Michael Watkins
February 09, 2024
Weekly Market Update
The Bank of Canada (BoC) released its Summary of Deliberations, which are the minutes from its last meeting held on January 24. The BoC held its benchmark overnight interest rate steady at 5.00%. Since the rate hold was widely expected, market participants carefully parsed through the BoC’s statement and accompanying comments for clues on when the bank might begin its pivot to lowering interest rates.
- The BoC held its policy interest rate at 5.00%, believing it is at a restrictive level, which is helping to bring down inflation. While inflation has come down, the BoC acknowledged there is still much work to do to get back to the bank’s 2% target.
- BoC governors haven’t yet completely ruled out the possibility of more interest-rate increases. While down from its multi-decade highs, inflation is still elevated and weighing on Canadian households. Still, officials agreed that conversations will likely focus on how long to keep the BoC’s policy rate at current levels.
- Signs point to the BoC lowering interest rates this year, but the question becomes when. The BoC expressed concern that if rates are cut too soon or quickly, it could boost demand and add to inflationary pressures.
- Canada’s central bank is wary of a housing market rebound early this year, which could add to shelter costs. Shelter costs have been one of the key components keeping Canada’s inflation rate elevated. Should the housing market rebound, costs for mortgages, rents and home operating expenses could all rise.
Even the BoC appears to be uncertain about the timing of an interest-rate cut. With inflation and Canadian economic growth slowing, market participants are expecting the BoC to begin lowering rates this year.
Looking at the States, last Friday the US Bureau of Labor Statistics released data on the US labour market for the month of January. The data showed the labour market remains relatively robust, raising expectations the US Federal Reserve Board (Fed) could hold off lowering interest rates for some time still. The labour market has been a source of strength for the US economy, helping to lift households despite tight financial conditions.
- The US economy added 353,000 jobs in January. This topped the 333,000 job additions in the previous month, and exceeded economists’ expectations of 185,000, based on a Bloomberg survey. January’s additions were the biggest since January 2023.
- Job additions were broad-based across several sectors of the economy. The business services, health care and retail trade industries added a high number of jobs over the month. The critical manufacturing sector also posted a rise in jobs in January.
- The US unemployment rate remained unchanged in January at 3.7%. While the US unemployment rate edged higher over 2023, it remains at relatively low levels on a historical basis, reflecting the overall strength in today’s labour market.
- As with most economic data releases, this report was diligently monitored by markets to predict when the Fed might begin lowering interest rates. Given the apparent strength in the US labour market, the Fed might begin reducing rates later in the year, but likely not in the short term.
In an interview aired Sunday night, Fed Chair Jerome Powell said that Americans might have to wait longer than the first quarter to see a reduction in interest rates. The Fed is looking for more signs that inflation will indeed fall to its 2% target. January’s labour market report added to expectations that rate decreases might happen later in 2024 and that the Fed will hold steady at its March meeting.
Looking at the bigger picture, the Organization for Economic Co-operation and Development (OECD) has released its latest economic outlook. In it, the economic organization has raised its projection for global economic growth in 2024 and 2025. The OECD sees inflation coming closer to central bank targets, which could open the door for central banks to loosen monetary policy sometime this year.
- The OECD expects the global economy to expand by 2.9% this year, according to its February economic outlook. In November, the OECD projected growth of 2.7% in 2024. Furthermore, it upped its projection of global growth in 2025 to 3.0%.
- Economic growth will vary among countries and regions, but growth is projected to be driven by some economies in Asia. In particular, the economic organization says China will see growth of 4.7% in 2024, while India’s economy might expand by 6.2%.
- As for North America, the OECD expects Canada’s economy to grow by 0.9% this year, suggesting tight financial conditions will continue to weigh on growth. Meanwhile, the US economy is expected to expand by 2.1% in 2024.
- The OECD expects inflation to continue to soften, moving closer to central banks’ 2% targets. This could allow central banks to start lowering interest rates, which could help boost demand and economic conditions.
- Despite the better outlook, the OECD acknowledges several risks that could weigh on growth. Geopolitical tensions and still-tight financial conditions could hinder growth, and ongoing tensions in the Red Sea might hurt trade activity.
Despite a current outlook of higher global economic growth in 2024, there are several risks that leave the outlook uncertain, including in Canada. The uncertain economic conditions are leaving investors unsettled. As a result, financial markets have seen relatively wide swings up and down thus far in 2024.
As always, please give us a call if you have any questions, or if you’d like to book a portfolio review. Also, don’t forget about our next seminar “Strategic Selling: Unlocking Maximum Value in Today’s Real Estate Market” Thursday February 22nd from 3-4:30pm in our boardroom. We are excited to welcome Alexandra Friesen, award winning Realtor with a CPA background from RE/MAX Camosun, who will present this always popular and relevant topic.
Source: CIBC Morning Market Brief