Michael Watkins
April 26, 2024
Weekly Market Update
I’m back from our conference in San Francisco last week. Great city; lot’s to see, but those hills are killers!
Turning to business, for a second straight month in February, retail sales in Canada dropped. The tight financial conditions brought about by high inflation and the aggressive rate hikes by the Bank of Canada (BoC) appear to be weighing on Canadian households. Consumer demand has waned, which is hindering economic growth. The drop in retail sales could be another indicator pointing to potential rate cuts from the BoC as soon as this summer.
- Retail sales in Canada dropped by 0.1% in February over the previous month. This was the second straight decline in Canada’s retail sales after falling by 0.3% in January. A Bloomberg survey showed economists were expecting a 0.1% increase in retail sales.
- Of the nine sectors surveyed, five posted declines over February. Sales declined by 2.2% at gasoline stations. Sales also fell at furniture stores and for clothing and sporting goods. Canadians appear to be pulling back spending for more discretionary items.
- Looking ahead, Statistics Canada reported that retail sales were likely unchanged in March. Retail sales have been relatively lackluster over the first quarter, which could have a negative impact on Canada’s gross domestic product growth.
- While the retail sales results have been a concern, it could prompt the BoC to begin cutting interest rates. Inflation has come down and economic growth has softened, which could have the BoC looking to help stimulate the economy.
The bad news is that the pullback in consumer spending could hurt economic activity. Conversely, evidence that tight financial conditions are weighing on Canadian households could result in a rate cut as early as this summer, which might relieve some pressure on Canadians. Investors are hoping that rate cuts could provide a tailwind for equity markets.
Meanwhile in the States, US economic growth slowed considerably in the first quarter of 2024. Tight financial conditions might be taking hold and negatively impacting household and business activity. As the US Federal Reserve Board (Fed) raised interest rates, economic growth was expected to slow but the US economy proved resilient, demonstrating its relative strength. That strength appears to be waning.
- According to an advanced estimate, the US economy expanded at an annualized pace of 1.6% over the first quarter of 2024. This marked a slowdown from the 3.4% annualized pace of growth in the fourth quarter of 2023 and was the slowest since falling in the second quarter of 2022.
- Consumer spending slowed, rising by only 2.5% compared to the 3.3% increase in the previous quarter. The US consumer has been a pillar of strength for the US economy, but this relative strength appears to be cooling off.
- Exports also slowed considerably, weighing on overall economic growth. Demand for US products from foreigners softened, due in part to tight financial conditions elsewhere in the world. Several countries and regions have seen a significant pullback in demand, including Europe, one of the world’s largest economies.
- High inflationary pressures persist. The gross domestic product deflator, which measures the changes in prices of all goods and services produced, was 3.1% in the first quarter, up from the 1.7% rate in the fourth quarter. This could keep the Fed on the sidelines from cutting interest rates in the near term, which raises the risk of missing a soft landing if economic activity continues to moderate.
Signs point to US economic strength cooling as we begin 2024. Market participants’ expectations of a soft landing pivoted with the release of this advanced estimate. The attention now turns to the Fed to see how it responds to slowing economic activity but still elevated inflation. The Fed holds its next meeting at the beginning of May where it is currently expected to hold steady at 5.25%–5.50%.
As always, give us a shout if you have any questions, or if you’d like to get together for a portfolio review.
And in case you’re interested, Geoff McLean of RE/MAX is hosting a “Rightsizing” seminar on Tuesday, April 30th from 4 to 6 pm. Let us know if you’re interested and we can pass along the details.
Source: CIBC Morning Market Brief