Michael Watkins
February 02, 2024
Weekly Market Update
Statistics Canada (StatsCan) reported that Canada’s economy expanded in November. This follows no growth (0.0%) in October. Canada’s economy shrank over the third quarter of 2023 as tight financial conditions weighed on household and business activity. However, data is showing the economy might have returned to growth in the fourth quarter.
- Canada’s gross domestic product expanded by 0.2% in November over the previous month. A Bloomberg survey showed economists were expecting growth of 0.1%. November’s increase marked Canada’s first since May 2023.
- November’s expansion benefited from an improvement in Canada’s manufacturing sector. Also contributing to growth was a rise in the warehousing and wholesale trade industries. This was partially offset by a drop in the financial services and construction industries.
- Looking at December, StatsCan estimates the Canadian economy grew by 0.3%. Should projections be correct, Canada is on track to see a fourth-quarter annualized expansion of approximately 1.2%. This would be a relatively strong rebound from the 1.1% contraction in the third quarter.
- We also got some insight into Canada’s manufacturing sector in January. S&P Global reported that manufacturing activity in Canada improved in January, but it was still at contractionary levels. The sector was hindered by weak new and export orders, suggesting relatively muted demand persists.
After a small downturn in the third quarter, the Canadian economy appears to have rebounded in the fourth. But despite the rebound, economic activity remains relatively lacklustre. With inflation coming down and a slowdown in the labour market, the Bank of Canada might begin lowering interest rates this year.
South of the border, the US Federal Reserve Board (Fed) held its first meeting of 2024, ending it by announcing it was holding its policy interest rate steady. This was the fourth consecutive rate hold by the Fed, which believes its interest rate is helping to bring down inflation. The Fed will closely monitor data to determine when a rate cut is appropriate.
- The Fed held the target range for its federal funds rate steady at 5.25%–5.50% at its first meeting of 2024. The Fed’s fourth consecutive rate hold keeps its policy interest rate at its highest level since 2001.
- The Fed noted it will carefully monitor incoming economic data before making any changes to its level of interest rates. With that said, the Fed believes the target range of its federal funds rate is helping it achieve its inflation goals.
- The US central bank didn’t explicitly say it will begin reducing interest rates. However, comments suggested an openness to begin lowering rates this year, but likely not in the near term. The Fed noted it will only begin lowering interest rates once it is confident it can bring inflation back to its 2% target.
- Following the meeting, Fed Chair Jerome Powell said that the Fed’s policy interest rate has likely peaked. Furthermore, Chair Powell indicated it might be appropriate to begin lowering interest rates sometime this year.
Investor attention on Fed meetings has shifted from how high rates will go to clues as to when the Fed will start cutting interest rates. While no clear date has been provided, rate cuts appear likely sometime this year. Both Canada and the US are likely to see financial conditions loosen as the year develops. Still, prices are elevated and borrowing costs might remain higher than pre-pandemic levels, which could have a negative impact on many households and businesses.
Looking at the EU, Europe’s economic growth was flat in the fourth quarter of 2023, helping the continent avoid a technical recession, which is represented by two straight quarters of falling growth. Europe’s economy struggled for traction over 2023 amid tight financial conditions, which weighed on domestic and foreign demand, hindering its critical manufacturing and services sectors. The outlook remains uncertain.
- A preliminary estimate showed Europe’s gross domestic product was unchanged (0.0%) over the fourth quarter of 2023. Europe’s economy just missed a technical recession after falling by 0.1% in the third quarter. A Bloomberg survey of economists estimated the economy shrinking by 0.1%.
- Germany’s gross domestic product contracted over the fourth quarter. Europe’s largest economy has seen its critical manufacturing sector shrink sharply over the year, hurt by weak domestic and global demand. Conversely, the economies of Spain and Italy expanded over the quarter, while France’s economy was largely unchanged.
- The European Central Bank (ECB) held steady at 4.50% at its meeting on January 25. The ECB has been adamant about keeping rates higher for longer in response to persistent inflationary pressures. However, market participants believe that slowing economic growth and easing inflation could result in rate cuts this year.
- The pace of growth between different countries and regions is diverging. An advanced estimate showed the US economy expanded by 3.3%, annualized, in the fourth quarter, while China’s economy expanded by 5.2% year-over-year.
The impact of tighter monetary policy has been reflected in economic conditions in places such as Europe, Canada and the UK, and the latest data shows growth is still uncertain. In a recent report, the International Monetary Fund raised its projection for global economic growth in 2024, with the US and China driving the increase.
As always, please give us a call if you have any questions, or if you’d like to book a portfolio review. And keep an eye out for an invitation to our upcoming seminar on the state of the housing market this month.
Source: CIBC Morning Market Brief