Market Pulse - The week in review - Feb. 2nd 2024
Duncan Presant - Feb 06, 2024
As anticipated, the Federal Open Market Committee (FOMC) maintained the status quo on interest rates. They acknowledged the solid pace of economic activity of late, showing that the balance between employment and inflation targets is improving.
THIS WEEK’S RECAP:
▪ As anticipated, the Federal Open Market Committee (FOMC) maintained the status quo on interest rates. They acknowledged the solid pace of economic activity of late, showing that the balance between employment and inflation targets is improving. The Committee emphasized their reliance on incoming economic data and stated their intention to hold off on any rate decreases until there is unambiguous evidence that inflation is consistently moving towards the 2% target. They refrained from providing precise benchmarks for this assessment. The consensus is that interest rates are poised to decrease this year unless unforeseen circumstances arise; the timing, however, remains less clear.
▪ US rates enjoyed an impressive performance this week, pulling global yields along for the ride. In addition to the dovish tone delivered by Jerome Powell, the rates market took comfort in the US Treasury's decision to keep their issuance schedule unchanged for the quarter. The move lower in rates helped buoy equity markets, with the tech sector leading the charge, in part due to strong revenue growth from the likes of Amazon and Meta in Q4.
▪ The US economy added an impressive 353,000 new jobs in January, and the unemployment rate ticked down to 3.7%. Of some concern was an increase in average hourly earnings, with wages increase such a crucial factor in driving inflation. As earnings reports for the final quarter of 2023 hit the tape, a handful of major firms disclosed large scale job cuts, to name a few: UPS, Paypal, Enbridge and Wayfair. While a soft economic landing is likely, it is important to monitor for cracks in the foundation, of which labour stability is arguably the most critical component. The bottom line is the very strong employment backdrop may delay forthcoming rate cuts.
▪ The IMF (International Monetary Fund) has released its growth forecasts for the years 2024 and 2025, predicting a global increase in output of 3.2%, a slight uptick from the previous year's rate. Notably, the IMF projects that Canada's GDP will grow quite rapidly, ranking third among advanced economies, with an expected growth of 1.4% in 2024 and 2.4% in 2025. This is a bit more optimistic than the Bank of Canada's estimate for the current year, which is just 0.8%, although it matches the Bank's expectations for 2025.
▪ In Europe, economic growth is struggling, with the latest data for the fourth quarter showing stagnation. On a brighter note, inflation is on the decline, with the Core Harmonized Consumer Price Index (HICP) now sitting at 3.27%. This mix of sluggish growth and falling inflation may prompt the European Central Bank (ECB) to begin reducing interest rates shortly. Meanwhile, the Bank of England left their overnight rate unchanged sighting concerns over the slow pace at which inflation is adjusting to their already restrictive policy.
ON DECK FOR NEXT WEEK:
▪ An important barometer for the health of the US economy comes Monday in the form of the Senior Loan Officer Survey on Bank Lending. It is a quarterly report that serves to measure loan demand, and how accommodative or restrictive bank lending standards have been.
▪ In Canada, the latest employment data will be released Friday morning. It will be interesting to see whether the Canadian job market can keep pace with US employment gains. A diverging labour backdrop could lead the Bank of Canada to act on interest rates ahead of the Fed.
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