Wicks Houghton group BI-Weekly Market Update

“You’ll do better if you have passion for something in which you have aptitude. If Warren Buffett had gone into ballet, no one would have heard of him.” - Charlie Munger

In a Nutshell: North American markets rallied again this past two weeks as it becomes more and more evident that we are at the end of the rate hiking cycle. While the economic picture isn’t as great in the Eurozone, there were clear signs that interest rate policy has taken effect and stymied inflation. We are saddened by the passing of Charlie Munger, Warren Buffet’s right hand man at age 99.

 

Canadian Economy

On a backdrop of a widely anticipated slowdown, the Canadian economy unexpectedly contracted in Q3 with inflation also below market expectations. This, along with modest retail sales and a cooling labour market suggest that we are very likely at the top of the rate hike cycle and initial forecasts suggests that cost of borrowing relief may be as close as Q2 2024.

Canada’s Real Gross Domestic Product (GDP) declined 0.3% in Q3 following a 0.3% increase in Q2. This was below market and BoC expectations.

Canada’s annual inflation rate fell to 3.1% in October from 3.8% in the previous month, slightly below market expectations of 3.2%. Core inflation eased to 2.7% in October 2023 from 2.8% September. It was the lowest rate since June 2021.

The deceleration in headline inflation could fortify investor bets that the BoC will start lowering its key policy rate from a 22-year high of 5.00% in the first half of 2024.

Canadian retail sales rose in September by 0.6% from the previous month, well above the flat reading expected. Core Retail Sales excluding autos and gasoline were up by 0.2% vs. a forecast of a 0.2% decline from August.

Canada’s Unemployment rate rose to 5.8% in November, up from 5.7% in October, in line with market expectations. It was the highest rate since January 2022.

 

U.S. Housing

U.S. home sales dropped in volume while house prices rebounded and mortgage rates trended downwards for a third straight week. Housing costs have been a significant contributor to inflation and weakness could validate the FEDs pause on rate hikes.

U.S. existing home sales dropped to the lowest level in more than 13 years in October as the highest mortgage rates in two decades and a low supply drove buyers from the market.

New construction remains supported by an acute shortage of houses on the market with permits for future single-family homebuilding rising to the highest level in nearly 1-1/2 years last month.

U.S. annual home price growth accelerated again in September, underscoring the rebound of housing prices as it entered the final quarter of the year, data showed on Tuesday.

The average rate on 30-year fixed-rate mortgages dipped to 7.44% from 7.50% the week before, according to a Freddie Mac survey released on Thursday. The softening comes after rates reached a 23-year high of 7.79% three weeks ago.

 

U.S. Economy

Labour markets and consumer spending both show signs of cooling, despite GDP numbers for Q3 being revised upwards. Labour markets and consumer spending are focal points at present as they will be a primary driver of central bank interest rate policy going forward.

U.S. Gross Domestic Product increased at a 5.2% annualized rate in the third quarter vs. the 5.0% expected. It was the fastest pace of expansion since Q4/2021.

The number of Americans filing new claims for unemployment benefits increased to a three-month high last week, suggesting that the labour market is gradually cooling.

U.S. consumer spending rose moderately in October, while the annual increase in spending inflation was the smallest since April 2021, signs of cooling demand.

 

Euro Zone Inflation

Eurozone saw signs of inflation cooling across this past two weeks. This means that energy prices are stabilizing in the 20 country zone and interest rate hikes are having the desired effect. At this stage of the business cycle, any data supporting cooling inflation supports pausing rate hikes.

The British Retail Consortium said annual shop price inflation dropped to 4.3% in the 12 months to November, its weakest since June 2022 and slower than October's 5.2% rise.

Eurostat said consumer inflation in the 20 countries using the euro decelerated to 2.9% year-on-year in October from 4.3% in September after prices rose 0.1% month-on-month.

German inflation eased more than expected in November, falling to its lowest level since June 2021 due to a decline in energy prices

Spain's annual inflation rate fell to 3.2% in November as a result of cheaper fuel and tourist packages.

 

Commodities

West Texas Intermediate crude oil prices edged higher supported by expectations that the OPEC+ producer group may deepen and extend output cuts as well as the Israel / Hamas ceasefire cools geopolitical tensions in the area slightly.

 

Bloomberg Market Updates - https://www.bnnbloomberg.ca/markets

Schwab Market Updates Podcasts - https://www.schwab.com/resource-center/insights/section/schwab-market-update

 

Market Data	S&P TSX	S&P 500	DOW	NASDAQ	STOXX EU	WTI	GOLD
This Week	+1.7%	+0.8%	+2.4%	+0.4%	+1.0%	+1.5%	+4.4%
Last Week	-0.4%	+1.0%	+1.3%	+0.9%	+1.0%	-0.5%	+0.9%

Market data taken from https://www.marketwatch.com/

 

All’s well that ends well By Avery Shenfeld Link to Article

As central banks continue to use interest rates to counter inflation, this is very likely to cause impacts to global growth in 2024. In Canada, there is more clarity that interest rates are already high enough, while in the U.S., there is still uncertainty.

Central banks will need to cut interest rates to stimulate growth, with Canada likely to make a rate cut in late Q2 ahead of the United States. The expectation is that these rate cuts could lead to improved growth by the end of the year, benefiting both stocks and bonds as markets anticipate lower policy rates and improved earnings prospects in 2025.

The Bank of Canada may need to act before headline inflation approaches 2%, citing core inflation and near-recessionary conditions as factors supporting early action. Inflationary pressures are expected to come from mortgage interest costs and rents, with higher mortgage rates impacting costs.

There are risks to this optimistic outlook, including the potential for a harder economic landing that could impact equities but boost returns on bonds with deeper overnight rate cuts. The best-case scenario is that central banks see inflation naturally decrease, leading to lower interest rates. Despite potential challenges in the early part of 2024, a diversified portfolio provides shelter against these risks and volatility.

 

Canada has made more progress on inflation than other countries; and Labour markets, though tight, are showing signs of easing.

 

 

Trying times by Benjamin Tal and Katherine Judge Link to Article

The benchmark home price has only decreased by 11% since its peak in early 2022 and remains 38% above pre-pandemic levels. Single-family home prices rose more than condo prices during the low-interest-rate era of Covid, and though there has been a greater drop in the former, prices are still 42% above pre-Covid levels, compared to 30% for condos.

One factor contributing to the resilience of prices is the lack of new listings on the market, which limited the decline in prices. However, the number of new listings has rebounded recently, rising by 31% from a low in March 2023. This increase is attributed to more distress sales as owners list their properties due to financing issues, with mortgage payments increasing rapidly.

As a result, the sales-to-new listings ratio at the national level has shifted from sellers' territory into a balanced market and is heading towards buyers' territory. Toronto is already in a buyers' market, and Vancouver is not far behind. A buyers' market does not necessarily mean a significant increase in demand, as low affordability is expected to keep potential buyers on the sidelines.

With listings increasing, demand decreasing due to high-interest rates eroding the tight labour market, the housing market activity is likely to continue to soften. Condo sales and prices are expected to be the most impacted and a rebound to 2019 levels is unlikely before early to mid-2025. This could also impact home and condo building, making the rental market even tighter. As the Bank of Canada begins cutting interest rates in 2024, demand may start to recover in the second half of the year and into 2025, resulting in a rebound in home prices.

 

Sales to New Listings ratio move into balanced territory (from buyer); while Overvalued markets enter buyer territory

 

 

Macro Memo November 21 - December 11, 2023 by Eric Lascelles Link to Article

Consumer Outlook Shifting

There are several factors that have contributed to the resilience of consumer spending in the past few years, including government stimulus, accumulated wealth from home price and equity appreciation, pent-up demand after pandemic lockdowns, robust hiring, and wage growth. However, several factors may negatively impact consumer spending in the future:

1. Rising Unemployment: The article notes that unemployment is starting to rise, reducing the pool of households able to spend enthusiastically.
2. Higher Interest Rates: Increasing interest rates are consuming a growing share of household budgets, potentially limiting spending.
3. Tighter Lending Standards: Tighter lending standards are restricting the availability of credit that could support spending.
4. Low Household Savings Rate: The U.S. household savings rate is already unusually low, limiting its potential as a driver of further spending. Households have also spent down the bulk of their accumulated pandemic savings.
5. Student Loan Repayments: More than 43 million U.S. households began repaying student loans in October, which could impact disposable income.
6. Wealth Effects: Likely to be less friendly in the immediate future, with softer home prices and underwhelming stock market performance.
7. Potential Recession: The forecast for a recession is expected to result in increased unemployment, diminished wage growth, and greater risk aversion.

There are early signs of this trend playing out, including declining consumer confidence, mounting credit card delinquencies, and a recent retail sales decline. In Canada, the economy is already weaker, home prices have more downside, and rising interest rates have a more immediate effect. Despite some positive factors such as intact pandemic savings and a higher household savings rate, Canada shows signs of weaker retail sales, increasing consumer bankruptcy proposals, and a rising share of mortgages in arrears.

 

In the U.S., Goods inflation is falling, Services Inflation has turned

 

U.S. Fiscal Burden May Create Drag

The U.S. fiscal deficit grew significantly in 2023 but is now starting to shrink as infrastructure-oriented stimulus and special factors on the revenue side decrease. However, a moderate fiscal drag in 2024 is anticipated as the fiscal picture changes.

Despite the recent reduction, the U.S. fiscal deficit is not expected to shrink significantly on its own, according to projections from the Congressional Budget Office (CBO). The CBO foresees the deficit remaining roughly steady at around 6% of GDP, with a potential deepening towards the end of the next decade.

The main factor keeping the deficit large is the cost of servicing the debt. As government bonds mature and the debt is refreshed at higher interest rates, the CBO estimates that the cost of servicing federal debt doubled from 1.2% of GDP to 2.5% in 2023. The forecast predicts this cost to rise to a substantial 6.7% of GDP in a decade, an unprecedented level in the post-World War II era.

This deficit and the austerity required to address them could become the next significant theme once these immediate concerns are settled. This, in turn, may cast a shadow over medium-term economic growth.

 

 

U.S. Debt servicing cost rising quickly or rising rates and debt load

 

Notable News

A new method of 3-D printing can create flexible products, including for use in robotics. Human-like robotic hands and artificial organs can be built using this new method, according to researchers at ETH Zurich, a Swiss university; MIT; and Inkbit, a startup company spun out of MIT.

While the technology was previously limited to fast-​curing plastics, it has now been made suitable for slow-​curing plastics as well. These have decisive advantages as they have enhanced elastic properties and are more durable and robust.

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Wicks Houghton Group are Investment Advisors with CIBC Wood Gundy in Calgary, Alberta, Canada. The views of Wicks Houghton Group do not necessarily reflect those of CIBC World Markets Inc.

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