Weekly Market Commentary November 7 2024

Canada Economy Soft Landing

Bank of Canada governor Tiff Macklem has affirmed that the Canadian economy is slowly benefiting from the recent interest rate cuts. Having cut rates by one and a quarter percentage points since June on inflation dropping to recommended levels, the economy appears to have stayed clear of recession with a soft landing on the cards.

Nevertheless, the policy environment remains challenging as we head into the New Year. The high interest rate environment has impaired consumer and business confidence over the past year. Similarly, financial vulnerabilities persist due to issues with housing, affordability, and high debt levels. These economic pressures may contribute to voter dissatisfaction, potentially impacting support for incumbent governments.

There is also growing dissatisfaction among consumers and businesses as inflation has increased by more than 17% since the start of the pandemic in 2020. While the overall inflation has come down, the average price of household goods is still up by 2%. Likewise, slices of the economic pie have gotten smaller even as the economic pie itself grows.

High interest rates and slow growth make it difficult to invest in a business. This harms future living standards and productivity. A soft landing policy victory won't be supported by record-high mortgage debt-service ratios and an unemployment rate that has risen to 6.5%, significantly higher than pre-COVID levels.

A recurring theme in the Canadian employment report should be that, as hiring demand slowed in October, the labour market continued to deteriorate. It is still anticipated that employment will rise, but not significantly. Estimates show that 15,000 new jobs were created in the month, but this would again understate population and labour force growth and raise the unemployment rate back to 6.6% after it slightly decreased to 6.5% in September.

Canada's leading indicators of employment conditions continue to give off ambiguous signals. Job openings have already fallen below their pre- pandemic levels and are continue to do so. A muted sales outlook for the upcoming year has kept business hiring intentions weak in Q3, according to the Bank of Canada's most recent Business Outlook Survey.

The Markets

Are we witnessing an historic event?

For an airplane or a spacecraft, a soft landing occurs when the vehicle “touches the ground in a controlled and gradual way that does not damage it,” according to The Britannica Dictionary.

For the American economy, a soft landing happens when the Federal Reserve raises interest rates to cool the economy and push inflation lower —and achieves its goal without causing a recession and significantly higher unemployment. It’s not an easy task.

“Historically, soft landings have been tough to pull off…Keeping unemployment and inflation low while at the same time having robust growth is difficult. Threading that needle has proven to be quite elusive,” reported a source cited by Aly J. Yale of The Wall Street Journal.

Solid economic growth, low unemployment, rising wages, and falling inflation have led one Federal Reserve official and several economists declaring to declare that the American economy has achieved this rare event—a soft-landing, reported Bryan Mena of CNN.

So, exactly how well is the U.S. doing?

“The extent to which America has outperformed other countries since the start of the COVID-19 pandemic is breathtaking. Its real GDP has expanded by more than 10 [percent], nearly three times as much as the euro area. Among the G20 group, which includes both rich countries and emerging markets, America is the only one where output is above pre- pandemic expectations, according to the International Monetary Fund,” reported Simon Rabinovitch of The Economist.

Last week, “with an election and Federal Reserve meeting still to come, stocks faltered under the weight of the uncertainty,” reported Teresa Rivas of Barron’s. Major U.S. stock indices finished the week lower. Uncertainty about the direction of future government spending and its possible effect on Federal Reserve policy caused some turmoil in bond markets, too, reported Paul R. LaMonica of Barron’s. Yields on longer maturities of U.S. Treasuries moved higher over the week, while yields on shorter maturities moved lower.

Source: FactSet

Meanwhile, the Canadian stock market started the month on a roll, driven by solid gains in the technology and consumer discretionary sectors. Toronto Stock Exchange was up by 0.4% at the start of the month as investors took advantage of significant pullbacks at the close of business in October. The Canadian main index had given back much of the monthly gains last week, dropping to three-week lows.

Amid the deep pullbacks, the chief investment strategy at Manulife Investment management expects the upward momentum to persist, given that November and December are typically solid months for the Canadian markets. One of the factors likely to support the upward momentum is the fact that domestic economic data remains solid, with manufacturing activity increasing faster in October as production and employment pick pace on rising orders.

PERCEPTION VS. REALITY. The human brain is complex and powerful. It runs on about 20 watts of power, and brains need to be recharged, just like your cell phone does, according to Northwestern Medicine.

It’s interesting to note that brains are not objective. They catalogue our experiences, beliefs, and emotions and then interpret what’s happening around us. As a result, our reality on any given day is affected by “our personal physical abilities, energy levels, feelings, social identities, and more,” reported Jill Suttie in Greater Good Magazine.

For example, studies have found that hills look steeper when people are:

• Tired.
• Wearing backpacks.
• Thinking of people they dislike.

In contrast, hills look less steep when people feel energetic or think of a supportive friend.

An August survey from the National Federation of Independent Business, a small-business advocacy group, reinforced the idea that there is a gap between economic perception and economic reality. The survey found that small business owners were quite optimistic about the financial state of their businesses, reasonably optimistic about the state of their local economies, and pessimistic about the state of the U.S. economy.

When survey participants were asked when the United States might experience another recession, 52 percent said the U.S. economy was in a recession right now. A recession is a downturn in economic activity that lasts for a significant period. Economic data show the U.S. economy, as measured by gross domestic product (the value of all goods and services produced in the U.S.), has been growing since late 2020.

The answers were interesting because most businesses—small and large— experience declines in sales and profitability when the national economy is doing poorly or in a recession. The gap in perception and reality may reflect the fact that “people are upbeat about what they see directly but pessimistic about what they glean indirectly through media (and social media),” opined Rabinovitch of The Economist.

Weekly Focus – Think About It

“A politician needs the ability to foretell what is going to happen tomorrow, next week, next month, and next year. And to have the ability afterwards to explain why it didn't happen.”

—Winston Churchill, former British Prime Minister

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Disclaimer:

Information in this article is from sources believed to be reliable, however, we cannot represent that it is accurate or complete. It is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. The views are those of the author, Eric Muir and Derek Lacroix and not necessarily those of Raymond James Ltd. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decision. Raymond James Ltd. is a Member Canadian Investor Protection Fund.