A Positive Start

In January, the North American equity markets saw positive momentum with the S&P-500 advancing ~+1.7% and the S&P-TSX by ~+0.5%. This increase stems from the market’s expectations that the Central Banks will pivot to cure rates sometime this year.  In contrast, fixed income markets lost some of the gains made over the last couple of months as investors scaled back on their optimism.  2–10-year bond yields advanced for most of the month on both sides of the border. Source: Bloomberg

The Bank of Canada and the US Federal Reserve held their policy meetings this month and decided to hold interest rates at current levels. Both banks acknowledged that they are determining at which point a reduction in interest rates maybe be feasible, however, as of now, it remains too early to start the easing cycle.  Investors’ expectations that rate cuts would start as early as March received push back from the US Fed chair, Jerome Powell, who stated that he does yet not think the Central Bank will have enough confidence on the inflation rate trajectory to start the rate cuts that soon. Investor skepticism was evident on the decreased probability of interest rates (implied by the Fed Funds Futures data) by March this year in the range of 5.25%-5.50% increased to ~85.0% as of 5th February from ~11.5% as at the end of December 2023 (See Figure 1).

Figure 1. Target rate probabilities for March 2024

Source: The CME Group

Better-than-expected economic data also corroborated the Central Bank’s guidance that the economy remains resilient enough to conclude the inflationary pressures.

Stats to note:

• Inflation in Canada was in line with the expected +3.4% in December (reported in January), however, advanced from +3.1% in November (reported in December).

• Inflation in the US advanced to +3.4% in December (reported in January) from +3.1% in November (reported in December) and was ahead of expected +3.2%.

• The unemployment rate in the Canada remained flat at +5.8 % in January - against expectations of an increase to +5.9%. 

• The unemployment rate in the US remained flat at +3.7% in January - against expectations of an increase to +3.8%.  

Source: Bloomberg

While better-than-expected economic data is reducing the extent of rate cuts expected by markets, it is also improving the sentiment that the economy may avoid a severe economic contraction that can be typical after an interest rate hike cycle. Overall, we maintain our expectations of a constructive outcome for the year while remaining aware of the gap between markets expectations and the Central Banks’ actions. We are also considering that geopolitical tensions and elections across several key geographies across the globe could be a source of volatility.