The Week in Review

Supercore inflation hits highest level in almost a year

More concerning may have been a material increase in so-called supercore inflation, which tracks services prices excluding energy and housing costs, which policymakers have acknowledged are a lagging indicator of overall inflation trends. Supercore inflation jumped 0.7% in March and 4.8% over the past 12 months, substantially higher than expectations and its biggest increase in 10 months.

In the wake of the report, futures markets began pricing in roughly a 20% chance of a rate cut at the Federal Reserve’s June policy meeting versus roughly 50% before its release. The week was a busy one for commentary from central bank officials—with 11 scheduled to speak, according to T. Rowe Price traders—and they seemed to confirm a change in their perspective following the CPI release. In particular, Richmond Fed chief Thomas Barkin said that the latest data did not increase his confidence in disinflation, and Boston Fed President Susan Collins said that the recent data argue against an imminent need to cut rates.

Thursday’s release of producer price inflation data seemed to help calm inflation fears and help equity markets recoup a portion of their losses. Producer prices rose 0.2% in March, a tick below expectations and well under February’s 0.6% increase. Input goods prices fell 0.1%, continuing a recent pattern of goods deflation that had been interrupted by a 1.2% surge in April.

s mentioned, the U.S. consumer price index surprised economists by coming in at an annual rate of 3.1%. (more about this a bit lower) and these numbers certainly dampened expectations of a rate cut coming anytime soon. We continue to see increases in the most critical inflation component of shelter & rent, which was up 6% annually in the U.S.

In this Edition of The Pulse:

• US Inflation Spooks the Markets

• Lightspeed Founder Returns

• New Home Construction

• Record Rent Hits $2,683

• CPP Adds $14.6 billion

• Market Movers | Winners & Losers

• Other News This Week

THIS WEEK’S POLL QUESTION

RESULTS IN NEXT WEEK’S NEWSLETTER

LAST WEEK’S POLL RESULTS

In 2024, will Canada fall into a recession (hard or soft, doesn’t matter) or will we avoid one?

S&P 500 Weekly Overview

S&P TSX Weekly Overview

Overbought

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. Always perform your own due diligence.

Oversold

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.

ECONOMY
U.S. Inflation Spooks the Markets

If you have any doubt that the stock market rally we’ve seen over the past number of months is fragile, you now have  your answer.

The annual inflation rate in the U.S. came in at 3.1% in January, down from 3.4% in December. Even though you’d by logical to think a decline would be good news, (after all, isn’t that what the Fed’s been trying to do; tame inflation?) the numbers came in higher than the consensus forecast of 2.9%, and the markets didn’t like what they saw.

On the news, we saw the North American stock markets take a big hit. The TSX on Tuesday suffered its worst day in 17 months, down 482 points, or 2.3%, the Dow dropped 525 points, or 1.4%, the S&P 500 lost 1.4% and the Nasdaq lost around 1.8%. You can see those losses reflected in this chart.

But then, once the dust had settled, we picked right back up where we’ve been of late with the markets saying “ya whatever” and again moved higher.

The clear takeaway from this market action is that with this unexpected inflation number, the US Federal Reserve has very little urgency to cut rates and pricing is now implying that the first rate cut will come in June instead of March which was previously expected.

As of the end of the week, the markets are pricing in 90% odds that the Fed won’t cut in March, 62% that they’ll hold tight in May, and a 54% chance that the first cut of 25 basis points will come at its June 12 meeting.

That said, I can assure you those odds will change with every little piece of information that comes in between now and those dates.

Compared to December, the CPI edged up 0.3%, the most in four months, and again it’s above forecasts of 0.2%.  The annual core inflation held steady at 3.9%, compared to expectations it would slow to 3.7%.

GLOBAL ECONOMICS
Japan Slides Behind Germany

There’s been a lot of chatter recently over how well the Japanese stock market has performed over the past year, as it’s kept pace with the S&P 500 and is now within striking distance of its all time high, set way back in 1989.

So it came as a bit of a surprise to many that last year Japan faced a surprising setback in its economy. The Japanese economy shrunk for two quarters in a row to close out 2023 and is now in what many economists say is a technical recession. With this slowdown, Germany has now taken over as the world’s third-largest economy.

The latest numbers show that Japan's economy shrank by 0.4% from October to December.

Several things contributed to this, including weak demand for goods from China, people in Japan not spending as much, and even issues at the nation’s global automaker, Toyota.

With Japan’s notoriously low interest rates still in place, the central bank basically has its hands tied and it would be extremely difficult for it to normalize interest rates in the face of these GDP numbers.

One of the biggest challenges facing the country right now is that people in Japan aren't spending as much money. The government has been lobbying for companies to increase wages to encourage spending, but rising prices are making this difficult and delaying any real impact

Some experts believe things might start getting better soon, but for the time being at least, it's a waiting game to see how Japan's leaders will tackle these economic challenges.

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TECHNOLOGY
Lightspeed Founder Returns

In response to negative investor reactions to the company's recent financial update, Dax Dasilva, the Canadian entrepreneur and founder of Lightspeed Commerce Inc. has returned as CEO, replacing Jean Paul Chauvet, who served as president for 11 years. Patrick Pichette will now serve as chairman.

Dasilva, who had previously left the company to pursue other interests, expressed his commitment to Lightspeed and hinted at potential cost-cutting measures to improve profitability. He emphasized the importance of operational efficiency and indicated a reluctance to pursue acquisitions.

Lightspeed, known for its point-of-sale transaction software, expects to generate around US$900 million in revenue this fiscal year. Chauvet had focused on shifting clients to in-house payment processing and targeting larger customers, however concerns arose about the company's financial outlook, prompting analysts to slash share price forecasts.

The shakeup has raised questions about potential changes in strategic direction and the need to tighten up on costs. Lightspeed's expense structure, including spending on administrative and marketing expenses, has been higher compared to other tech companies.

Dasilva plans to review operations, facilities, and remote work policies to create efficiencies and improve profitability.

CANADA’S HOUSING CRISIS
New Home Construction Falls

New home construction in Canada dropped by 10% compared to December, according to the Canada Mortgage and Housing Corporation (CMHC). The decline was attributed mainly to fewer multi-unit urban homes, such as townhouses, being built.

Total housing starts in January were 223,589 units, down by 25,379 from December. This decrease comes despite predictions by economists of an increase, further illustrating how unpredictable the sector can be, even in light of the substantial datapoints available to the economists.

TD economist Marc Ercolao noted the need for Canada to speed up homebuilding to prevent housing affordability from worsening.

TD's forecasts remain fairly conservative, with the possibility of Bank of Canada rate cuts potentially boosting existing home sales and supporting new home construction.

The decline in housing starts was particularly notable in urban areas, where construction slowed down by 11%. Multi-unit urban homes saw a 14% decrease, while single-detached urban homes experienced a slight increase of 0.08%.

Toronto saw a significant increase in housing starts, primarily due to more construction of new multi-unit homes, marking a 179% rise. However, other cities like Montreal and Vancouver experienced drops in multi-unit starts, with decreases of 28% and 55%, respectively.

HOUSING CRISIS
Record Rents Hurt Tenants

The average rent price in Canada hit a new high in January, reaching $2,196, up 10% from last year. The increase comes amidst a growing rental crisis, which has seen rent prices steadily rising, especially since before the COVID-19 pandemic.

Last year, rent prices soared due to high demand and limited supply, which now sees the country with the lowest national vacancy rate on record. However, as is always the case, the situation varies across different cities. While Vancouver remains the most expensive city for renters, its rent prices actually dropped by three percent compared to last year.

Edmonton saw the fastest rate of increase in rental prices, with a 17.1% jump since last year, averaging $1,479. Calgary's rents also rose by 12.8% to an average of $2,047.

The cost of one-bedroom rentals also continued to rise, with an annual growth rate of 12.6% in January. Vancouver had the highest average rent for one-bedroom apartments at $2,683, followed by Burnaby, B.C., and Toronto. Saskatoon had the lowest average rent for one-bedroom apartments at $1,192.

In four provinces - Alberta, B.C., Ontario, and Quebec - the average rent for shared living spaces increased by 18.5% annually to $1,010 in January.

According to the Canada Mortgage and Housing Corp. (CMHC), the vacancy rate for purpose-built rental apartments was 1.5% in October 2023, down from 1.9% the previous year, which was already the lowest in over two decades.

GOVERNMENT PENSION
CPPIB adds $14.6 Billion

The Canada Pension Plan Investment Board (CPPIB) earned a 3.4% return in the last three months, adding $14.6 billion to its total assets and bringing its total assets to nearly $591 billion by the end of 2023, up from $576 billion in the previous quarter. Over the past decade, CPPIB has averaged a yearly return of 9.3%, adding $319 billion in profit to its fund.

The gains in the latest quarter were helped by strong performances in stocks and bonds, as well as other investments like private equity, energy, and infrastructure assets.

The road is never without bumps, and in this case, currency fluctuations brought challenges. But despite some losses due to currency changes, the overall gains were still positive. The fund saw a net outflow of funds to pay pensioners, which partially offset the gains.

When you compare returns to other Canadian pension plans, CPPIB's performance was slightly better, with a median return of 8.2% for similar plans in the same quarter.

CPPIB manages the Canada Pension Plan, the main retirement program for Canadians and have been managing and investing its funds since 1999. CPPIB's main headquarters is in Toronto, with other offices located around the world.

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