Say it with me: “This too shall pass”. Markets have been very volatile over the last quarter, and this week seemed particularly gloomy as markets tried in vain to stay in the green. At least I can just wear my suit when I go out trick-or-treating (Boo, I’m a stockbroker).

But it’s not all bad news; at its October 2023 meeting, the Bank of Canada (BoC) maintained its key interest rate at 5.00%, echoing its decision from September. This decision comes as the BoC carefully assesses evolving economic signals that suggest monetary policy is affecting Canadian consumer spending and savings.

• The overnight rate remains unchanged in alignment with market expectations. This means that borrowing costs for consumers and businesses remain at a two-decade high.
• Interpreting economic indicators played a pivotal role in the BoC’s decision. The BoC acknowledged that rate hikes have contributed to a slowdown in both headline and core inflation. Additionally, gross domestic product (GDP) growth and retail sales showed signs of slowing.
• Short-term inflation fluctuations are expected. Policymakers project that inflation will average around 3.5% until mid-2024 and then gradually retreat to the BoC’s 2% target by 2025.
• Quarterly policy report reveals adjusted growth forecasts. The BoC anticipates moderated real GDP growth of 1.2% in 2023, versus the previous forecast of 1.8%. The updated projections suggest that GDP could rise by 0.9% in 2024 and 2.5% in 2025. Key risks to the BoC’s growth forecasts include the Middle East conflict, which could cause problems for global oil supply networks.

Tight financial conditions might be showing signs of weighing on Canadians. Data from Statistics Canada indicated Canadian retail sales fell in August, with early estimates pointing to no growth (0.0%) in September.

• Retail sales in Canada fell by 0.1% in August over the previous month. August’s decline was the first since March 2023.
• Sales fell at motor vehicle and parts dealers, where purchases often include a loan portion to finance the entire purchase. Sales also dropped at food and beverage retailers. Conversely, sales at gasoline stations increased due in part to higher oil prices.
• Underlying the drop in sales were supply chain issues for retailers amid the port strikes in B.C. Canadian households have proven to be relatively resilient over the past four months, but signs are emerging that higher rates and elevated prices might be weighing them down.

Canada’s economy stalled in the second quarter of 2023, and data is pointing to another quarter of potential weakness for Canada’s economy. There is much uncertainty, given tight financial conditions, weaker global demand and ongoing geopolitical tensions. The uncertainty has driven up government bond yields in recent weeks, while pushing down equities.

Looking at the States, an advanced estimate showed US gross domestic product expanded in the third quarter of 2023, boosted by a relatively strong US consumer. The US economy has proven to be relatively resilient despite ultra-tight financial conditions. While the outlook might not be as promising, third-quarter data shows the relative strength of the world’s largest economy.

• An advanced estimate showed the US economy expanded at an annualized pace of 4.9% over the third quarter of 2023, its highest rate of growth since the fourth quarter of 2021. A Bloomberg survey of economists expected a 4.5% annualized increase.
• Third-quarter economic growth was boosted by strong consumer spending. Consumer spending rose by 4.0% over the quarter, the sharpest pace of growth in spending since the fourth quarter of 2021. US consumers are brushing aside tight financial conditions, instead benefiting from a strong labour market and pent-up savings.
• Another contributor to growth was real estate investment, which had declined for almost two years. Exports were another critical contributor to growth over the quarter, rising by 6.2%. The demand for US goods was relatively strong, helping to lift economic activity.
• What does better-than-expected economic growth mean for the US Federal Reserve Board (Fed)? If economic growth and inflation remain elevated, the Fed could raise interest rates again. The Fed will make its next interest-rate announcement on November 1.

A healthy and robust US economy is generally good for Canada’s economy, given its interconnectedness for trade, travel and spending. Still, Canada’s economy has pulled back in recent quarters, hindered by high inflation and rising borrowing costs. This result could add some fuel to expectations the Fed might lift interest rates again.

As always, please give us a call if you have any questions, or if you’d like to get together for a portfolio review.

 

Source: CIBC Morning Market Brief