These are some of the highest interest rates we have seen in 15 years. You may not think so at first glance, however when you look at real rates (the current 1-month interest rate minus inflation), they are as high as we have seen since the end of the 2009 recession.

 

It is hard to be pessimistic on the US market when the economy is doing well in combination with a high-rate environment. Inflation is collapsing and will likely continue to go down because of substantial productivity growth, which leads to further disinflation. Meanwhile, the labour market is expanding, and jobs are getting harder to come by, which also leads to lower inflation.

 

Any way you look at it, rates are way too high and are likely coming down significantly. As you can see from the chart below, rates are as high as they have been since 2010. From a stock market point of view, this is very bullish. Declining interest rates help almost every part of the economy and the stock market. The key for the Federal Reserve has been avoiding both an overheated economy (which increases inflation), and an economic recession (which decreases inflation and is bad for everyone). Thus far, it appears the US Federal Reserve has successfully managed this balancing act and has come out of it looking like they know what they are doing.

 

Unfortunately, it doesn’t look as rosy in Canada. It appears that we may be close to (if not already in) a recession, and the Bank of Canada has responded accordingly with another 0.5% cut this week. Rates are likely to come down even more in Canada, but more so as a result of the Bank being concerned about our weak economy. Hopefully, a strong US economy will pull us out of a potential tailspin!

 

 

I have also included a report from our CIBC Economics team entitled “Some Monday morning quarterbacking... on a Friday”.

 

As always, if you have any questions, please feel free to give us a call at any time.

 

Have a great weekend.

 

Milan