Weekly Market Commentary December 26 2024

Slowing Canadian Economy

The Canadian economy has proven remarkably resilient for the better part of the year. However, not anymore. Economic growth appears to be losing strength heading into 2025, even after the Bank of Canada cut interest rates at a rapid pace. Immediate data suggest that the gross domestic product shrank 0.1 per cent in November, marking the first monthly contraction of the year. The decline comes after a 0.3 per cent expansion in October.

Assuming December growth is flat, the economy will have grown at an annualized pace of 1.7 per cent in the final quarter due to October's stronger-than-expected gain. While the annual growth rate would be below the central bank's prediction of two per cent, it would still be above the 1.5 per cent predicted by economists.

Additionally, it would be a faster growth than the third quarter's one per cent expenditure-based growth. Following 11 months of inflation staying within their target range of one per cent to three per cent, Bank of Canada policymakers are hoping for an acceleration of economic growth.

Earlier this month, the BoC lowered borrowing costs by half a percentage point for the second consecutive meeting, increasing the total amount of rate cuts since June to 175 basis points. After an aggressive interest rate cut spree, the central bank has indicated that it will slow down on the rapid easing campaign to avert the risk of inflation spiking.

On the other hand, rapid rate cuts by the central bank appear to be beginning to stimulate economic activity, particularly in the housing market. October saw a 0.5 per cent increase in real estate, the biggest monthly growth rate since January and the sixth consecutive month of growth. Real estate agent offices and housing-related activities were the main drivers of the sector's growth in October, when home sales increased due to increased activity in essential markets in the Toronto and Vancouver regions.

The next interest rate decision comes on January 29, when the Bank of Canada will publish a new set of economic growth forecasts. The outlook for growth and inflation will be impacted by Canada's immigration crackdown, a two-month sales tax holiday, possible U.S. tariffs, and the uncertainty surrounding Prime Minister Justin Trudeau's future.

Meanwhile, the Canadian equity market remains on edge after one of the longest bull run. The main stock index, the Toronto Stock Exchange, posted its second straight weekly decline last week after going down 2.7 per cent. While the index is up by about 18.57 per cent for the year, it is down by about 2.60 per cent from its all-time highs, signalling a potential pullback.

The recent pullback in the Canadian equity markets comes amid growing concerns of a potential return to a more hawkish U.S. Federal Reserve and a weaker Canadian dollar. The U.S. central bank hinting that it will go slow on interest rates next year has rattled investors, triggering pullbacks in the

U.S. and Canada.

Additionally, reports that Canadian Prime Minister Justin Trudeau could lose power early next year are fuelling uncertainty in the Canadian stock market. A key ally has already indicated that they will bring down the minority Liberal government, which will trigger an election. The developments continue to trigger market fluctuations even as the focus remains on long-term fundamental drivers.

The Markets

But that’s not what I wanted!

Last week, markets were about as happy as a toddler opening a gift they didn’t like.

The first upsetting event followed the Federal Reserve (Fed)’s final policy meeting for 2024. The Fed met expectations by lowering its policy rate one-quarter of a percentage point, as many economists had anticipated. The federal funds rate is now a full percentage point lower than it was at the start of September.

In later remarks, Fed Chair Jerome Powell confirmed the United States economy remained strong, the jobs market remained solid, and progress had been made toward the Fed’s inflation goals. That was all good news. The upset came when Powell pointed out that inflation remained higher than the central bank’s target and the Fed will “be more cautious as we consider further adjustments to our policy rate.”

Powell’s statement was reflected in the “dot plot,” a scatter chart showing projections for the federal funds rate over the next three years. The chart suggested there may be only two rate cuts in 2025, which is fewer than markets had hoped.

“Stocks tumbled 3 [per cent] and bonds plunged too, sending yields on benchmark 10-year Treasuries to their highest in seven months…Of course, Powell’s remarks…weren’t a total blindside. Economic data has been hinting at a resilient U.S. economy, while inflation has remained stubbornly above the Fed’s 2 [per cent] target. In the $29 trillion U.S. bond market, traders had pushed yields up some 75 basis points on the 10-year Treasury since the central bank first started cutting rates in mid-September,” reported Liz Capo McCormick, Michael Mackenzie, Jess Menton, and Alexandra Semenova of Bloomberg.

The markets’ malaise deepened as the spectre of a holiday government shutdown appeared. “The S&P 500 dipped late Wednesday…after [Elon] Musk and [President-elect Donald] Trump derailed the original spending deal,” reported Anita Hamilton, Liz Moyer, Bill Alpert, and Callum Keown of Barron’s. A fast-tracked second deal also failed. The chance of a shutdown loomed as markets closed for the week, but policymakers passed a stopgap funding bill just after midnight, reported Christina Wilkie of CNBC.

Markets were concerned because government shutdowns hurt the American economy. “A shutdown at the end of 2018 that ran through the new year was partial because five of the government’s 12 appropriation bills had been funded. Even still, the shutdown…reduced the U.S. gross domestic product by $11 billion, according to the Congressional Budget Office,” reported Dan Rosenzweig-Ziff of The Washington Post.

Investors’ spirits lifted on Friday after the Fed’s favourite inflation gauge was released. The Personal Consumption Expenditures Index showed that headline inflation was 2.4 per cent year over year, slightly higher than the previous month. However, core inflation, which excludes food and energy, cooled significantly month to month.

Last week, major U.S. stock indices finished lower. The yield on the 10-year U.S. Treasury rose last week, steepening the yield curve, reported Liz Capo McCormick of Bloomberg.

Source: FactSet

WHICH COUNTRY HAD THE BEST ECONOMY IN 2024? Despite high

interest rates, stubborn inflation, and wars in Ukraine and the Middle East, there was no stopping the global economy in 2024. In October, the International Monetary Fund forecasted the world economy will grow by

3.2 per cent in 2024 with the world’s developed economies growing by 1.8 per cent and emerging and developing economies growing by 4.2 per cent. The United States was projected to grow by 2.8 per cent over the same period.

While the U.S. economy is growing faster than many advanced economies, the United States did not have the best economy in 2024, according to analysis from The Economist. The newspaper reviewed economic and financial indicators, including:

• Gross domestic product, or GDP, which is the value of all goods and services produced by a country,
• Stock market performance, Core inflation,
• Unemployment, and
• Government deficits, which is the difference between what a government receives and what it spends.

When the analysis of 37 nations was complete, The Economist determined that Spain had the “best” economy for 2024.

“While Europe’s other large economies are plunged in gloom, Spain’s is soaring. It is set to grow 3 [per cent] this year…almost four times the euro- area average. Hit harder than most by the pandemic, it now boasts 1.8 [million] more jobs than at the end of 2019. Investors have noticed: with faster growth and a lower fiscal deficit than France, Spain has seen its bond yields dip below those of its northern neighbor for the first time since 2007,” reported The Economist.

Ireland, Denmark, Greece, and Italy rounded out the top five. The United States landed in 20th position. The U.S. had higher inflation than most of the top five, a slightly higher unemployment rate, and a much higher deficit, which offset solid economic growth and extraordinary share price gains.

Three of the top five economies had budget surpluses last year.

Weekly Focus – Think About It

“We cannot cure the world of sorrows, but we can choose to live in joy.”

—Joseph Campbell, writer

Best regards,

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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.