Michael Watkins
April 12, 2024
Weekly Market Update
On Friday, Statistics Canada released Canada’s labour market data for March. The report showed signs of Canada’s labour market cooling, which could disrupt Canadian households, but might put the Bank of Canada (BoC) on track to lowering interest rates. Conversely, US labour market data showed signs of recovering after cooling towards the end of 2023.
- The Canadian economy lost 2,200 jobs over the month of March. March’s decline in jobs was the first since July 2023. A Bloomberg survey showed economists were estimating 25,000 job additions.
- The economy lost jobs in both the full- and part-time sectors. The food services and retail trade industries shed jobs over the month, which offset a rise in jobs in the health care and construction industries.
- Canada’s unemployment rate edged higher to 6.1% in March from 5.8% in February. This marks Canada’s highest unemployment rate since October 2021. The unemployment rate has ticked higher in recent months as employment growth has not kept pace with the growth in Canada’s population.
- The situation is much different in the US. The US economy added 303,000 jobs in March, the most since May 2023. The US unemployment rate ticked lower to 3.8% from 3.9% in February.
The Bank of Canada (BoC) held steady at its April meeting. While inflation is coming down, it remains stubbornly high, suggesting the central bank’s battle against inflation isn’t quite over. The BoC didn’t provide any specific details on the timing of a potential rate cut.
- The BoC held its benchmark overnight interest rate steady at 5.00% at its April meeting. The rate hold was widely expected by market participants. The BoC acknowledged its battle against inflation is ongoing, which warranted its restrictive interest rate.
- The BoC refused to give any timeline on potential interest-rate cuts. While noting inflation has softened, Canada’s central bank said it needs more evidence inflation will slow further to its 2% target. The BoC believes it isn’t appropriate to adjust policy yet given uncertain economic conditions and rising commodity costs, particularly for energy products.
- The BoC believes inflation will stay close to the 3% mark over the first half of 2024. Inflation is expected to reach the central bank’s 2% target in 2025. Gross domestic product growth is projected at 1.5% in 2024 and 2.2% in 2025, amid relatively resilient global economic conditions.
- The BoC will also be mindful of the actions of the US Federal Reserve Board (Fed). The US inflation rate was 3.5% year-over-year in March, above economists’ expectations. In response, markets are expecting the Fed to delay rate cuts until later in 2024.
Borrowing costs are set to stay higher for a bit longer. The BoC is grappling with several economic contradictions that are weighing on its decision. Economic growth and inflation are slowing, but wage growth is high, and the housing market is again picking up steam. Tough decisions still lie ahead for the BoC, but the potential for a rate hike this year is high.
Across the pond, the European Central Bank (ECB) came into the spotlight this week, one day after the Bank of Canada (BoC) held its benchmark overnight interest rate steady. As widely expected, the ECB held its key interest rate steady at a fifth consecutive meeting. Comments suggest a pivot to rate cuts might not be that far off for the ECB.
- Europe’s central bank held its policy interest rate steady at 4.50%, leaving it at record high levels. A Bloomberg survey showed economists were expecting the ECB to hold steady at a fifth straight meeting.
- The ECB believes its rate hold was warranted. The central bank deems its rate restrictive, helping to pull down inflation. Still, it has more work to do to bring inflation back to its 2% target. The ECB believes inflationary pressures remain elevated, hindering consumer and business activity, particularly in its critical services sector.
- Expectations are rising that a rate cut is possible in June. The ECB seeks more confidence that inflation is consistently falling. But ECB President Christine Lagarde said officials believe upcoming data will show a further decline in inflation, which might change its outlook in June, opening the door for a potential rate cut.
- While the BoC kept its policy interest at 5.00% on Wednesday, the US Federal Reserve Board and Bank of England are scheduled to announce their next interest-rate decisions in early May. Both are currently expected to hold steady at those meetings.
This week has brought more evidence of a strong likelihood of the BoC and other central banks beginning to lower interest rates this year. With inflation slowing and economic strength waning, these central banks might look to pivot to help stimulate economic activity. However, they are trying to be careful not to stimulate too soon, which could push inflation up again.
As always, if you have any questions, or if you’d like to get together for a portfolio review, please give us a call. Also, please join us online for a virtual presentation on the North American economy on Thursday, April 25th at noon PST. Mike will go in-depth into the current state of the union and describe how we got there. After that, we will be joined by special guest, Wincy Wong of CIBC Private Wealth, as she will take over to discuss her thoughts on what we can expect in the market for 2024. Wincy is the chair of the Investment Strategy Committee’s (ISC) stock selection subcommittee. She is also a member of the CIBC Asset Allocation Committee.
Source: CIBC Morning Market Brief