Michael Watkins
January 12, 2024
Weekly Market Update
What’s happening? Is it cold outside? At least it’s sunny, right?!
Last Friday, Statistics Canada released details on Canada’s labour market over December. The results were disappointing. Job additions dropped considerably, reflecting the challenges faced by Canada’s economy amid high inflation and elevated borrowing costs.
- The Canadian economy added 100 jobs in December, which was well below economists’ expectations of 15,000 job additions, based on a Bloomberg survey. In November, the economy added just under 25,000 jobs.
- Canada’s unemployment rate was unchanged in December at 5.8%. While up from 5.0% at the beginning of 2023, it is still relatively low on a historical basis. Canada’s participation rate edged lower to 65.4% in December. Meanwhile, the number of unemployed persons increased over the month.
- December’s data raised bets the Bank of Canada (BoC) might begin reducing interest rates in 2024. While wage growth accelerated in December, the labour market has slowed in recent months. This could eventually ease its impact on elevated inflation. The BoC’s benchmark overnight interest rate currently stands at 5.00%, with its next meeting on January 24.
- Conversely, the US labour market continued to show signs of immense strength. The US economy added 216,000 jobs in December, well above economists’ expectations. The result tempered expectations of the size and timing of rate cuts by the US Federal Reserve Board this year.
After years of being a beacon of strength in Canada’s economy, the labour market appears to be pulling back. Combined with moderating inflationary pressures and slowing economic growth, a weaker labour market could result in the BoC reducing interest rates in 2024. While markets are betting on rate cuts this year, the BoC has largely tried to temper expectations, but it hasn’t entirely ruled out the possibility.
Turning to the States, the US inflation rate accelerated in December to its highest since September 2023. Despite the higher rate, inflation softened considerably over 2023, potentially setting the stage for some rate cuts by the US Federal Reserve Board (Fed) this year. However, December’s result shows the Fed’s battle against inflation isn’t over.
- The annual US inflation rate was 3.4% in December, up from the 3.1% rate in November. A Bloomberg survey of economists estimated a rate of 3.2% in December. In January 2023, the US economy had an inflation rate of 6.4%.
- Energy prices continued to drop year-over-year in December but at a slower pace than in November. Also contributing to the higher rate was upward price pressure on automobiles, vehicle insurance and hospital services.
- Conversely, the US core inflation rate softened in December. Core inflation, which excludes more volatile items such as energy and food, slowed to 3.9% in December from 4.0% in the previous month. Core inflation is still too high, but its downward progression over the past year has helped put rate cuts on the table for the Fed.
- With December’s inflation report in the rearview, market attention turns to the Fed, which makes its next interest-rate announcement on January 31. At its last meeting, the Fed noted it expects rate cuts by the end of 2024. Inflationary pressures are easing, but December’s numbers show the path to the Fed’s 2% target might not be smooth.
Higher-than-expected inflation in December moderated investor expectations of the size and timing of the Fed’s rate cuts. Still, rate cuts from the Fed seem likely, as they do from the Bank of Canada. In the meantime, financial markets are likely to swing between gains and losses as market participants parse through economic indicators to predict when and how deep central bank interest-rate cuts might be this year.
Looking at the big picture with the Global Economic Prospects report, the World Bank estimated that global economic growth would slow for a third consecutive year in 2024. Several global economic organizations have projected the global economy to grow relatively slowly this year as it faces several challenges. Despite a strong likelihood of slower growth ahead, the World Bank believes global recessionary risks have subsided compared to last year.
- The World Bank estimates the global economy will expand by 2.4% this year. This would be down from the 2.6% expected pace of growth in 2023 (all data has yet to be confirmed and reported). After a strong 2021, where the global economy recovered after the COVID-19 pandemic, economic growth is expected to slow for a third straight year in 2024.
- Growth might be relatively soft in advanced economies, where the World Bank is projecting growth of just 1.2% in 2024, compared to 1.5% last year. The economic organization expects developing economies to see growth of 3.9% this year, down from 5.5% in 2023.
- Geopolitical tensions, tight financial conditions, reduced trade activity and high debt, particularly in developing economies, are all likely to weigh on global economic growth this year, according to the World Bank. On the plus side, the World Bank expects global inflation to moderate in 2024, which might provide some much-needed relief to households and businesses.
- Canada’s economy might not be immune from the global economy’s struggles this year. Canada’s gross domestic product shrank by 1.1%, annualized, in the third quarter of 2023. Given slower economic growth and falling inflation, the Bank of Canada is widely expected to start reducing interest rates this year.
As always, please give us a call if you have any concerns or questions. Also, please join us as we kick off our 2024 Monthly Seminar Series with our “Power of Planning” presentation from 3-4:30pm on Thursday January 25th in our boardroom. We are excited to have our resident Senior Wealth Strategist, Kelsey Draper, and Financial Planning Specialist, James Amarelo, co-host this Financial Planning event. As always, we will provide refreshments and appetizers. This will be an informative and engaging event and since space is limited, please RSVP to either myself here or to Karen at karen.king@cibc.com to secure your seat.