The Week in Review

It was milestone week in the markets, with the S&P 500 setting another all-time closing high on Friday, and the Dow topping its previous high and also finishing the week at an all-time high.

Things started slowly across the board but the late-week surge, particularly with the Nasdaq and S&P 500, resulted in gains. The Dow, TSX and Russell 2000 all ended roughly flat for the week.

Some further insight as to where the markets might be headed in 2024 will come on on January 25th when we’ll get a look at Q4 2023 U.S. GDP growth. Consensus sees the number coming in at 2.0%, down considerably from 4.9% QoQ growth in Q3.

Also coming this week, on Wednesday the Bank of Canada will will announce its first interest rate decision for 2024 on Wednesday. It’s widely expected that they will hold the rate at its current 5.0%, so anything other than that will definitely move the markets in one direction or the other.

Another report that came out this past week that points to a possible bull market shift is U.S. Consumer Sentiment. The University of Michigan’s consumer sentiment for the US spiked to 78.8 in January, compared with 69.7 in December. This continues the stronger sentiment numbers that we’ve seen in the past few months, suggesting it’s full steam ahead.

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In this episode of Pulse:

• Canadian Inflation Rate Rises

• Benjamin Tal’s Economic Outlook

• Microsoft Passes Apple for Largest Company

• CEBA Deadline has Passed: Now What?

• Loblaw Ending 50% Discount Policy

WEEKLY POLL QUESTION

RESULTS IN NEXT WEEK’S NEWSLETTER

THE ECONOMY
Inflation Up, Rate Cut Odds Down

The annual inflation rate in Canada rose to 3.4% in December, up from 3.1% in the previous month, pretty much aligned with what the market had been expecting. This is also consistent with the Bank of Canada’s signal that headline inflation is expected to remain stubbornly elevated, close to the 3.5% mark through the middle of next year, and backing policymakers' warnings that another rate hike may still be necessary to combat unsustainable price growth.

Of particular note, two of the CORE measures of underlying inflation that the Bank of Canada uses, CPI nedian and CPI trim, were up.  The CPI median annualized rate was 3.6%, higher than the 3.4% consensus.  And the trimmed-mean core inflation rate made a surprise jump to 3.7%, above the 3.5% consensus.

Leading inflation on the upside was shelter, up 6.5% as mortgage rates continued to dog homeowners. Rent prices were up 7.7%, an increase from November’s 7.4%.

Transportation costs rose 3.2% for the month, as we saw a rebound in gas prices, up 1.4% vs a drop of 7.7% in November.

Overall, consumer prices fell by 0.3% from November.

With the release of this new data, the odds of the Bank of Canada cutting interest rates in March dropped from 50% to 33%.

Canada’s Core Inflation, which carves out the most volatile components of inflation such as food, energy and mortgage interest costs, came in at 2.6%, down from the 2.8% recorded in December.

THE ECONOMY
Ben Tal’s Economic Outlook

When I was working directly with clients as an advisor, one of the sources I checked in with all the time to get a sense of what was to come was Benjamin Tal, CIBC Capital Market’s deputy chief economist. I still keep up to date with Ben’s prognostications, and wanted to share some of my biggest takeaways from one of interviews I read this past week. I’ll link the full article here so you can dig deeper into his insights if you’d like.

First on interest rate cuts, Ben feels that the markets might be a bit too optimistic about how early cuts might begin. He believes that all the talk of cuts starting in the first quarter are overly enthusiastic, and says that both the Bank of Canada and Fed will wait until they’re absolutely sure inflation is dead before they make any moves. He does see cuts by both central banks in the second half of 2024.

When it comes to projected GDP growth, he says he believes that the International Monetary Fund is again being optimistic. He projects Canada’s GDP growth to be negative in Q1, or at best very close to zero.

Mr. Tal also projects that the unemployment rate in Canada will rise in the next few months, which would be a normal part of an economic slowdown. He sees the rate peaking in Q2 2024, and says he see it staying around 6.1% for the remainder of the year.

From an investment opportunity perspective, Mr. Tal sees interest-rate sensitive sectors doing well, and includes construction, utilities and even manufacturing in that group.

The full interview goes into much more detail on these and other topics, and I’d encourage you to take a few minutes and read everything Mr. Tal has to say. Full Article Here

TECHNOLOGY
Apple No Longer Top Dog

Just a few short weeks ago, Apple was comfortably the world’s largest company when measured by market cap. Today, they find themselves in a neck-and-neck battle for that honour with Microsoft, which overtook Apple and now holds that title by the slimmest of margins.

It’s been a tough start to 2024 for Apple, and more bad news came this week when the US Supreme Court ruled that a lower court’s order that would loosen Apple’s grip on its lucrative App Store, would be allowed to take effect. The result could be billions of dollars in lost revenue.

This comes as a part of the antitrust lawsuit that was filed by Epic games back in 2020. Epic claimed that Apple was violating federal antitrust law and was unfair competition under California law.

A lower court had previously ruled that Apple’s App Store had rules for apps purchased on its phones that did, in fact, violate the law, and the Supreme Court ruling this week rejected Apple’s appeal of that decision.

The end result is that going forward, it should make it easier for developers to avoid paying commission to Apple, which range from 15% to 30%.

And this is a big deal. In its last fiscal year, fees from this division generated around $85 billion in revenue, so any slice of that that disappears is meaningful.

And as if this Supreme Court decision wasn’t bad enough, it only further compounds concerns that investors have about new European regulations, which are scheduled to take effect in March.

The new laws could also force Apple to allow alternate payment methods inside its iPhone apps in Europe, further eroding this lucrative revenue stream.

RETAIL
CEBA Deadline Passes

Back in April 2020, when the world was pretty much still in panic over the COVID-19 pandemic, the federal government handed out around $49 billion an emergency loans as part of a program called The Canadian Emergency Business Account (CEBA) to almost 900,000 businesses in Canada. This support went out to businesses of all sizes and at the time it seemed pretty much critical to ensure the survival of the economy.

One of the big differentiating factors between the CEBA loans and much of the other money that was sent out by the government during the pandemic, such as the CERB benefits, was that the intent was always that these loans would be repaid. They were not simply sent out to provide extra cash flow to businesses. There would be a subsidy in the form of loan forgiveness for a portion of the loan, but not all.

Well, here we are almost 4 years later, and the final deadline for businesses to repay these loans came earlier this week, on Thursday. An exception is for companies that are currently negotiating refinancing with their banks, who will have until March 28 to make their repayment.

Leading up to the deadline, there were a huge number of small businesses that were asking the federal government to further extend this deadline, as they say that are simply not in a position to repay enough of the loan to secure their forgivable portion.

Dan Kelly, the president of the Canadian Federation of Independent Business said in November that he was worried about catastrophic failures if the deadline isn’t further extended.

Well, now the truth will come out. The deadline has passed and only time will tell how much of this forecast become reality.

For those businesses that did not repay their loans in full, they lose the forgiveness portion, and will start being charged interest at 5%. According to the CRA, businesses will have until December 31, 2026 to complete the payment plan.

As of the end of 2023, according to statistics Canada about 25% of CEBA loans had been fully paid back. That left $37 1/2 billion of outstanding debt that needs to be repaid.

YOUTUBE INSIGHTS

I hope they’re wrong, but whispers of Stagflation have once again reared their ugly heads. This video was published over two years ago, but it’s worth a review. Revisit Mohamed El-Erian’s comments here.

RETAIL FOOD
Loblaw Ending 50% Discounts

Canada’s Loblaw grocery chain is ending a long-standing policy of offering up to a 50% discount on perishable foods that are nearing their best-before dates, leading to pushback from consumers and consumer advocates groups. There are calls for Canada’s Competition Bureau to investigate.

To be clear, there is nothing inherently illegal about this change, but there are interpretations of the laws governing anti-competitive behaviour that some are saying points to this possibly being a violation.

Pushing back on this stance is University of Ottawa Associate Professor Jennifer Quaid, who recategorizes the change as “conscious parallelism”, referring to the practice of a business watching what its competitors are doing and copying them, as opposed to colluding with them to control prices. She maintains that this behaviour is not illegal at all.

This issue has brought to light the fact that there are a number of vulnerable Canadians who rely on the discounts Loblaw and other stores provide, stretching their dollars further. The loss of this pricing program will put further financial strain on these families.

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🚗 Elon Musk owns around 13% of Tesla but says that in order to grow the company into a leader in AI and robotics, he needs to almost double his holdings to 25%. “Unless that is the case, I would prefer to build products outside of Tesla.” Full Story

 💵 For those readers who track our Canadian Dollar against the U.S. Dollar and hedge portfolios accordingly, you’ll know that the loonie hit a five-week low this week. Read More Here

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