Michael Watkins
February 16, 2024
Weekly Market Update
After a bit of a tantrum early in the week, the North American equities markets resumed their positive ways. Looking at the housing market, the Canadian Real Estate Association reported that sales of existing homes in Canada increased for a second straight month in January. Canada’s real estate market appears to be picking up after struggling over much of 2023 after the Bank of Canada lifted interest rates at a relatively aggressive pace. Despite expectations of interest rates eventually coming down this year, they remain relatively elevated, which could weigh on purchasing decisions.
- Sales of existing homes in Canada rose by 3.7% in January, marking the second straight increase. Home sales increased by 8.7% in December following five consecutive months of decline as demand and supply waned.
- The benchmark home price declined by 1.2% in January over the previous month. Home prices have come down but remain elevated compared to pre-pandemic levels. Lack of supply has supported those higher home prices. In response, the Canadian government has made it a priority to increase the supply of homes across the country.
- A recent reading on Canadian consumer confidence showed growing optimism about the potential strength of Canada’s real estate market. For the week ended February 9, the Bloomberg Nanos Canadian Confidence Index showed more Canadians believe the value of real estate will strengthen over the next six months. The reading has consistently increased thus far in 2024.
- A relatively strong real estate market is critical for Canada’s overall economic health. A stronger market makes consumers feel more optimistic, leading to higher spending and investment.
The real estate market appears to be bouncing back, which could ultimately put upward pressure on home prices. This will help add to the overall net worth of those who already own a home.
In other economic news, Canada’s relatively strong labour market persists. Statistics Canada reported last Friday that the Canadian economy added more jobs than expected. Canada’s economy has seen job gains in six consecutive months. The resiliency in Canada’s labour market could push back plans by the Bank of Canada (BoC) to begin lowering interest rates.
- The Canadian economy added 37,300 jobs in January, the most since September 2023. A Bloomberg survey of economists showed they were estimating 15,000 job additions. Job gains were concentrated in the part-time sector, which added 48,900 jobs, while full-time jobs fell by 11,600 in January.
- Canada’s unemployment rate edged lower to 5.7% in January from 5.8% in the previous month. This marked the first decline in Canada’s jobless rate since December 2022. Canada’s jobless rate continues to run close to its lowest level since the 1970s.
- Wage growth remained elevated in January. Average hourly earnings rose by 5.3% year-over-year in January, down from the 5.7% increase in December. Higher wages, due in part to a tight labour market, are contributing to elevated inflationary pressures.
- The BoC still appears poised to begin cutting interest rates this year. The lingering question for investors is when it will start. January’s relatively strong labour market report might push back the timing of interest-rate cuts.
While there were signs of the labour market cooling in 2023, it has continued to prove its relative resiliency. This has helped support Canadian consumer activity, despite ultra-tight financial conditions. Given the labour market’s importance in the BoC’s interest-rate decisions, markets pushed back their expectations for a rate hike to later in 2024. Markets appear relatively certain rate cuts are coming in 2024, but they can’t decide on the exact timing and how deep the rate cuts might be.
Turning to the States, the US inflation rate continued to soften in January, according to data from the US Bureau of Labor Statistics. Inflation continues to inch closer to the US Federal Reserve Board’s (Fed) 2% target. Still, as the Fed has acknowledged, there remains much work to do to bring inflation down further. As inflation does moderate, markets believe it is opening the door for the Fed to begin lowering interest rates this year.
- The US inflation rate was 3.1% in January, slowing from the 3.4% rate in December. However, the annual inflation rate came in above the 2.9% rate expected by economists, based on a Bloomberg survey of economists.
- Again, the slowdown in inflation was driven by a fall in gasoline prices, which declined by 4.6% year-over-year. Further downward pressure came from a slowdown in shelter and food prices, both of which have steadily moderated over the past year.
- Core inflation remains elevated, which suggests higher prices have been broad-based. The annual core inflation rate, which excludes more volatile items such as food and energy, was 3.9% in January, which was unchanged from December. Still, core inflation is running at its lowest level since 2021.
- Investor attention now turns to the Fed, which is scheduled to make its next interest-rate announcement on March 20. The ongoing downturn in inflation is reflective of the Fed’s efforts over the past two years. However, it is clear there is still much work to do, which could have the Fed holding at current levels for a bit longer yet.
The slowdown in inflation is a positive development for the US, which has also been able to avoid a recession to this point amid the aggressive rate hikes by the Fed.
As always, please give us a call if you have any questions, or if you’d like to book a portfolio review. Please note that the branch will be closed on Monday, the 19th, for Family Day.
Source: CIBC Morning Market Brief