Michael Watkins
February 23, 2024
Weekly Market Update
January data showed more signs that inflationary pressures are softening in Canada. This could help put the Bank of Canada (BoC) on a path to begin lowering interest rates after expressing its desire to see more clear signs inflation will eventually fall to its 2% target. Inflation started coming down in earnest in 2022 after moving to decades-high levels amid the pandemic in response to supply chain disruptions and rising demand. The BoC raised interest rates aggressively, which appear to have taken hold.
- Canada’s annual inflation rate was 2.9% in January. This was a slowdown from the 3.4% rate in December, and below the 3.3% rate estimated by economists, based on a Bloomberg survey. January’s rate was the slowest in Canada since June 2023.
- Gasoline prices dropped considerably on a year-over-year basis, contributing to January’s declining rate. The growth in food prices slowed again in January, which might help ease the pressure on many Canadian households in terms of grocery costs.
- Despite January’s decline, inflation remains relatively elevated and above the BoC’s 2% target. Mortgage costs are a main contributor to Canada’s high inflation rate. Amid the BoC’s aggressive interest-rate hikes, mortgage rates rose substantially. Canadians have been faced with high mortgage costs relative to pre-pandemic levels.
- January’s falling rate is a positive development for Canada’s economy. Before starting to lower rates, the BoC wanted to see more evidence inflation will indeed move back to its 2% target. This likely puts it on track to meeting that goal, which could result in the BoC cutting interest rates at some point this year.
The headline inflation figure was welcome news for market participants, who are mostly hoping the BoC will begin lowering interest rates. While inflation is coming down, there is still much work to be done by the BoC.
Turning to the States, economic activity continues to be relatively robust. Based on the latest data from S&P Global, US manufacturing activity expanded as a result of the highest gain in new orders since May 2022. Strong new export demand also contributed to the expansion. Despite the increase, overall business activity slipped as growth in the services segment missed expectations. Measures of services activity fell to the lowest level in three months.
- US factory output rose at the quickest rate since April 2023 as indicated by the S&P Global Flash US Manufacturing Purchasing Managers’ Index’s (PMI) increase to 51.5 in February from 50.7 in January.
- The US Manufacturing PMI increased for two consecutive months for the first time in over 12 months. Manufacturing sentiment was subdued for most of 2023, with almost every monthly reading under 50, a level indicating contraction. However, business confidence in the sector has been stronger at the start of 2024.
- Order processing times quickened. The improved functioning of supply chains helped to speed up delivery times, especially as challenging weather conditions from January did not extend into February.
- Input costs of raw materials stabilized. Prices grew at the slowest rate since October 2020, suggesting that pricing pressure was easing. The lower-than-expected prices countered some concerns that price pressures would increase again in February.
Employment growth at manufacturers in the US remained largely unchanged in February compared to the previous month. In Canada, it remains to be seen whether the manufacturing segment will also pick up. According to Statistics Canada, manufacturing sales are expected to decline by 0.7% in January. However, economists expect Canada’s manufacturing PMI to break through the 50 level, indicating expansion, by the end of the first quarter of 2024.
As always, please give us a call if you have any questions, or if you’d like to get together for a portfolio review. Also, if you need to make an RRSP contribution before the deadline (to count against 2023 taxes), you need to have the contribution made before midnight on February 29th. Having said that, there won’t be anyone here in the office at midnight, so best to get it in a little earlier. If you need a reason to make that contribution, check out Jordan’s latest video!
Source: CIBC Morning Market Brief