The Week in Review

Weekly Market Recap: U.S. and Canada

We saw mixed performance in the markets this week, influenced by several key factors. First off, economic data from the U.S. came in stronger than expected and we saw the Nasdaq underperform, with rising bond yields creating pressure. On the other hand, energy and resource sectors provided a boost to the Canadian market, as rising oil prices and strong demand for commodities supported gains in the TSX. Also, new geopolitical concerns in the Middle East continued to inject volatility into the markets, with investors seeking safe-haven assets.

In terms of returns, the TSX led the way, climbing 1.44% for the week. The Dow Jones posted a solid 0.96% gain, while the S&P 500 followed closely with an increase of 0.85%. However, the Nasdaq 100 lagged, managing only a modest 0.26% rise.

S&P 500 Returns | Week At-a-Glance

TSX Returns | Week At-a-Glance

Major Economic Stories This Week

The main story of this week’s economic news was the release of Canada’s latest inflation numbers. I’ll also share some US data, and then provide you with my thoughts on what it all means.

Here’s how it all played out.

Canada Inflation Falls to 1.6% in September

Canadian inflation dropped to 1.6% in September, marking the lowest rate since February 2021 and falling below expectations.

This decline, which was driven primarily by falling gasoline prices, adds momentum to the belief that the Bank of Canada will probably continue its rate-cutting cycle. Shelter inflation eased slightly, though food costs saw a small uptick. 

• Inflation rate: 1.6% vs 2% in August

• Gasoline prices: -10.7% vs -5.1% in August

• Shelter inflation: 5% vs 5.3% in August

• Food inflation: 2.8% vs 2.7% in August

US Retail Sales Jump 0.4% in September

Retail sales in the US grew 0.4% in September, beating market forecasts and showing strength in categories like clothing and health stores.

What jumped out at me is that sales in electronic stores fell sharply, and auto sales stagnated. (More on this below) Core retail sales, excluding key volatile categories, rose by 0.7%, the largest increase in three months, a sign of solid consumer spending.

• Monthly retail sales: +0.4% vs +0.1% in August

• Miscellaneous store sales: +4%

• Electronics store sales: -3.3%

• Core retail sales: +0.7%

US Building Permits Fall 2.9% in September

Building permits in the US dropped 2.9% in September, missing market expectations, largely due to a sharp decline in approvals for multi-unit buildings.

Total seasonably adjusted permits were reported at an annual rate of 1.428 million in September. This overall decline in permits could indicate softer demand in the housing market moving forward.

• Building permits: -2.9%.

• Permits came in below market expectations of 1.46 million.

• Buildings with five or more units tumbled 10.8%.

• West permits up +10.9%.

Key Takeaways From this Week’s Economic News

Canada’s Inflation Slowdown and Likely Rate Cuts 

With inflation dropping to 1.6% in Canada, my guess is that the Bank of Canada continues with rate cuts. The fact that inflation is now below the 2% target for two months in a row makes rate cuts seem inevitable, especially with gas prices crashing and transportation costs dipping into negative territory. This should help ease some of the financial pressure on households, though rising food prices are still an issue. If the bank does cut rates, we could see a bit of a boost in consumer spending, which could breathe some life into the economy. But it’s a balancing act – cut too fast, and we could end up overheating things.
[Watch My Inflation Report on YouTube]

US Retail Sales Outperform Expectations 

US retail sales came in stronger than expected, and honestly, this feels like one of those moments where the economy is shrugging off the gloom. With big jumps in categories like clothing and health stores, it’s clear that consumers are still spending despite higher interest rates. I do note that electronics sales fell, a possible hint that consumers are cutting back on discretionary purchases. But, the strong core retail sales number tells me the economy is holding up pretty well. I don’t expect it, but I also wouldn’t be shocked if the Fed uses this as an excuse to keep rates steady for a while. It’s a good sign that people aren’t closing their wallets just yet, even if some sectors are struggling.

US Housing Market Faces Some Pressure 

The drop in US building permits, especially for multi-unit housing, makes it feel like the housing market is hitting a bit of a wall. Overall, fewer permits are a sign that developers might be nervous about demand or the cost of borrowing. Single-family homes saw a small uptick, but if we keep seeing declines in new building projects, the housing market could tighten even more.

THIS WEEK’S POLL QUESTION
(Results in Next Week’s Newsletter)

Comments of the Week

🏦 Back to Normal

They're a major Canadian bank with massive history. This strikes me as a blip overall. Not sure I’ll keep my shares, but solid investment for most Canadians looking for income etc - maverick_83a

Unless I'm mistaken, the asset cap is only on U.S. operations, which is the smaller part of TD's business. I think this fiasco will mostly blow over during the next couple years, but not sure what will constitute "normal" at that point but I don't expect further blowback.

In the end, most customers and prospective customers of the bank likely don't/won't know the money laundering even happened so I don't see them losing much business over this. TBD tho'... - callawayguy

🔨 Still Struggling

They stopped td from expanding into the US so i think that will be crippling long term. - premierdentsolutions

Dug themselves into too deep,a hole. They will emerge, just not soon. Too many regulatory problems. - rcbent

THE ECONOMY
Canada’s Inflation Falls to 1.6%, Raising Odds of Larger Rate Cut

• Canada’s inflation rate dropped to 1.6% in September, below expectations.

• Markets now see a 67% chance of a 50-basis-point rate cut on October 23.

• Core inflation held steady, driven by rising shelter and grocery costs.

• Concerns about economic slowdown increase as inflation undershoots target.

As noted above, Canada's inflation rate eased to 1.6% in September, the lowest level since early 2021, largely due to a sharp decline in gasoline prices. This slowdown was more than economists had expected, reinforcing the likelihood of a 50-basis-point interest rate cut by the Bank of Canada at its upcoming policy meeting next week, on October 23 to be exact. Before this report, odds of a half-point cut were 50/50, but they’ve now jumped to 67%.

We’re seeing headline inflation ease, but core inflation—excluding volatile items like fuel—remained steady at 2.2%, showing that underlying price pressures are still there, particularly in housing and groceries. With this mix of data, the central bank now faces the challenge of preventing inflation from falling too far while also addressing concerns about an economic slowdown.

Regional Inflation Shows Varied Trends

Inflation rates varied across Canadian provinces and cities, with Toronto and Ottawa both seeing 2.4% inflation, while provinces like Newfoundland and Labrador (0.7%) and Manitoba (0.8%) seeing much lower rates. Despite the national inflation cooling, costs related to shelter and food are still high, especially in urban centers, and that continues to put pressure on household budgets.

The Bank of Canada has already cut rates by 25 basis points three times this year, bringing the current rate to 4.25%. Governor Tiff Macklem has hinted at more aggressive cuts if inflation and growth are still below expectations, and this latest data suggests that larger rate cuts may be necessary to stabilize the economy.

What Comes Next?

With inflation now below the central bank’s 2% target, Tiff and his team are likely to prioritize boosting economic growth. Financial markets are already pricing in additional rate cuts by the end of the year, and many believe that if inflation remains subdued, the Bank of Canada could continue cutting into 2025.

On the housing front, the easing inflation may offer relief to those with variable-rate mortgages, but there’s also concern that lower borrowing costs could fuel another surge in home prices. Either way, the Bank of Canada’s next moves will be crucial as it tries to "stick the landing" and balance the risks of both economic slowdown and inflation that’s too low.

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 What Makes a Company a Quality Company?

There are different approaches to identifying Quality, with associated pros and cons. Warren Buffett, prefers to look for companies with “competitive moats” and companies which exhibit earnings power in excess of its peers.

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When Does Quality Tend to Perform Well, and When May It Lag?

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Overall, the historical track record of MSCI’s Quality Indexes is strong³, however investors should consider how different sector and security exposures may affect their overall portfolio exposures.

As investor education has continued to advance around the potential benefits of disciplined factor investing, we can see why investors are increasingly drawn to Quality ETFs as a tool in the overall portfolio toolkit. 

³ For a high level overview of Quality performance, see the MSCI report on Quality, Quality-brochure.pdf (msci.com), showing a higher expected return, with lower risk, on an index of World Quality equities.

Disclaimer
This content is sponsored by BMO Exchange Traded Funds. This content has been prepared by Beavis Wealth and represents its assessment at the time of publication. Beavis Wealth is compensated under this arrangement by BMO Exchange Traded Funds.

Please visit http://www.bmoetfs.com/ to learn more.

Click here for the full disclaimer.

HOUSING
September 2024 Housing: Starts Up, Trends Down

• Housing starts trend decreased 1.3% from August.

• Monthly housing starts rose by 5% compared to August.

• Year-to-date starts are 2% higher than in 2023.

• Regional disparities show growth in some provinces, while Ontario and B.C. see declines.

In September, the six-month trend in housing starts fell slightly, dropping 1.3% from August’s levels, reaching 243,759 units. However, on a monthly basis, housing starts actually increased by 5%, with 223,808 units started in September, according to the Canada Mortgage and Housing Corporation (CMHC). It’s nice to see some growth, especially since housing supply has been a big concern lately, but I can’t help but wonder if this increase will be enough to make a dent in the affordability issues that so many people are facing in Canada’s cities. Count me in as skeptical.

Urban Growth, Regional Disparities

Year-to-date, there’s been a modest 2% increase in actual housing starts in urban areas, with 168,897 units started between January and September. CMHC’s Deputy Chief Economist, Kevin Hughes, pointed out that this growth is largely happening in Alberta, Quebec, and the Atlantic provinces, driven by both multi-unit and single-detached housing starts.

But on the other hand, Ontario and British Columbia—two provinces where housing is already notoriously expensive—are seeing declines.

If you’re someone who keeps an eye on housing trends, you might wonder how much longer it will take before we see any real improvement in housing supply in those areas. I personally know, as I’m sure most of our readers do,  a number of people who are feeling stuck, either unable to buy or facing rising rents because of this shortage.

Why This Matters to Homebuyers

Urban housing starts rose 6% in September, with a significant focus on multi-unit developments (163,400 units). Rural areas also saw some activity, with 13,806 starts. Montreal stands out with a 15% increase year-to-date, which is good news for a city that struggled with low new home construction last year. But on the flip side, Vancouver and Toronto are both down—by 19% and 20%, respectively—after record highs in 2023.

It’s a reality check that even with some positive trends, the housing crisis is far from over. I feel like many people, myself included, are hoping for a real shift—more supply, more affordability—but the numbers show we’ve still got a long way to go.

PERSONAL FINANCE
Income Inequality in Canada Hits Record High

• The income gap between the richest and poorest has hit a record high.

• The top 20% of earners have seen significant gains due to investments.

• Lower and middle-income Canadians face challenges keeping pace with wealth accumulation.

• Political responses highlight different approaches to addressing inequality.

Canada is experiencing its highest level of income inequality since records began in 1999, according to new data from Statistics Canada. In the second quarter of 2024, the gap in disposable income between the wealthiest two-fifths of Canadians and the bottom two-fifths grew to 47 percentage points. This rise was driven largely by investment gains among the top 20% of income earners, thanks to high interest rates boosting returns on savings and investments.

While this may seem like a financial windfall for those with the resources to invest, it highlights a troubling divide. Many lower-income Canadians, who typically have fewer savings or investments, have been unable to benefit from these high returns.

Who’s Benefiting—and Who Isn’t

The data paints a clear picture: the wealthiest Canadians hold a disproportionately large share of the country’s wealth. The top 20% of income earners now hold more than two-thirds of Canada’s wealth, with an average of $3.4 million per household. In contrast, the bottom 40% of Canadians account for just 2.8% of the country’s wealth. The middle 60% of Canadians have also felt the squeeze, with a decline in their share of disposable income as the wealth gap widens.

I’m fortunate that I feel financially secure, but it’s hard not to feel a bit discouraged hearing these numbers, especially knowing that for many people, everyday costs are rising faster than incomes. The slight wage increases for the lowest 20% are a small consolation in the face of such stark disparities in wealth.

Political Reactions to Income Inequality

As you would probably expect, this growing inequality has sparked different reactions from Canadian leaders. Finance Minister Chrystia Freeland pointed to government policies, such as childcare and dental care programs, as part of the effort to support middle- and lower-income Canadians.

On the other hand, Conservative Leader Pierre Poilievre criticized the Liberal government, blaming their policies for inflating the wealth of the rich while making life more expensive for everyone else.

He attributes the widening divide to what he described as "money printing" that has inflated the assets of the wealthy.

Looking at it from both sides, it’s clear there’s no easy solution. But for a lot of Canadians, (far too many) the day-to-day reality of rising costs and stagnant wealth growth makes it feel like we’re stuck watching this gap grow wider and wider.

LITIGATION
Tobacco Companies to Pay $32.5B in Landmark Canadian Settlement

• Tobacco companies will pay $32.5 billion to settle legal claims in Canada.

• $24.8 billion will go to provinces and territories to cover healthcare costs.

• Quebec class-action members will receive $4.25 billion, with individuals eligible for up to $60,000.

• The settlement closes a decades-long legal battle over tobacco-related health costs.

In one of Canada’s largest legal settlements, three major tobacco companies—JTI-Macdonald Corp., Rothmans, Benson & Hedges Inc., and Imperial Tobacco Canada Ltd.—will pay $32.5 billion to settle claims related to health care costs and the impact of tobacco use. This includes a $4.25 billion payout to members of two Quebec class-action lawsuits and $24.8 billion to Canadian provinces and territories that sought to recoup healthcare expenses caused by tobacco-related illnesses.

For more than 25 years, these legal proceedings have dragged on, and now, finally, there’s a resolution in sight.

A Battle for Corporate Responsibility

The heart of this settlement lies in corporate responsibility—or the lack thereof—when it comes to selling a product known to cause harm. The 2015 Quebec ruling that led to Thursday’s settlement determined that these companies did not properly warn customers about the risks of smoking.

Bruce Johnston, a lawyer who represented the Quebec class-action plaintiffs, called it a world-first.

Smoking still kills more than 50,000 Canadians a year, more than alcohol, opioids, suicides, and car accidents combined. For years, taxpayers have shouldered the burden of smoking-related healthcare costs—an estimated $6.5 billion per year in the early 2010s.

A Landmark Moment, But More Work Ahead

So yes, this settlement is a massive step forward, but it’s also clear that many feel there’s unfinished business. The Canadian Cancer Society, for instance, argued that the settlement should have included provisions to further limit tobacco sales and promote public health.

The settlement offers compensation and closure for thousands of Canadians, but the ongoing legal sale of tobacco products raises questions about whether enough is being done to curb the damage. And with $12 billion already accumulated from tobacco profits during the companies’ bankruptcy process, it’s a reminder that despite the financial penalties, the business of tobacco is alive and well.

Ultimately, this deal, which is expected to be finalized in early 2025, might feel like the end of one chapter in Canada’s long fight against tobacco—but it leaves open the question of what comes next. Will we see further restrictions on tobacco sales, or will this settlement be the final major action taken against an industry that continues to profit, even as it pays the price for past wrongs? Please vote in today’s poll question.

In partnership with BMO ETFs

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