December 01, 2023
Weekly Market Update
I’m back after our National Conference in Toronto last week. The sessions were jam packed, and the tone was fairly optimistic as we look towards 2024. In economic news, Statistics Canada (StatsCan) announced that Canada’s gross domestic product shrank over the third quarter of 2023. The aggressive monetary tightening by the Bank of Canada (BoC) over the past year is appearing to take hold and slowing economic activity and inflation. However, there was a bit of good news from the announcement with StatsCan saying that the economy grew in the second quarter, and did not decline as originally reported (so no technical recession at present).
- The Canadian economy contracted by 1.1%, annualized, in the third quarter of 2023. This follows an upwardly revised 1.4% annualized growth in the second quarter, meaning the Canadian economy has not fallen into a technical recession, which is marked by two straight quarters of falling growth.
- Consumer spending was muted over the quarter, remaining largely unchanged. High inflation and rising borrowing costs are weighing on Canadian households and businesses, hindering spending activity.
- Moderating foreign demand also weighed on Canada’s economic activity. Exports fell sharply, notably for energy products. Canada’s manufacturing sector has weakened as tight financial conditions drag down foreign demand for Canadian manufactured products.
- With the third-quarter shrinkage behind us, our attention can now turn to the next interest-rate announcement by the BoC on December 6. Markets are currently expecting the BoC to hold steady at 5.00%.
Market participants were expecting muted economic growth and the data yesterday, confirming the slowdown in economic conditions. Expectations are rising that slowing economic activity and cooling inflation might give the BoC the ability to start dropping interest rates next year.
Statistic Canada (StatsCan) also reported that retail sales in Canada rebounded in September, with growth likely continuing into October. Canadian retail sales edged lower in August, suggesting tight financial conditions might have hindered households. However, that appears to have been just a hiccup, with households showing relative strength in September.
- StatsCan reported that retail sales in Canada rose by 0.6% in September over the previous month. September’s increase exceeded the flat growth (0.0%) StatsCan initially estimated. Canadian consumers showed their relative resilience despite tight financial conditions. StatsCan estimated retail sales grew by 0.8% in October.
- September’s rate of growth was the fastest since April, benefiting from stronger sales at gasoline stations, motor vehicles and parts dealers, and hardware stores. Conversely, sales fell for clothing and jewelry.
- Core retail sales, which excludes auto and gasoline sales, fell by 0.2%. This suggests spending was primarily driven by more high-ticket items, such as automobiles, while purchases for less costly items waned. As such, the headline figure might have some underlying weakness.
- Canadian consumers showed relative strength in September, even with high interest rates and elevated inflation. Still, there are signs the labour market is weakening while savings levels are depleting, which could cause some uncertainty in consumer spending in the upcoming months.
Canadian households continue to spend despite tight financial conditions, but the nature of sales has shifted, suggesting some underlying weakness.
Turning to the States, US consumer confidence increased in November, marking its first increase in four months. While concerns about current economic conditions persist, consumers appear more optimistic about the long-term health of the US economy. A strong labour market and expectations of looser financial conditions ahead have boosted confidence.
- The Conference Board Consumer Confidence Index rose to 102.0 in November from 99.1 in the previous month. A Bloomberg survey of economists estimated a 101.0 reading.
- US consumers’ perception of current economic conditions weakened in November. Economic uncertainty is weighing on consumers, particularly as the threat of a recession looms over the economy.
- A strong labour market is keeping hopes high for the outlook of the US economy. Slowing inflation should ease pressure on consumers, while signals point to the US Federal Reserve Board being close to ending its interest-rate hiking cycle.
- Spending might remain relatively robust among US consumers. In November, compared to the previous month, more consumers expressed intentions to make a major purchase, such as a car or major appliance. A more bullish consumer might translate into higher spending.
There is much uncertainty in current economic conditions both in the US and Canada, weighing on households and businesses. However, the long-term health of both economies appears robust. Economic conditions go through cycles just like financial markets. Monitor financial markets and prepare to pounce when securities are trading at attractive prices. Having exposure to defensive sectors might protect your portfolio under challenged conditions, while cyclical stocks could help as economic conditions improve.
As always, please give us a call if you have any questions, or if you’d like to get together for a portfolio review. And thanks to all who made it out to our Christmas Mingle this week (I promise to never do the YMCA dance again)!
Source: CIBC Morning Market Brief