Michael Watkins
March 28, 2024
Weekly Market Update
Some interesting news this morning as Canada’s GDP grew by 0.6% in January, surpassing expectations of 0.4%. The healthy start could make the Bank of Canada’s rate decisions tougher. However, data from January showed Canadian retail sales dropped in January, the first decline in six months. Canadian consumers remained strong and helped push Canada’s overall economy higher, benefiting from a strong labour market and pent-up savings. However, that strength appears to now be stalling, which could weigh on economic growth this quarter.
- Statistics Canada (StatsCan) reported that Canada’s retail sales dropped by 0.3% in January compared to the previous month. January’s decline was the first since August 2023. Based on a Bloomberg survey, economists were expecting a 0.4% decline.
- A marked decline in sales at motor vehicles and parts dealers was a major contributor to January’s fall. Conversely, sales edged higher at sporting goods and garden equipment retailers.
- Looking ahead, StatsCan estimated retail sales might have ticked higher by 0.1% in February. This would be a second straight month of lacklustre retail sales results, suggesting tight financial conditions are putting pressure on many Canadian households.
- The Bank of Canada (BoC) has been mindful of consumer strength and spending patterns over the past several quarters. While a slowdown in consumer demand could help pull down inflation further, the BoC might be inclined to begin lowering interest rates based on the impact elevated rates are having on Canadian consumers. Market participants are widely expecting the BoC to begin cutting interest rates this year.
The Canadian economy appears to have entered a period where consumers are showing some weakness amid high borrowing costs and elevated inflationary pressures. Despite recent weakness, Canadian consumers have proven their relative resilience, helping to add to the relatively strong economic conditions that have prevailed in Canada over the past few years. Regardless, the BoC seems poised to lower interest rates this year, which has fuelled investors to push Canadian equities to new highs in 2024.
Turning to the States, the US Conference Board reported that confidence among US consumers was largely unchanged in March. Optimism about current economic conditions remains relatively high, but the outlook for the US economy is weighing on confidence. Consumers are uncertain about the outlook for the US economy, largely as a result of tight financial conditions, geopolitical tensions and the upcoming elections.
- The Conference Board Consumer Confidence Index fell to 104.7 in March from 104.8 in the previous month. According to a Bloomberg survey, March’s reading came in below the 107.0 economists had estimated.
- While US consumers expressed optimism about the current economic environment, confidence about the future dropped considerably during the month. US households are still being weighed down by tight financial conditions. Still, the economy appears to be growing, albeit at a relatively slow pace, thus avoiding a recession to this point.
- However, the upcoming election is weighing heavily on consumers. Many consumers expressed concern about the direction of the economy and public policy after the election, and what that might mean for their own personal finances and job security.
- In Canada, consumer confidence remains at relatively low levels on a historical basis. The Bloomberg Nanos Canadian Confidence Index fell to 52.9 over the week ended March 22 from 53.5 in the previous week. Canadians have expressed concern about the health of the Canadian economy and their own job security, given signs are pointing to a slowing labour market.
Consumers on both sides of the border are riddled with much uncertainty, with inflation remaining high, central banks keeping rates elevated and economic growth waning. Still, there appears to be some light at the end of the tunnel with central banks appearing to be nearing interest-rate cuts. This should help loosen the pressure on many households, which could be positive for both the Canadian and US economies.
At the start of 2024, industrial profits in China increased sharply compared to 2023. China’s economy has struggled for traction amid tight financial conditions globally. Industrial production was hindered, weighing on China’s overall economic growth. However, strong industrial profits at the start of 2024 might be a signal of improving economic conditions in the world’s second-largest economy.
- From January 1 to February 29, 2024, industrial profits in China rose by 10.2% over the same period in 2023. This marked a significant increase compared to the 2.3% decline in 2023 compared to 2022. Over 2023, industrial profits were lackluster due in part to muted demand combined with higher input costs.
- Private sector and state-owned firms both posted a rise in profits over the period. Private sector profits rose by 12.7% year-over-year, while state-owned profits ticked higher by 0.5%.
- The computer industry saw profits rise at a sharp pace, increasing by 210.9% year-over-year. There were also strong gains in profits in the textile and automobile industries.
- These results could be signaling some stabilization in China’s economy. As global and domestic demand weakened amid tight financial conditions, China’s industrial production dropped. These early results are pointing to improving demand, while input costs are going down amid slower inflationary pressures.
- China wasn’t the only country in Asia that grabbed headlines yesterday. The significant drop in the Japanese yen, which fell to its lowest level against the US dollar in 34 years, set off concerns among Japanese policymakers. The government has noted it is willing to step in and help prop up the value of the yen if necessary. A significant decline could make imports much more expensive, adding to inflationary pressures.
Any stability and strength in China’s economy will help bolster global economic activity. As economic activity picks up in China, there might be a rise in demand for Canadian exports, thus helping Canada’s economy. Chinese equities, which have lagged other equity markets this year, could also benefit from improving economic conditions.
As always, please give us a call if you have any questions, or if you’d like to get together for a portfolio review. Please note that the office will be closed on Friday for the Easter Holidays but will be open on Monday. Happy Easter everyone!
Source: CIBC Morning Market Brief