MARKET UPDATE – december 9^th – december 20^th

In a Nutshell: A volatile two weeks for equity markets as mixed economic was digested by investors.  Markets saw a sharp decline on Wednesday on the back the U.S. Federal Reserve meeting as policy makers adjusted their rate cut expectations for 2025 significantly.

U.S. Labour Markets

The number of Americans filing new applications for jobless benefits was flat over the two weeks with a slight spike last week.  Initial claims for state unemployment benefits increased 17,000 to a seasonally adjusted 242,000 above a forecasted 220,000 last week but dropped back to 220,000 this week below analyst expectations of 229,000.  Last weeks’ bump is likely a result of the Thanksgiving holiday and the U.S. labour market continuing to remain robust, which could lead to consumer spending and economic strength into the new year.

 

U.S. Economy

The U.S. Federal Reserve cut interest rates on Wednesday by 0.25% and signaled it will slow the pace of rate cuts.  The Federal Reserve (FED) also changed trajectory for 2025 projecting that they will make just two 0.25% cuts by year end.  That is 0.50% less in policy easing next year than officials anticipated as of September.

U.S. consumer prices increased slightly on an annualized basis in November.  The Consumer Price Index (CPI) rose by 2.70% last month, accelerating slightly from 2.60% in October.  Despite persistently high inflation, the encouraging news was that rents, one of the stickier components of inflation, rose at the slowest pace in nearly three and a half years.

U.S. Retail sales jumped 0.7% last month, above analyst expectations of 0.50% and annualized increase of 3.80% through November.  Labour market resilience, characterized by historically low layoffs and strong wage growth, is underpinning consumer spending.

The U.S. Manufacturing Purchase Mangers’ Index (PMI) dipped, indicating a contraction in the manufacturing sector.  The latest figures show an actual reading of 48.30 which not only indicates a contraction but also falls short of the forecasted figure of 49.40.

Services on the other hand, showed continued strength with the PMI index coming in at 58.50, a robust uptick that surpassed both the forecast of 55.70 and previous figures.  The Services sector makes up 2 thirds of the U.S. Economy.

 

 

Canadian Economy

Last week, The Bank of Canada reduced its main interest rate by 0.50%.  This decision marks the second consecutive 0.50% cut and the fifth consecutive reduction in the benchmark interest rate, which stood at 5.00% at the beginning of 2024.

Canada's annual inflation rate unexpectedly dropped by a tick to 1.90% in November, driven by a broad-based slowdown in prices, while the CPI was unchanged on a monthly basis.  Analysts had forecast that inflation would hold steady at the 2.00% rate recorded in October and the consumer price index would rise 0.10% month over month.

Canada's Finance Minister Chrystia Freeland resigned on Monday after clashing with Prime Minister Justin Trudeau on issues including how to handle possible U.S. tariffs, dealing another blow to an already unpopular government.

 

Eurozone and UK Economy

British inflation reached an eight-month high in November, with consumer prices increasing by an annual 2.60%, up from 2.30% in October.  This is the highest inflation rate since March, marking a continuous monthly rise in inflation and highlighting persistent price pressures within the UK economy.

The UK economy contracted again in October, pointing to further interest rate cuts by the Bank of England in 2025. Data showed that the UK economy contracted by 0.10% in October, matching the prior month, resulting in annual growth rate of 1.30%. This was far weaker than October’s annual increase of 1.60% and below analyst forecasts of a rise of 0.10%.

Europe's labour market softened in the third quarter, pointing to a further decline in inflation pressures that could justify more interest rate cuts.  The rise in euro zone labour costs slowed to 4.60% in the third quarter from 5.20% three months earlier while the jobs vacancy rate slipped to 2.50% from 2.60%.  A tight labour market is the primary reason for the European Central Bank’s cautious rate cutting approach.

 

Energy

A smaller-than-expected decrease in U.S. crude oil inventories has been observed, with a drop of 0.934 million barrels, compared to the forecasted decline of 1.6 million barrels.  The report also showed a slower pace of inventory depletion compared to the previous week.  Overall, the report indicates a potential slowdown in crude oil demand, which could impact prices.  The Energy Information Administration’s (EIA) inventory data is crucial for gauging market conditions, as it influences oil prices and inflation.

The latest report shows a significant drop in natural gas storage, with a decrease of 190 billion cubic feet in the past week, surpassing both the forecasted decline of 175 billion and the previous week's 30 billion.  This larger-than-expected reduction indicates stronger demand for natural gas, with the drop being significantly more than the prior week and a notable surge in natural gas consumption.

 

Reuters Market Updates http://www.reuters.com

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

 

 

Market Data	S&P/TSX	S&P 500	DOW	NASDAQ	STOXX EU	WTI	GOLD
Last Week	-1.6%	-0.6%	-1.8%	0.3%	-0.5%	6.1%	0.6%
This Week	-2.7%	-2.0%	-2.3%	-1.8%	-0.03	-2.4%	-1.3%

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

 

 

 

 

CIBC Economics:  Quick Take:  FOMC Announcement Summary of report by Ali Jaffery

The Federal Reserve reduced the fed funds rate by a 0.25% as expected, though there was one dissent from Hammack, who favored a pause.  The Fed's statement showed a more cautious stance on further rate cuts, signaling the possibility of pauses.

The key update came in the December projections, with the median forecast now calling for two rate cuts in both 2025 and 2026, and one cut in 2027.  This is a reduction from the previous projection, which had four cuts in 2025.  The Fed's median estimate for the neutral rate also moved up to 3.00% from 2.90%.

Core inflation expectations were revised upward, indicating that underlying inflation will remain sticky for the next two years.  Overall, while rate cuts are expected, the pace will be slower than initially anticipated. Fed officials are divided on the appropriate neutral rate, and with economic uncertainties and upcoming administration policies, the Fed is adopting a cautious approach.  Further details are expected from Powell’s upcoming press conference, but more cautious forward guidance is anticipated.

 

 

CIBC Economics: Quick Take:  Bank of Canada Rate Decision Summary of report by Avery Shenfeld

The Bank of Canada cut its overnight rate by 50 basis points to 3.25%, aligning with expectations for two successive rate cuts.  This move follows weaker-than-expected economic growth in the second half of the year, rising unemployment, and slower population growth.

The Bank's decision also reflects a cautious outlook, as the overnight rate now sits at the high end of the neutral rate range (2.25% to 3.25%).  While the Bank is signaling it may shift to smaller, quarter-point cuts moving forward, further rate cuts to 2.25% by mid-2025 are expected unless there is significant fiscal stimulus.

The Bank will continue to assess temporary measures, such as the GST holiday and one-time cheques, but is focusing on underlying economic conditions.  The press conference is expected to provide more insight into the potential impact of U.S. tariffs and fiscal policy changes.
 

 

 

MacroMemo - December 17, 2024 – January 6, 2025 by Eric Lascelles Link to Article

 

Key Themes for 2025

Sustained economic growth

Economic growth is expected to continue in 2025 across developed countries, marking a shift after years of recession fears.  This outlook is based on the fading of economic challenges, such as central banks cutting rates and the persistence of growth despite adversity.  U.S. growth has been particularly strong, supported by a resilient housing market, consumer spending, and capital expenditures driven by the AI boom and falling interest rates.

RBC GAM GDP forecast shows U.S. still ahead of other developed markets

 

While international trade may offer less support due to potential tariff increases, moderate U.S. growth is still expected. Other developed economies, while lagging behind the U.S., are likely to see moderate acceleration, aided by aggressive rate cuts, which should unlock growth due to their higher sensitivity to rates.

 

Tricky Inflation

Inflation has improved significantly over the past two years, and further improvement is expected in 2025, but any gains could be modest.  In the U.S., inflation has slowed recently, but risks remain that it may not fall much further in 2025.  November's CPI data showed a 0.3% month-over-month increase in both headline and core inflation, keeping annual inflation rates at 2.7% for headline and 3.3% for core.  While gasoline prices have contributed, food and shelter costs also play a role, and services inflation remains volatile.

 

 

Costs rising across many categories – especially Shelter and Services ex shelter

 

Fiscal stimulus and tariffs may push U.S. inflation higher than initially expected, prompting a revision of the 2025 forecast from 2.30% to 2.60%.  The Fed's slower rate cuts may help temper this.  Globally, inflation is expected to improve modestly but remain slightly above the general 2.00% target.  Overall, inflation should decline slightly but at a slower pace than previously anticipated.

 

 

Choppy Canada

The Canadian economy has been weak recently, with only 1% annualized GDP growth in Q3 and a rise in unemployment from 4.8% in 2022 to 6.8%.  Three main factors are contributing to this slowdown: immigration, productivity, and tariffs.

1. Immigration and Productivity: High immigration in recent years has added to the workforce but slowed productivity growth.   The Canadian government’s recent policy changes to reduce immigration could help boost productivity over time, though the recovery in productivity may take longer than the decline in immigration, potentially leading to a period of minimal or negative growth.
2. Tariffs: Tariffs, particularly from the U.S., pose a significant threat to Canada's growth.  The country may be increasingly targeted by U.S. tariffs, especially if a 25% tariff were imposed, which could trigger a recession.  Even lesser tariffs would harm Canada's economy, particularly its energy, vehicle, and manufacturing sectors, which are key export drivers to the U.S. Tariffs could have a significant regional impact, especially in provinces like Alberta, New Brunswick, Saskatchewan, and Ontario, which are highly dependent on U.S. demand.

Overall, while productivity may eventually improve, Canada faces several risks, including potential tariffs and bumpy economic activity in the near term.