Milan Cacic
April 12, 2024
Money Financial literacy Economy Commentary In the news Trending Weekly update Weekly commentaryUS INFLATION UP! COMMODITIES UP! STOCKS AND BONDS DOWN… AT LEAST FOR NOW!
On Wednesday, the US announced inflation numbers that were higher than expected. The resulting effect on the market had bonds going down, equities going down, and (for the most part) commodities going up. With the new data out, I thought it might be a good idea to take a look at what markets are currently predicting.
As you can see from the below chart, the market is still predicting two rate cuts this year. The timing for the first rate cut has been pushed out to September 2024, however, the long-term depth of the cuts has not moved at all.
I think it's important to remember that when the Federal Reserve begins to change rates, they tend to move hard and fast. Remember how quickly we moved from 0.25% to 5.25% in 2022? It took less than 16 months to move the federal funds rate up 5%. If we look at history, the same thing happens when the Federal Reserve starts to cut. As you can see from the chart below, once the Federal Reserve makes the first interest rate cut, the subsequent cuts have happened fairly quickly. Based on previous rate-cut cycles, the Federal Reserve has cut rates a minimum of 2% within the first 12 months (and in some cases as much as 5%). Not far off the pace of interest rate increases we experienced in 2022.
Remember, the inflation data above is US data. If we take a look at Canada's economy, things don't look as optimistic. In the chart below, it appears our per-capita GDP is at the same level that it was in 2017. For those unfamiliar with GDP (Gross Domestic Product), it's basically a measure of the size of a country’s economy at a given point in time. If the GDP of a country does not increase over time, it’s very difficult for the income of its residents to go up. You may say that GDP is a snapshot of a country's economic health. One way to increase GDP is to lower interest rates or devalue the currency. Since the Bank of Canada controls interest rates, this is the lever they will likely choose. At some point, this may force the bank of Canada to cut interest rates – not only further than the United States, but also more quickly.
I've also included a piece from our CIBC Economics team entitled "Are tax hikes also certain?”.
As always, if you have any questions, please feel free to give us a call at any time.
Have a great weekend.
Milan