Stock Market - Canada - October 4, 2024

Equity markets scratched out modest gains this week, with early geopolitical-related weakness offset by a strong U.S. payrolls report. The S&P 500 rose 0.2%, with energy leading the pack, while consumer discretionary and staples lagged. The TSX added 0.9%, with strength in energy pulling more weight north of the border.

Here’s a big question at this stage of the cycle: Are rate cuts coming soon enough and fast enough to cushion the economy from the impact of past tightening, thereby preventing a textbook recession? Our forecast says yes, and the market agrees. The complication in this dynamic is that policy changes take time to filter through the system, and it’s therefore very easy for a central bank to get caught in the wrong direction. If a central bank, which has policy set well in restrictive territory, waits to see a full break in the (mostly backward-looking) economic data before easing, then it’s usually too late. With that in mind, here is what the (forward-looking) market is telling us right now about the path of the economy:

Rate cuts should continue in the near term, but expectations were scaled back this week in the wake of a strong U.S. September payrolls report. A steady stream of 25 bp Federal Reserve rate cuts is priced in through the spring, with slightly more aggressive pricing in Canada. It will be worth monitoring how expectations play out for the period beyond next spring (i.e., do rates really take a straight line back to neutral?), especially if the economy reacts well to early rate cuts.

Inflation expectations remain well contained, and that’s good news. We know that policymakers have shifted their risk-management bias at least toward balance and away from inflation concerns, and for good reason with core price trends fading toward 2%.

Forward-looking inflation expectations are similarly well-behaved despite the Fed’s 50 bp tee shot. Implied 5-year inflation expectations have edged up in recent weeks, but are still sitting at just 2.1%, or the very low end of the range seen since mid-2022. Five-year forward expectations are holding in the middle of that range at 2.3%. In a nutshell, the market isn’t too worried about another flare up at this stage.

Equity investors are starting to build in firmer growth ahead. Indeed, the real beneficiaries of the break in inflation and start to the easing cycle have not been previously high-flying technology and telecom services names. Rather, the strength has been in more traditionally cyclical sectors like industrial, materials, financials and consumer discretionary. Rate-sensitives like utilities have, of course, feasted as well. In fact, the tech-heavy Nasdaq has now lagged both the S&P 500 and the TSX over the past three months. At the same time, small cap stocks have outperformed their largecap counterparts by a wide margin over the past three months. We’d read all of this as a good omen for the underlying economy. Importantly, it’s far from the action you’d see when central banks are scrambling to cut rates, too late, at the onset of recession.

Source: 满地可银行

1. Population and Income - https://www.advisor.ca/economy/economic-indicators/canada-tops-california-in-people-but-not-profits/
2. GDP - https://thedeepdive.ca/canadas-economy-falls-behind-as-us-surges-ahead/
3. Oil - https://www.ogj.com/drilling-production/article/55233360/canada-rig-count-climbs-while-us-count-dips
4. Natural gas - https://edmontonjournal.com/business/enbridge-to-build-new-oil-and-natural-gas-pipelines-in-gulf-of-mexico
5. Lithium - https://finance.yahoo.com/news/first-lithium-minerals-corp-completes-201500938.html First Lithium Limited (ASX:FL1) First Lithium Minerals Corp.
6. Forestry - Forest Products – October 2024 - https://www.dhirubhai.net/pulse/forest-product-sector-october-2024-paul-young-vntrc/
7. Mining - https://www.canadianminingjournal.com/news/mining-industry-needs-us2-1-trillion-in-new-investments-by-2050-bloombergnef/ or https://www.agenzianova.com/en/news/Saudi-Arabia-Looks-to-Invest-in-Canada%27s-Mining-Sector/
8. Productivity - https://www.manitobacooperator.ca/news-opinion/news/canadas-productivity-decline-to-hit-farmers/
9. PMI - https://www.reuters.com/world/americas/canadas-ivey-pmi-shows-activity-expanding-september-2024-10-04/
10. ESG - https://www.sustainableviews.com/in-brief-eu-to-agree-on-additional-chinese-ev-tariffs-canada-to-review-chemicals-policy-576d2f83/

Paul is a former IBM Customer Success Manager that has deployed over 300 data and AI solutions across industry and geographies for the past 8 years. Paul is a Financial Planning, Analysis, and Reporting SME working with data including integration of macro and micro indicators as part of the integrated business planning and reporting cycle.

[email protected]

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