooling in the labour market, this news gives them the assurance they needed to confidently continue their rate cut cycle.  Since June they have cut rates 0.75% and given this result, we expect several more cuts for the remainder of the year and well into 2025.  For Canadians, life is going to become relatively less expensive over the next several quarters. For you the investor, expect to see further capital appreciation in your Canadian fixed income positions within your portfolio as the Bank of Canada has received their first clear signal of victory on the inflation front.  We expect them to continue to continue to cut which will result in the capital appreciation of existing bond portfolios.  If you're sitting in cash right now and that money was intended to be invested for the long-term, I strongly recommend looking at investment options that align with your long-term objectives for your wealth and plan to invest those funds accordingly. Short term rates on investments such as GICs and money market funds have already declined and will continue to do so in the months ahead as more cuts come.  We do not expect a return to the ultra-low-rate environment we experienced for nearly a decade before the pandemic – but the passive income you’ve grown use to these last two years from high rates is certainly coming to an end, and a more strategic approach to how you grow your wealth is needed. (Canadian inflation pressures eased further in August)

 

Across the pond in Europe, the pressure of the Fed’s rate cut is being felt by the ECB who some argue have been moving to slowly to bring down their overnight rate and address recession concerns.  Despite the concern, members of the ECB continue to communicate their focus on a data-driven approach to their monetary policy.  The same has been said of the Bank of England, who in their most recent meeting left rates unchanged.  However the BOE’s decision is reflective of economic conditions similar to that of the U.S. and it is anticipated that their policy moves will more closely align with the U.S. Fed in the months ahead.  Europe on the other hand has shown notably economic weakness in recent months and an acceleration of their rate cut cycle may in fact be appropriate.  For now, managing investment in both equity and fixed income securities in Europe remains an act of tactical allocation – focusing on investment in more defensive sectors given the probability of recession in the Eurozone is higher than elsewhere in the developed world.  (Reuters)

 

In Japan, the inflation and interest rate story has been unique to other developed economies over the last two years.  Given decades of deflation, the Bank of Japan has had to manage an upward trend in inflation that hit 20-year highs and currently sits at 2.80%, which is above their 2% target.  This month they decided to hold rates steady at 0.25%, citing they will continue to monitor the situation, while markets indicating the probability of another hike is not on the table until January.  (BNN Bloomberg)  In China this week the story was the same, as the PBOC surprised markets by leaving their lending policy rates (LPRs) unchanged this month.  With sluggish economic activity in recent months, the calls for future rate cuts remain quite loud and further easing is expected from the PBOC later this year. There is also the prospect of further stimulus from the government, which could add upward pressure to inflation and result in further delays to their rate cutting cycle.  With the economy continuing to slow, and a notable decline in lending in the month of August, the need for monetary easing in China is appearing to be more urgent.  (Reuters)