September began the month living up to its reputation, but as the weeks have passed it’s clear to see this year bucked the trend.  This week, the TSX reaching an all-time high of 24,033.83 and the S&P 500 Index reaching it’s 42^nd all-time high of the year of 5,745.37, proof that time in the market is always better than timing the market. 

 

Here at home, there continues to be signs that the Canadian economy has slowed down in 2024.  Even with a marginal uptick in July, per-capita GDP is trending downward in Q3.   July’s 0.16% increase in GDP was stronger than estimated a month ago, but still leaves growth in Q3 as a whole tracking below the Bank of Canada's 2.8% forecast in July.  For the Bank of Canada, the need for further interest rate cuts is clear, and we anticipate gradual interest rate reductions of 25 basis point per meeting well into 2025.  There remains the real risk of negative GDP growth in Canada and given a soft-landing is in sight, the Bank of Canada may take more aggressive action should the need arise.  (Canadian GDP Update)

 

In the U.S. this week, a risk on mentality took hold in markets following last week’s aggressive rate cut of 50 basis points but he U.S. Federal Reserve.  On Friday, the PCE Deflator, the Fed’s preferred measure of inflation, came in at 2.2% in August and surprised to the downside given markets had priced in a 2.3% result.  This was also a marked month-over-month improvement as the measure declined by 0.3% from July.  Looking at the outlook for the U.S. economy, a recent BNN survey of economists indicated that the majority see the Federal Reserve’s forecast more likely than not aligning with reality.  The expectation for the unemployment rate to settle at 4.4% by the end of the year remains in play and combined with the progress on inflation the probability of a U.S. recession in 2025 now sits at 30% - much lower than the expectation from several months ago.  It’s important to note here that most economists estimate a 20% chance of recession in the U.S. in any given year.  Though 30% is certainly higher than average, there remains a higher probability that the economy sticks the soft-landing, and this is the narrative that markets are operating on. (BNN Bloomberg)

 

Overseas in Europe, recent Eurozone inflation prints have provided support for the expectation of further ECB rate cuts in the near term. Notably, the ECB’s Consumer Expectations Survey showed consumer inflation expectations have fallen.  The European consumer now expects inflation in a year’s time to be at 2.7% - the lowest result since September of 2021.  Looking ahead, in three years’ time consumers expect inflation to be down to 2.3%, the lowest since June’s report.  Though inflation in the Eurozone in aggregate remains above target, there continues to be support for the disinflation narrative.  Spain and France’s most recent inflation prints fell well below the ECB’s 2% target at 1.5% and 1.2%, respectively.  Conversely, the Eurozone economy continues to be at risk of recession, as was highlighted this week by a meaningful contraction in private sector activity lead notably by manufacturing. (BNN Bloomberg)  This has resulted in European fixed income traders and analysts speculating that the pace of cuts from the ECB could accelerate.  The equity market performance of the Eurozone earlier this year was impressive, but there has been a downward trend in recent months as economic concerns have taken hold and the prospects for a soft-landing appear to be slimming.  Case in point the EURO STOXX 50 Index is relatively flat over the last two-quarters, compared to the performance of North American indexes that have maintained an upward trend.

 

Finally in Asian markets, the big news this week was the People’s Bank of China’s implementing a robust stimulus package to halt the economic slowdown seen in recent months.  The PBOC made cuts to its short-term reverse repo rate and reduced the amount of cash banks must hold in reserve.  The Chinese government expects these efforts will free up close to $142.4 billion USD in new lending and have signalled that they may take further action if needed.  In addition to these changes, according to sources cited by Reuters, the Chinese government is expected to release another $284 billion USD in sovereign bonds to further stimulate the economy.  Though these moves could prove to be inflationary, the Chinese economy has experienced a significant drag due to it’s depressed real estate market and these measures are seen as a positive step in reinvigorating economic activity.