MARKET UPDATE – January 13^th – January 24^th, 2025

In a Nutshell: After a volatile start to 2025, markets stabilized and posted a strong recovery post inauguration, with the S&P 500 reaching all time highs.  After indicating they may be delayed, President Trump suggested that contingent Tariffs may be imposed on Canada and Mexico as early as February 1^st and oil prices weakened after as he also announces plans to boost U.S. production.

U.S. Labour Markets

Recent economic data reveals a rise in U.S. initial jobless claims, signaling potential labour market softening.  This week claims reached 223K, slightly above the 221K forecast, reflecting a marginally weaker labour market.  Last week, claims increased to 217K, exceeding both the forecasted 210K and the prior week's 203K.  The increases suggest more individuals are filing for unemployment, potentially indicating a slowdown in economic momentum.

 

 

U.S. Economy

U.S. consumer prices rose slightly more than expected in December, driven by higher energy costs.  The Consumer Price Index (CPI) rose by 0.4% in December, up from 0.3% in November which was a 2.9% increase annually, in line with expectations.  The data suggests inflation remains elevated, aligning with the Federal Reserve's projection for fewer interest rate cuts in the near term.

U.S. manufacturing output surged in December, driven in part by Boeing's recovery following a workers' strike.  Factory output increased by 0.6%, exceeding the forecasted 0.2%.  Output was flat year-over-year in December but fell at an annualized rate of 1.2% in Q4, following a 0.8% contraction in Q3.  This was a 9 month high showing significant improvement, though future growth may face headwinds due to potential tariffs.

U.S. retail sales rose in December, reflecting strong consumer demand and supporting the Federal Reserve's cautious stance on interest rate cuts.  Retail sales increased by 0.4%, following an upwardly revised 0.8% rise in November.  This was slightly below the forecasted rise which was driven by purchases of motor vehicles and a variety of other goods, underscoring robust consumer spending.  The data highlights resilient economic demand despite modest deviations from forecasts.

 

 

 

Canadian Economy

In December, Canadian consumer prices experienced a modest increase, influenced by a mid-month sales tax break that lowered costs for alcohol, restaurant meals, and children's clothing.  Annual Inflation dropped to 1.8% supported by a 0.4% decline in December, slightly below expectations and down from 1.9% in November.  The GST tax holiday played a key role in the easing of inflation and the monthly price contraction.

Canada's retail sales remained flat in November, influenced by mixed sector performance.  Lower sales were reported in supermarkets, grocery stores, alcohol outlets, and furniture shops, with these declines offset by auto sales.  Retail sales, which account for nearly 40% of consumer spending, are a key Gross Domestic Product (GDP) growth indicator.  Despite November's stagnation, consumer spending was a major driver of Canada’s economic growth in Q3.

President Donald Trump delayed imposing tariffs on Canada and Mexico as initially promised but suggested he might implement 25% duties on imports from both countries starting February 1, citing concerns over illegal immigration and fentanyl entering the U.S.  An internal memo set an April deadline for aides to provide the Trump Administration recommendation on tariffs, suggesting the possibility of more flexibility on that timeline.

While refraining from immediate tariff action, President Trump directed federal agencies to investigate persistent U.S. trade deficits and unfair trade practices.  The federal agencies will assess the economic and national security risks of large trade deficits and recommend measures, such as a global supplemental tariff, to address them.

 

 

Eurozone and UK Economy

The United Kingdom's unemployment rate rose to 4.4% for the three months ending in November, up from 4.3% in the prior quarter.  This increase, alongside slower labour market activity, has heightened expectations that the Bank of England (BoE) may reduce interest rates in February.

Inflation in the UK slowed unexpectedly to 2.5% in December, down from 2.6% in November, contrary to forecasts of no change.  However, inflation is expected to rise again in early 2025 due to energy prices, fast wage growth, and temporary fiscal stimulus.

UK Retail sales fell by 0.3% in December after a revised 0.1% gain in November, missing expectations of 0.4% growth.  Annual retail sales grew by 3.6%, below the forecasted 4.2%.

The data reflect ongoing challenges in the labour market, rising wage pressures, and weaker consumer spending, which could influence the BoE's policy decisions.

Eurozone headline inflation experienced a slight increase from 2.2% in November to 2.4% in December, while the core rate remained steady at 2.7%.  Services inflation saw a marginal rise though despite the uptick, analysts anticipate a significant decline in services inflation across the zone in 2025 due to the fact that when you exclude insurance, tourism and transport, Eurozone inflation has seen considerable decrease in inflation over the last two years.

 

 

Energy

Natural Gas storage saw a smaller decline than anticipated this month, implying weaker demand for natural gas.  While the smaller than expected decrease in natural gas storage could be seen as a positive sign for production, the potential implications for demand and prices cannot be overlooked.

Crude also saw a smaller than expected decrease in stockpiles, also suggesting weaker demand.  When compared to the previous week's decrease of 1.96 million barrels, this week's decline in inventories was also significantly less.  This suggests a slowing momentum in the demand for crude oil, which could potentially impact the price of petroleum products and subsequently, inflation.

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	1.2%	2.9%	3.7%	2.4%	2.1%	1.7%	1.2%
This Week	1.6%	1.7%	2.2%	1.7%	1.2%	-4.2%	1.0%

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

 

 

CIBC Economics: Quick Take:  US CPI (Dec) CIBC Economics by Ali Jaffery (Summarized version)

The December inflation report provided a positive surprise for Jay Powell, with core CPI rising by 0.23% month-over-month, slightly below expectations of 0.3%.  The three-month annualized core CPI fell to 3.3%.  headline inflation increased by 0.4% month-over-month, in line with forecasts, and rose to 2.9% year-over-year, while core inflation edged down to 3.2%.

The decrease in core inflation was mainly driven by softer prices for core goods, particularly used cars, while service inflation, including shelter costs, remained stable.  Although the report was encouraging, it doesn't alter the Federal Reserve's approach.  With the labour market and economic growth remaining strong, the Fed will continue monitoring inflation progress and await further insights into fiscal and trade policy.  Powell is expected to reinforce this stance in his upcoming remarks.

 

 

CIBC Economics: Quick Take:  Canadian CPI (Dec) by Andrew Grantham (Summarized version)

Canadian inflation decreased slightly in December, primarily due to a GST/HST tax holiday that began mid-month.  Prices dropped by 0.4% month-over-month, resulting in a 1.8% year-over-year inflation rate, which aligned with expectations.  Without the tax change, the year-over-year inflation rate would have been 2.3%.

The tax exemption impacted about 10% of the inflation basket, leading to price declines in areas like restaurants, alcohol, and toys.  The Bank of Canada's core inflation measures, CPI-trim and median, decelerated to 2.4% and 2.5% year-over-year, respectively.  Despite the influence of temporary factors, underlying price pressures seem to be stabilizing near 2%, and a 25 basis point interest rate cut from the Bank of Canada is anticipated.

 

 

Chart: U.S. Consumer Price Index (Yellow) tends to run hotter than PCE deflator (Blue)

 

The Federal Reserve prefers the Personal Consumption Expenditures (PCE) over the Consumer Price Index (CPI) to measure U.S. inflation.  While inflation in the U.S. remains above target, there is potential for it to ease in 2025, although it is likely to stay higher than in most other developed nations.  Currently, the U.S. PCE stands at 2.4% year-over-year, compared to 2.7% for CPI, and the core PCE is at 2.8%, versus 3.3% for core CPI.  These differences indicate that U.S. inflation isn't as far from the 2% target as it may appear, but it remains higher than in many other countries.

 

Chart: Economic surprises have dipped below zero

 

Recent economic data for both the U.S. and t he global economy has shifted from positive to slightly negative territory over the past few months. While this isn't a cause for concern, it indicates that economic data is no longer consistently outperforming expectations.  

The latest ISM Manufacturing report was relatively strong, but the overall trend is weaker.  Similarly, the Atlanta Federal Reserve's GDPNow model, which tracks U.S. GDP growth, has revised its forecast for the fourth quarter of 2024 down from a peak of 3.4% annualized growth to 2.4%, still respectable but less robust than previous projections. This follows growth rates of 3.0% in Q2 and 3.1% in Q3.  

As such, there may be greater capacity of the U.S. to cut rates than is currently being suggested in Bond Markets in 2025, though the headwinds relating to potential tariffs are still largely unknown.

 

 

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

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