No Easy Path!

The month of September defied the expected seasonality of typically being a weak month of the year and both equity and fixed income asset classes witnessed positive performance for the month. The S&P 500 Index and the S&P TSX Index were in green by ~+4.25% and ~+4.92%; respectively, while the aggregate fixed income indices were up by ~+1.33% in the United States and ~+2.29% in Canada. The risk assets rallied in anticipation of the start of a policy rate cut cycle after a long pause on both sides of the border. The Central Banks did not disappoint investors as the Bank of Canada reduced the policy rate by 25 basis-points from +2.75% to +2.50% and the United States Federal Reserve also reduced the policy rate by 25 basis-points and brought the policy rate down from +4.50% to +4.25%.

The expectations of the start of the rate cut cycle had been building after the United States’ Federal Reserve chairman, Jerome Powell, had indicated at the annual Jackson Hole economic symposium, that downside risks to employment are rising and the shifting balance of risks may warrant adjusting the policy stance. The unemployment rate in Canada has been persistently on a rise and has increased from +6.6% at the start of the year to +7.1% during the month of August (reported in September). Relatively, the unemployment rate in the United States has not increased at a similar pace and has increased from +4.0% at the start of the year to +4.3% during August (reported in September) (See Figure 1). However, it is noteworthy that the crackdown on the immigrant workers in the United States has complicated the proper measurement of the unemployment rate. As immigrant workers drop out of the work force, they do not form part of the calculation of labour force, and this conceals the true weakness in labour market. During the press conference after the Federal Open Market Committee meeting on the 17^th  of September; Jerome Powell acknowledged that the headline unemployment number perhaps does not indicate the true extent of labour weakness and though the inflation has not yet reached the desired target of +2.0%; the balance of risks have shifted to warrant policy rate adjustment. The Federal Reserve chair also said there is no risk-free path for the bank’s next moves as inflation is still elevated.

Figure 1: Unemployment rate has been increasing steadily

Source: Bloomberg

We note that there is indeed ‘no easy path’ for the United States’ Federal Reserve as inflation and unemployment are not the only worries the country must face. Due to the US government shutdown, the Bureau of Labour Statistics does not have the manpower to collect data and provide estimates of several key economic releases that feed into forming views of the members on Federal Reserve’s board. These include important datapoints such as non-farm payrolls, initial jobless claims, and the consumer price index. The risk to the independence of Federal Reserve have been well discussed and risks spooking the fixed income investors at a time when yields are already high and the United States national debt is at an all time high of ~$37.8 trillion. Lisa Cook, a Fed board member, who has been targeted by the US President on accusations of mortgage fraud; has managed to get a stay on her firing until January. Stephen Miran, a Trump appointee to the Fed’s board after a member resigned, voted for a 50 basis points cut at the September meeting while the rest of members voted for 25 basis points. Investors are viewing the appointment of Stephen Miran on Fed’s board of governors as a step towards exerting greater influence of the White House on the US Federal Reserve’s decisions. Overall, the Federal Reserve appears to be facing challenges on many fronts.

Nevertheless, we think the Central Banks cutting policy rates in a slowing but still growing economy put together with still robust earnings expectations for the year 2026 continue to bode well for the risk assets performance in the foreseeable future. We also think developments around Federal Reserve losing its independence, flaring up of geo-political tensions, companies’ guidance for the 2026 outlook during the third quarter earnings season; and/or resurgence of trade wars are the risks to be monitored in an increasingly volatile world.

Source: Bloomberg, Bureau of Labor Statistics

Vipul Arora is a Portfolio Manager with Assante Capital Management Ltd. The opinions expressed are those of the author and not necessarily those of Assante Capital Management Ltd. Please contact him at 613-258-1997 or visit ofarrellwealth.com to discuss your particular circumstances prior to acting on the information above. Assante Capital Management Ltd. is a member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization. Insurance products and services are provided through Assante Estate and Insurance Services Inc