Note: A version of this article was published on Tker.co.
Stocks rallied last week, with the S&P 500 rising 2.5% to close at 4,719.19. The index is now up 22.9% year to date, up 31.9% from its October 12, 2022 closing low of 3,577.03, and down 1.6% from its January 3, 2022 record closing high of 4,796.56.
Inflation continues to dominate conversations about the markets and the economy.
But the nature of those conversations have shifted significantly over the past year. This evolution can be seen in how the Federal Reserve’s language has changed from meeting to meeting.
At the Fed’s December 2022 policy meeting, Chair Jerome Powell warned: “Inflation remains well above our longer-run goal of 2%. … It will take substantially more evidence to give confidence that inflation is on a sustained downward path.”
At the time, inflation rates had begun to come down from their mid-2022 highs — but confidence wasn’t particularly high that they would come down to comfortable levels in the near term. Everyone agreed interest rates would be hiked further in 2023. And many economists were convinced that the cost of defeating inflation was a recession.
Fast forward to present day after four more interest rate hikes. At their December 2023 meeting this past week, Powell acknowledged, “We’re seeing inflation making real progress.”
Impressively, the economy absorbed higher interest rates and realized lower inflation without having to go into recession. To get a sense of how surprising this was, check out: TKer’s 2023 chart of the year
As more and more people were able to go back to work, supply chains eased and supply gradually caught up with demand. This helped ease inflation, even as economic growth persisted — suggesting the goldilocks soft landing scenario that TKer described in January.
More recently, the massive tailwinds that have defined excess demand have faded significantly. Specifically, excess savings are nearing depletion, job openings are coming into balance with unemployment, and business investment orders have leveled off.
And while economic normalization has been good news for inflation, it also means demand is not as hot as it used to be.
The pandemic era economy has been an unusual one. The initial disruptions were unprecedented. With the unusually strong positive developments over time came unusually problematic challenges like inflation rates surging to levels the world hasn’t seen in 40 years.
And the pace and nature of the economic recovery has been almost unimaginable.
“I have always felt,” Fed Chair Jerome Powell said on December 13, “since the beginning, that there was a possibility, because of the unusual situation, that the economy could cool off in a way that enabled inflation to come down without the kind of large job losses that have often been associated with high inflation and tightening cycles. So far, that’s what we’re seeing.”
As things normalize, we can expect areas of strength to fade, which could present new challenges. But we should also expect new positives to emerge as unusual headwinds like high inflation dissipate.
There were a few notable data points and macroeconomic developments from last week to consider:
TheFed keeps rates unchanged, signals rate cuts. On Wednesday, the Federal Reserve kept monetary policy tight, leaving its target for the federal funds rate unchanged at a range of 5.25% to 5.5%.
From the Fed’s policy statement: “Recent indicators suggest that growth of economic activity has slowed from its strong pace in the third quarter. Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated.”
However, the Fed’s economic projections suggested that the central bank could cut rates three times in 2024.
That said, inflation still has to cool more and stay cool for a little while before the central bank is comfortable with price stability. So even though there may not be more rate hikes and rate cuts may be around the corner, rates are likely to be kept high for a while.
Inflation cools. According to BLS data released Tuesday, the Consumer Price Index (CPI) in November was up 3.1% from a year ago. This was down from the 3.2% rate in October. Adjusted for food and energy prices, core CPI was up 4.0%, the lowest since September 2021.
On a month-over-month basis, CPI was up just 0.1% as energy prices fell 2.3%. Core CPI was up a modest 0.3% as good prices fell and services prices rose.
If you annualize the three-month trend in the monthly figures, CPI was rising at a 2.2% rate and core CPI was climbing at a 3.4% rate.
While many broad measures of inflation continue to hover above the Fed’s target rate of 2%, they are way down from peak levels in the summer of 2022. And the trend suggests they could continue to move lower.
Inflation expectations improve. From the New York Fed’s November Survey of Consumer Expectations: “Median one-year ahead inflation expectations declined by 0.2 percentage point in November to 3.4%. This is the lowest reading since April 2021. Median inflation expectations at the three- and five-year ahead horizons remained unchanged at 3.0% and 2.7%, respectively.”
Gas prices continue to fall. From AAA: “According to new data from the Energy Information Administration (EIA), gas demand increased from 8.47 to 8.86 million b/d last week. Meanwhile, total domestic gasoline stocks increased slightly to 224 million bbl. Typically, higher demand would push pump prices higher, but lower oil prices have pushed prices lower. If oil prices remain low, drivers can expect pump prices to do the same during the holiday season. Today’s national average of $3.10 is 25 cents less than a month ago and 11 cents less than a year ago.”
Mortgage rates continue to decline. According to Freddie Mac, the average 30-year fixed-rate mortgage fell to 6.95%. From Freddie Mac: “Potential homebuyers received welcome news this week as mortgage rates dropped below seven percent for the first time since August. Given inflation continues to decelerate and the Federal Reserve Board’s current expectations that they will lower the federal funds target rate next year, there will likely be a gradual thawing of the housing market in the new year.”
Rent is coming down. From Redfin: “The median U.S. asking rent declined 2.1% year over year in November to $1,967 — the biggest annual drop since February 2020 — and fell 0.6% from October.”
Consumers are spending. Retail sales increased 0.3% in November to a record $705.7 billion.
Categories leading growth included restaurants and bars, sporting and hobby, online, and furniture. Gas stations, department stores, and electronics saw declines.
Card data suggest consumer spending is holding up in December. From BofA: “Total card spending per HH was up 1.3% y/y in the week ending Dec 9, according to BAC aggregated credit and debit card data. Spending on holiday items fell 1.5% y/y in the week ending Dec 9. … However, in the 16 days since Thanksgiving, spending on holiday items was up 0.8% compared to the same period last year.”
Unemployment claims fall. Initial claims for unemployment benefits fell to 202,000 during the week ending December 9, down from 220,000 the week prior. While this is up from a September 2022 low of 182,000, it continues to trend at levels associated with economic growth.
This comes as the Federal Reserve continues to employ very tight monetary policy in its ongoing effort to bring inflation down. While it’s true that the Fed has taken a less hawkish tone in 2023 than in 2022, and that most economists agree that the final interest rate hike of the cycle has either already happened or is near, inflation still has to cool more and stay cool for a little while before the central bank is comfortable with price stability.
The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.
The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.
CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.
This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.
While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.
Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.
The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.
This report by The Canadian Press was first published Nov. 7, 2024.
Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.
As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.
Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.
A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.
More than 77 per cent of Canadian exports go to the U.S.
Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.
“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.
“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”
American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.
It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.
“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.
“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”
A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.
Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.
“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.
Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.
With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”
“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.
“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”
This report by The Canadian Press was first published Nov. 6, 2024.
OTTAWA – Statistics Canada says the country’s merchandise trade deficit narrowed to $1.3 billion in September as imports fell more than exports.
The result compared with a revised deficit of $1.5 billion for August. The initial estimate for August released last month had shown a deficit of $1.1 billion.
Statistics Canada says the results for September came as total exports edged down 0.1 per cent to $63.9 billion.
Exports of metal and non-metallic mineral products fell 5.4 per cent as exports of unwrought gold, silver, and platinum group metals, and their alloys, decreased 15.4 per cent. Exports of energy products dropped 2.6 per cent as lower prices weighed on crude oil exports.
Meanwhile, imports for September fell 0.4 per cent to $65.1 billion as imports of metal and non-metallic mineral products dropped 12.7 per cent.
In volume terms, total exports rose 1.4 per cent in September while total imports were essentially unchanged in September.
This report by The Canadian Press was first published Nov. 5, 2024.
