In a Nutshell: A positive and low volatility beginning to 2024 as the year begins with some more mixed signals from developed global economies.  The positive end to 2023 was fueled by a continued view of a soft landing and rate cuts in 2024, but recent inflation data suggests that path is less clear.

 

U.S. Economy

 

The uptick in bankruptcy filings is notable in the magnitude of it’s increase.  This is definite area to monitor over the coming months given the current level of interest rates and how that will continue to effect businesses.

One of the primary indicators we have been focusing on in recent months is employment.  An uptick in unemployment or jobless claims is a later stage indicator that the economy has gone into recession.  While it has remained tight to start the year, job openings and “quit rates” falling to near 3-year lows are notable, and the Household Survey employment drop is significant.

 

U.S. bankruptcy filings surged by 18% in 2023 on the back of higher interest rates, tougher lending standards, and the continued runoff of pandemic-era backstops, although insolvency case volumes remain well below the level seen before the outbreak of COVID-19.  Commercial Chapter 11 business reorganization filings shot up by 72% and Consumer filings rose 18% from 2022.

The average wage U.S. employers were willing to offer new workers surged to record levels in November, a report from the New York Federal Reserve showed on Monday. The average full-time annual wage offer has increased by 15% since July.  The wage in November was the highest ever in a survey that dates back to 2014 and likely reflects ongoing labor market tightness.

U.S. job openings fell to nearly a three-year low in November as the labor market gradually cools, which could pave the way for the Federal Reserve to start cutting interest rates this year.  Americans are also feeling the shift in the labor market, with the report showing the number of people quitting their jobs, dropping to the lowest level since February 2021.

Against the headline reports, the Household Survey reported that 683,000 less people in the U.S. were employed in the month of December.  This drop in employed people was masked in the unemployment numbers by a similar drop in the participation rate.

 

Global Inflation

 

The path to rate cuts in 2024 is not guaranteed as we have seen sticky inflation figures to end 2023.  Both the U.S. and Canada saw inflation readings above market expectations.

 

Canada's annual inflation rate unexpectedly remained at 3.1% in November, data showed on Tuesday, prompting market players to trim their bets as to when the Bank of Canada would start cutting interest rates. Analysts had forecast inflation would ease to 2.9% from 3.1% in October.

The U.S. CPI increased 0.3% for December, higher than the 0.2% estimate. U.S. Core CPI increased 0.3% for December and 3.9% from a year ago, compared to respective estimates of 0.3% and 3.8%.

 

Eurozone Economy

While it is fairly clear that the Eurozone entered recession in Q4 of 2023, the U.K. remains resilient seeing buoyant business output and consumer spending in the past weeks.  With inflation now in check across the zone, it is likely they begin to lower rates sooner than later.

Business activity continued to decline largely across the Eurozone in December, which indicated the bloc's economy is almost certainly in recession.  It was a broad-based with deterioration in both Germany and France and across services and manufacturing.  HCOB's Composite PMI fell to 47.0 from 47.6 in November to mark its seventh month below the 50, separating growth from contraction.

Britain's economy ended 2023 on a stronger footing than previously thought, signs that the Bank of England's high interest rate campaign might not trigger a recession.  The final S&P Global/CIPS UK Services PMI rose to 53.4 in December, showing the sector grew from November's 50.9.

The UK's consumer spending in December saw an increase of 2.3% compared to the same month the previous year, signaling a slowdown from the growth observed in November and remaining below the current rate of inflation. Despite the overall rise, certain sectors showed varied performances.

 

Canadian Economy

 

Cracks continue to show here at home, but the economy is remaining somewhat resilient like many global economies at present.  Businesses output and employment have seen obvious deterioration, which serves as reasonable basis for the stagnation of interest rates.

 

Activity in Canada's service sector deteriorated for a seventh consecutive month in December as elevated borrowing costs weighed on the housing market.  The S&P Global Canada services PMI edged up to 44.6 in December from a near three-year low in November.  However, it remained well below the 50 threshold which separates expansion from contraction in the sector.  The index has been below 50 since June.

Canadian Employment was virtually unchanged (+0.0%) in December, and the unemployment rate held steady at 5.8%.  The country added about 100 positions in December, missing expectations for a gain of 15,000 positions but beat a jobless rate of 5.9 per cent, according to a survey of economists.

Canada's trade balance showed imports increased 1.9% and exports were down 0.6% in November.  The trade surplus narrowed from $3.2 billion in October to $1.6 billion in November.  This is the fourth consecutive monthly trade surplus.

 

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	-0.1%	-1.5%	-0.6%	-3.2%	0.1%	3.0%	-1.1%
Last Week	0.3%	1.8%	0.3%	3.1%	0.0%	-1.4%	0.1%

 

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

 

 

THE WEEK AHEAD Fast fashion (A synopsis of the Bond Market) Avery Shenfeld Link to Article

 

Extending duration and dramatically increasing exposure to bonds or GICs has been all the rage to end 2023.  While yields have increased, and there are considerable opportunities to find ‘value’ in the bond market, one must make these considerations within the context of a diversified portfolio.

 

Investors should be cautious about following market trends too closely, as they may end up with an unfavorable portfolio allocation.  The belief that rates will remain "higher for longer" was being touted only months ago and now expectations have pivoted to "lower rates sooner" due to factors such as decreasing inflation.

 

While current bond yields may not be mispriced in the long term, yields have dropped substantially since October and far sooner than anticipated, which can pose a risk to investors with and over exposure to bonds relative to their risk profile.  Many have not experienced the volatility of bond markets seen in 2022, after a near 40-year bull market in the bond market due to declining interest rates.  As such, it is a good reminder of the potential volatility in this asset class, and the need for a diversified investment strategy.

 

2024 Stock Market Outlook by Jurrien Timmer, Director of Global Macro for Fidelity Management & Research Company Link to Article

While we may be closing in on the darkest days of the year, in the markets it feels practically like spring—with stocks and bonds making strong gains in recent weeks as investors have welcomed the likely end of the Fed’s long rate-hiking campaign.

 

1. The market is ending 2023 on a high note, after an impressive and broad-based rally in recent weeks
2. The Fed signaled in its most recent release that as many as 3 rate cuts could be on the horizon in 2024—news that has been welcomed by markets.
3. 2024 could see a continued broad-based bull market if, as expected, the Fed pivots, earnings advance, and the economy continues to avoid recession.

 

Risks to the outlook

 

There are two main risks to this outlook:

1. The Fed could have to walk back on the narrative of rate cuts.  Even if the Fed sticks the soft landing, pivoting to rate cuts too soon could threaten its progress on bringing core inflation towards target—by reigniting investors’ and triggering a loosening of financial conditions.  While giving back a few rate hikes makes sense, an over zealous pivot down the road seems like a bigger risk than a hard landing.
2. Secondly, the soft-landing narrative may already be priced into the market, leaving little room for significant further gains.  The S&P’s forward P/E ratio (meaning price divided by consensus earnings expectations) has gained 5.5 points since its low of 15.3 in October 2022.  It made those gains in anticipation of an earnings recovery, which is now happening.  If earnings do continue to grow from here, the impact on stock prices could be muted by falling P/E ratios.

 

When Earnings Zig, Prices Zag:

 Price/Earning ratios don’t necessarily move in unison and can often move inversely

 

Based on data for S&P 500 constituent companies. Forward P/E is stock price divided by consensus earnings estimates for the following 12 months. Weekly data. Source: FMRCo., Bloomberg.

 

MacroMemo - January 9 - 22, 2024 by Eric Lascelles Link to Article

 

Soft landing versus hard landing

 

The likelihood of an economic soft landing have increased. Avoiding a recession has always been conceivable, but the probability has lately gone up. RBC Economics have assigned a likelihood of 40% for a soft landing in the U.S., up from the prior 30%. Conversely, the likelihood of a hard landing – a recession – has fallen to 60%. The stock market and risk assets more generally are not ignorant of this shift, rallying enthusiastically in recent months.

 

Soft Landing - 40% Probability

1. Economy refusing to quit
2. Falling Inflation
3. Lower rates / easier financial conditions
4. Newly optimistic Federal Reserve - Less worried about inflation and more focused on growth
5. Positive confidence shock?

Hard Landing - 60% Probability

1. Aggressive monetary tightening cycle
2. Higher rates hit with a lag
3. Classic recession signals still remain
4. Business cycle is quite old / late cycle
5. international economies already weaker
6. Fiscal and consumer supports to fade
7. Softening economic data?

as at January 8, 2024 via RBC GAM

 

While less likely to align with the first hike in the cycle, the average time between the Federal Reserve's first rate cut and the onset of a recession aligns with Spring of 2024, which given the current set of economic conditions the U.S. experiencing is very well a possibility.

 

While reduced inflation may enable central banks to cut interest rates more quickly during economic weakness, rate cuts alone have not always been sufficient to prevent recessions. Further to that, advanced economies outside of the U.S., such as the Eurozone, U.K., and Canada, are already experiencing considerable economic stagnation or even decline.

 

Historical monetary cycles point to Spring 2024 recession 

 

NOTABLE NEWS

 

The top Democrat and Republican in the U.S. Congress have reached a deal to fund the government through the current fiscal year, but if they fail to pass it by Jan. 19, parts of the federal government will begin to shut down. Here is a guide to what would stay open and what would close, according to agency shutdown plans.

 

Reuters

 

Attacks on vessels by Iranian-backed Houthi militants in Yemen have disrupted international commerce on the shortest shipping route between Europe and Asia. The attacks, targeting a route that accounts for about 15% of the world's shipping traffic, have pushed several shipping companies to reroute their vessels.

Reuters

 

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Aurie Wicks, CA, CPA, CFP                            Bram Houghton, CFA, CFP

Wealth Advisor                                                  Wealth Advisor

(403) 835 – 4785                                              (403) 690 – 9376

aurie.wicks@cibc.com                                   bram.houghton@cibc.com

 

 

 

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