Michael Watkins
September 15, 2023
Weekly Market Update
It was great to see a strong rally in the markets yesterday, but a surprise European Central Bank rate hike has taken a bit of the wind out of our sails this morning.
Looking at Canadian demographics, a recent report from CIBC Capital Markets suggests that the official number of non-permanent residents in Canada might be underestimated by as much as one million. This has raised some concern about whether housing policies are robust enough to manage the rising demand.
- Underestimating the number of non-permanent residents. Benjamin Tal, deputy chief economist at CIBC, noted that the discrepancy is partially due to the absence of a comprehensive system to track individuals with expired visas who continue to reside in the country.
- Implications for housing and infrastructure. Since accurate population estimates are critical for development plans and budgeting, this level of underestimation could require roughly two years of additional building capacity to satisfy demand.
- Canada’s population growth trajectory. According to Statistics Canada, Canada’s population exceeded 40 million in June 2023. Immigration became the main source of population growth in 1995, with the population reaching 30 million in 1997.
- Housing starts in focus. Given the need to balance housing supply and demand, housing starts are an important element of increasing supply. In July, housing starts were 254,966 units, according to the Canada Mortgage and Housing Corporation.
There is an accepted lag between the time interest-rate increases take place and when the impact is fully felt by the market. In a similar way, there is a delay between when policies are implemented to increase supply and when that supply arrives on the market.
Turning to our neighbours south of the border, another increase in retail sales across the US in August suggests the US consumer remains relatively strong amid elevated inflation and rising interest rates. Despite the tight financial conditions, spending has remained fairly healthy, mainly driven by pent-up savings and a strong labour market. Consumer spending has been a critical driver of growth in the US coming out of the pandemic.
- US retail sales rose by 0.6% in August over July, the fifth consecutive increase. A Bloomberg survey of economists estimated a 0.1% increase over the month.
- A 5.2% jump in sales at gasoline stations led August’s results. Sales for clothing, electronics and motor vehicles also increased over the month. Conversely, sales for sporting goods and books dropped in August.
- The US consumer has been a key contributor to growth in the US economy. Despite tight financial conditions, US consumers have proven their relative resilience, benefiting from savings accumulated during the pandemic and a robust labour market.
- The US Federal Reserve Board (Fed) will make its next rate decision on September 20. While most expect the Fed to hold steady at this meeting, evidence of a strong US consumer, robust labour market and still-high inflation could result in more rate increases later this year.
A strong US consumer is often good for Canada. Should spending increase down south, demand for goods worldwide, including Canada, might rise, helping Canadian producers of goods and services and propping up exports. Consumer-related stocks are at an interesting point right now.
Meanwhile in the European Union, the downward revisions by the European Commission signal mounting concerns about slowing economic activity and the dual impact of elevated inflation and interest rates. Gross domestic product (GDP) in Europe expanded by 0.1% in both the first and second quarters of 2023. Later this week, the European Central Bank convenes to make a critical decision about potentially adjusting interest rates.
- Projections for 2023 and 2024 scaled back. The European Commission expects GDP growth of 0.8% in 2023 and 1.3% in 2024, versus previous estimates of 1.1% and 1.6%, respectively.
- Consumer demand under pressure. Although seasonal tourism activity was strong, growth in services slowed and consumers’ willingness to spend was curtailed by high prices and more limited credit availability.
- Europe’s inflation forecasts remain above 2% target. Consumer price growth is expected to be 5.6% in 2023 and lower to 2.9% in 2024, according to the Commission.
- Germany faced high energy costs and reduced demand from China. Germany’s growth forecast for 2023 was revised to a contraction of 0.4%. Elsewhere, the economies of Italy and the Netherlands are expected to grow more slowly than expected in 2023, while the economies of France and Spain are projected to exceed previous expectations.
- Nevertheless, jobs data remained fairly positive. Low unemployment rates and wages that are trending up might restore some of the purchasing power lost to inflation.
As always, please give us a call if you have any questions, or if you’d like to book a portfolio review. And don’t forget to join us Thursday September 28th from 1pm-2pm for a virtual presentation on “Your Mind & Your Money: Train your Brain to Achieve Optimal Financial Wellbeing”.
Source: CIBC Morning Market Brief