The Week in Review

Weekly Market Recap: U.S. and Canada

The Dow Jones was the star of the week, reaching new all-time highs and finishing with a gain of just under 1%. The S&P 500 gained 0.24%, now trading just below its mid-July record, and the TSX was right on its heels, ending up 0.21%. The Nasdaq was the drag this week, finishing down 0.74%.

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

TSX Returns | Week At-a-Glance

Major Economic Stories This Week

Bank of Canada Faces Pressure for Larger Rate Cuts 

Statistics Canada reported a slightly positive surprise in Canada’s Q2 GDP growth, but even though the report came in ahead of expectations most economists are anticipating a larger interest rate cut from the Bank of Canada.

It looks like momentum is fading as consumers pull back on spending, and the latest numbers show that government spending has taken on an outsized role in propping up the economy.

• June GDP was flat, with July’s early estimate showing no improvement.

• Q3 GDP Projection estimated to be well below the BoC's 2.8% forecast, potentially as low as 0.5%.

• Growth driven by government spending and investment in machinery, but not sustainable areas.

• Economists now see a 50 basis-point cut as possible, with more aggressive cuts likely by year-end.

Canada's Current Account Deficit Expands

Canada's current account deficit widened to CAD $8.5 billion in Q2 2024, now the largest deficit in seven quarters.

We saw notable growth in the goods, while services showed some improvement, and investment income turned negative due to declining profits from Canadian investments abroad.

• Goods Deficit swelled to CAD $2.2 billion from near balance in Q1.

• Services Deficit narrowed to CAD $3.2 billion.

• Investment Income shifted to a deficit of CAD $0.6 billion from a surplus.

• Foreign Direct Investment rebounded strongly to CAD 38.5 billion.

 US Core PCE Index Signals Cooling Inflation

The US core PCE price index, which is the key inflation measure for the Federal Reserve, rose by 0.2% month-over-month in July 2024, in line with expectations.

The year-over-year increase was 2.6%, slightly below consensus, and supports the view that the Fed may begin cutting rates soon.

• Monthly increase: 0.2% in July, consistent with June.

• Yearly increase: 2.6%, slightly below the forecast of 2.7%.

• Inflation trend aligns with the outlook for potential rate cuts.

Key Takeaways From this Week’s Economic News

Pressure Mounts on the Bank of Canada to Accelerate Rate Cuts 

The weak Canadian GDP momentum, with nearly flat growth from June through July, is creating a compelling case for the Bank of Canada to consider a more aggressive approach to rate cuts than we have originally been anticipating. With consumer spending faltering and government intervention driving the little growth that exists, the central bank might need to deliver a bigger cut than originally anticipated in order to avoid deeper economic stagnation. We’re now seeing a real risk of underperformance in the Canadian economy unless monetary policy becomes more supportive. 

Canada’s Widening Current Account Deficit Raises Red Flags 

To add to the concern over our sluggish GDP growth, the ballooning current account deficit, now the largest in seven quarters, is pointing to more potential vulnerabilities in Canada's economic structure. The widening goods deficit, coupled with a reversal in investment income, is evidence that Canada’s international trade and investment position is weakening. This growing deficit could put additional pressure on the Canadian dollar and may necessitate more proactive economic measures to rebalance trade and investment flows.

US Inflation Trends Could Influence Global Monetary Policy

As I noted above, the US core PCE index is very closely watched by the Federal Reserve and is a major factor in how they manage interest rates. July’s slight cooling may may not seem like a big detail, but it plays a major role in shaping global economic policy. As the Federal Reserve inches closer to cutting rates, other central banks, including the Bank of Canada, could follow suit to remain competitive and manage currency fluctuations.

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

Comments of the Week

✅ Other External Factors

“Rate cuts are great but external factors like (POTUS policy) especially how they handle corporate tax laws has more of an influence I think.” - aloquicious

“Have you seen the price of groceries and people’s wages? Rent isn’t going down. A little rate drop means nothing to the low to middle class.” - terrismith1224

INVESTING & TECHNOLOGY
Nvidia's Earnings Impress, But Concerns Grow

• Nvidia exceeded earnings expectations, but its stock dipped 6%.

• The company's market value surpassed $3 trillion, a rare achievement.

• Investor skepticism rises over AI hype sustainability and growth pace.

• Nvidia's data center business remains a strong revenue driver.

Nvidia reported over $30 billion in sales for its fiscal second quarter 2025 when it released it’s latest earnings report on Wednesday this week, a 122% increase from the previous year, and profits of $16.6 billion (both of which surpassed Wall Street's expectations, by the way) but….their stock price was down by 6.38% after earnings, with a 1.51% recovery on Friday. Clearly, we’ve reached the point where investors are growing concerned about the sustainability of its rapid growth and the AI boom driving it.

Market Milestone and AI Growth Concerns

With a market value sitting at around $3 trillion, Nvidia joins an elite group of only three U.S. companies to reach this milestone. The company's AI processors have fueled its rise, with shares up 154% this year alone. All that said, questions are emerging about how long this growth can last.

Thomas Monteiro, a senior analyst at Investing.com is trying to keep things real and says that nothing can go up forever.

Data Center Strength and Future Outlook

Nvidia's data center business, which brought in nearly $26.3 billion, or 87% of total revenue, continues to be a strong performer, driven by demand for AI infrastructure. Research firm Third Bridge predicts that by the end of next year, 60-70% of AI model training at major tech companies will rely on Nvidia chips. CEO Jensen Huang reassured investors, emphasizing the broad utility of Nvidia's GPUs beyond AI, highlighting their role in ad targeting systems and search engines.

By all accounts, the company is in a very strong position to keep up the momentum for some time to come.

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COMMUNICATIONS
Moody’s Downgrades BCE’s Credit Rating Over Debt Concerns

• Moody's downgraded BCE's credit rating to one notch above junk status.

• BCE's rising debt and focus on dividend growth prompted the downgrade.

• BCE's dividend payments have exceeded free cash flow in recent years.

• Other rating agencies are also cautious about BCE's financial outlook.

This is something that’s been brewing for a while, and now Moody’s has downgraded BCE Inc.’s credit rating to the lowest level above junk status, citing the company’s high debt and limited ability to reduce it. Bell Canada, BCE's primary subsidiary, also saw a downgrade to a rating two notches above junk. These downgrades reflect concerns about BCE’s rising debt levels, which have consistently increased relative to profits since 2019.

Impact of Debt and Dividend Strategy

BCE has prioritized dividend growth, raising it for 16 consecutive years. However, Moody’s analyst Peter Adu noted that the company has not shown any real commitment to reducing its debt, which adds governance risks and contributed to the downgrade. BCE’s dividend payouts have exceeded its free cash flow in seven of the last nine years, including a 130% payout rate in 2023, raising questions about the sustainability of its dividend strategy.

Outlook and Ratings from Other Agencies

As of June 30, BCE’s debt stood at $39.5 billion, and other rating agencies have also expressed concerns. S&P Global Ratings placed BCE on “negative watch” in March, signaling a potential downgrade. However, Moody’s noted that Bell Canada has good liquidity for the next 12 months and expects the company to focus on reducing its debt to maintain its revised rating.

THE ECONOMY
Canadian Economy Sees Modest Growth in Q2 2024

• Canada's economy grew by 2.1% annualized in Q2 2024, surpassing expectations.

• Growth was driven by government spending and higher wages, particularly in public sectors.

• GDP per capita fell for the fifth consecutive quarter, highlighting underlying economic weakness.

• The Bank of Canada is likely to cut interest rates again in September.

In the second quarter of 2024, Canada's economy grew at an annualized rate of 2.1%, exceeding both the Bank of Canada's estimate of 1.5% and economists' expectations. GDP per capita, though, declined for the fifth straight quarter, and this is concerns about the economy's overall strength. Key contributors to the growth included increased government spending and higher wages, particularly in sectors like health care, education, and mining. Employee compensation rose by 1.6%, with notable gains in these areas, helping to offset slower consumer spending on non-essential items like vehicles and travel.

Weak Momentum Going Forward

Even with this better-than-expected growth in Q2, the economic outlook remains muted. CIBC economist Andrew Grantham noted that momentum is weak heading into the third quarter, with flat monthly growth in June and similar expectations for July.

This sluggish performance supports the case for the Bank of Canada to continue lowering interest rates, with a 25 basis point cut anticipated in their upcoming meeting, which would bring the rate down to 4.25%.

Underlying Economic Weakness

If we dig a bit deeper into the numbers, the boost in GDP was largely attributed to government spending, with increased hours worked and wage adjustments for public employees contributing significantly. Business investment saw some positive movement, particularly in machinery and transportation equipment, but housing investment dropped by 1.9%, the largest decline since early 2023.

This mixed economic picture led Andrew DiCapua of the Canadian Chamber of Commerce to share some words of caution.

The overwhelming sentiment points to another Bank of Canada rate cut, as the economy continues to display signs of underlying weakness despite surface-level growth.

HOUSING
30-Year Amortizations Fail to Entice First-Time Buyers

• The uptake of 30-year amortizations for first-time buyers has been minimal.

• High home prices in major markets make the program largely ineffective.

• The program's benefits are mostly limited to regions with lower real estate costs.

• Interest-rate cuts may eventually increase participation, but current interest is low.

Effective August 1^st, the government introduced the option of 30-year amortizations for first-time home buyers with insured mortgages, but early participation has been nothing short of underwhelming. The program is meant to ease housing affordability for first-time buyers purchasing new builds with less than a 20% down payment. However, data from CanWise Financial (Ratehub.ca’s lender) indicates minimal interest, with only 1.03% of August applicants opting for the extended amortization period.

High Prices and Limited Eligibility

The program's limited impact shouldn’t be overly surprising given the high costs of newly built homes, particularly in expensive markets like Toronto and Vancouver. For example, the Building Industry and Land Development Association (BILD) reported that the benchmark price for a new condo in the Greater Toronto Area (GTA) in July was $1,020,179—above the $1-million cap for insured mortgages, effectively excluding many potential buyers. This limits the program's usefulness to more affordable regions where new builds are priced within the program's eligibility range.

 Future Prospects and Market Dynamics

While official uptake numbers are pending, it appears unlikely that the program will significantly boost new-build sales in high-cost areas like the GTA. BILD noted a record low in new home sales for July 2024, with transactions down 48% from the previous year.

One professional less than enthused about the program is Justin Sherwood, SVP Communications & Stakeholder Relations at BILD.

Whether future interest-rate cuts will encourage more first-time buyers to utilize the 30-year amortization remains uncertain, with current interest levels far from encouraging.

COMMERCIAL REAL ESTATE
Receiverships Surge, Flooding Market with Distressed Properties

• Distressed commercial property sales in Canada more than doubled in the first half of 2024.

• A growing disconnect between buyer and seller expectations is slowing transactions.

• Receiverships are expected to rise further as real estate firms face higher borrowing costs.

• Buyers are looking for steep discounts, but sellers are reluctant to lower prices.

As I covered on our YouTube channel this week, the number of distressed commercial properties in Canada has surged, with $803 million worth of sales recorded in the first half of 2024, more than double the amount from the same period in 2023. We’re seeing increase largely because of a rise in developers filing for bankruptcy protection and lenders pushing projects into receivership.

Buyer-Seller Disconnect

A big factor is that despite the influx of distressed properties, a major disconnect between buyers and sellers is stalling many transactions. Buyers, sensing an opportunity (perhaps even smelling blood), are looking for deep discounts, while sellers are holding out for prices closer to appraisals from several years ago.

Jeffrey Berger of TDB Restructuring Ltd. noted that sellers are "clinging on to these appraisals from five years ago with unrealistic valuations," even as buyers push for significant bargains.

This gap in expectations is preventing a boom in transactions, despite the growing number of properties entering receivership.

Rising Receiverships and Market Uncertainty

Canada saw 137 construction and real estate receiverships in the first half of 2024, an average of 23 per month, with projections suggesting the country could reach 274 by the end of the year. This would mark a significant increase from the 143 receiverships recorded in 2023. The rise in receiverships spans across all types of properties, from office and retail spaces to unfinished residential developments and vacant land. Industry veterans like Mike Czestochowski of CBRE Group Inc. anticipate a continued increase in distressed property sales, but note the challenge in finding buyers willing to meet sellers' price expectations.

Selective Buying Amidst Market Flood

Even as more properties come to market, not all distressed assets are attracting buyers. Minto Group, a major Canadian developer, reported receiving numerous pitches for distressed properties, including high-profile projects like the unfinished luxury condo tower, The One, in Toronto. However, Minto has passed on all such opportunities, with Senior Vice-President Dan Dixon saying that “It would have to be an extraordinary opportunity. And by that I mean extraordinarily cheap."

This selective approach reflects broader market trends, where buyers are cautious, and sellers are reluctant to accept steep discounts, leading to a slower pace of transactions.

OTHER NEWS FROM THE PAST WEEK

A $1 Flight: Bargain or Bust?

Flair Airlines’ $1 flights back to Canada sound incredible, but experts warn it might be a marketing ploy loaded with hidden fees. Can this ultra-low-cost airline sustain such a deal, or is it too good to be true?

Tesla's Bold Request: A Tariff Reduction for Chinese-Made EVs

Tesla sought a lower tariff on its Chinese-made vehicles before Canada imposed a 100% duty. Will this tariff hike impact EV affordability, or is it more about political posturing?

On the first day without X, many Brazilians say they feel disconnected from the world - The Globe and Mail?

As Brazil blocks Elon Musk's X, citizens feel disconnected and debate the implications. Is this a battle for free speech or a move towards dystopian control? This shutdown is reshaping social media use and sparking political outrage in Brazil.

Japan's 4-Day Workweek Experiment: A Cultural Shift or Just a Dream?

Japan, known for its intense work culture, is urging companies to embrace a four-day workweek. With only a few takers so far, can this initiative really transform work-life balance in a nation where overwork is common?

And, to wrap things up for this week….

Stephen Curry Extends Warriors Legacy with $62.6M Deal

Stephen Curry has signed a one-year, $62.6 million extension with the Warriors, ensuring his stay through 2026-27. As the NBA’s all-time leader in 3-pointers, Curry continues to break records and shape the future of the franchise. How will this impact the Warriors' next chapter?

Market Movers

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The Relative Strength Indicator (RSI) can provide a signal that suggest a stock is either overbought or oversold.
📈A stock that has an RSI over 70 is considered to be in “overbought” territory. This might suggest that the stock is due for a pullback, however it is not a recommendation to sell.
📉A stock that is trading with an RSI below 30 is considered to be in “oversold” territory. This might suggest that the stock is due for a recovery, however it is not a recommendation to buy. Always perform your own due diligence.

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