Higher unemployment’s affect on rates, and BoC’s Housing Market worries.

The Week in Review

Canada wins again! 🍁For those who have that warm and fuzzy feeling when our Canadian market outperforms our American counterparts, you’ll be happy to know that for the second week in a row, the TSX outperformed the major U.S. indices, and for both weeks was the only index showing positive gains.

The TSX gained 0.69% for the week, and each of the U.S. majors lost ground, albeit ever-so-slightly for the Dow and S&P 500. The Nasdaq was down just over 1%.

From an economic standpoint, the U.S. Consumer Price Index (CPI) and Producer Price Index (PPI) contributed to some cautious sentiment among investors.

The CPI annual rate rose to 3.2% in February, surprising many, as consensus was 3.1%. Increasing shelter costs once again had a significant impact on the index. Energy costs dropped, but much less than expected.

Meanwhile, the PPI showed a notable increase, the largest in six months in fact. It came in at 0.6%, far above consensus of 0.3%. This raises concerns about the potential for sustained inflationary pressure, flying in the face of the expectations of a downward trend.

So when you factor in these inflation concerns, and in anticipation of the Federal Reserve’s upcoming interest rate decision, we’re reminded of the complex relationships of the major factors influencing the markets. With the slight market jitters we saw late this week, all eyes will be on the Fed rate decision due up this coming Wednesday.

As you’ll see by the poll results just below, this week wasn’t even close. A full 78% of those responding are expecting the unemployment rate in Canada to continue to go up. Don’t forget to weigh in on this week’s question.

In this Edition of The Pulse:

• Unemployment in Canada and the U.S.

• How Rate Cuts Might Overheat the Housing Market

• McDonald’s says Consumers are Staying Home

• Renters Falling Behind Homeowners

• Uber and Lyft Leaving Minneapolis

• Market Movers | Winners & Losers

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

LAST WEEK’S POLL RESULTS

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.

EMPLOYMENT
Jobs

Let’s start this week with unemployment and jobs numbers from both Canada and the U.S.

In February, Canada's economy saw the addition of 41,000 jobs, a sign of strength driven by the country's continued strong population growth, which is still outpacing gains in employment.

Despite this job growth though, the unemployment rate saw a slight increase to 5.8%, and that’s a reversal from the decline we saw in January.
Growth in jobs was predominantly seen in the services sector, with significant boosts in accommodation and food services.

What’s driving this? Well, it appears to be the continuing strong population growth which is heavily influencing the jobs numbers.

A few key takeaway from the latest reports:

• Women’s workforce participation stood at 47.3%

• Women earned 87 cents for every dollar earned by men in the core working-group age.

• The number of unemployed grew by 35,800 from January to 1,260,400.

Now to keep everything in perspective, despite the job gains, the employment rate—which measures the proportion of the working-age population that is employed—declined for the fifth consecutive month, the longest streak of declines since 2009.

This suggests that while jobs are being added, the rate at which they are filling is not keeping up with the population growth.

In the U.S., the unemployment rate in February rose by 0.2 percentage points to 3.9%, touching the highest level since January 2022 and coming in above market expectations of 3.7%.

• The number of unemployed grew by 334,000 to 6.5 million.

New U.S. inflation numbers also came out this week. Annual inflation rate in the US unexpectedly edged up to 3.2% in February, compared to 3.1% in January and above forecasts of 3.1%. Some highlights:

⚡ Energy costs dropped much less than expected (-1.9% vs -4.6% in Jan)
🚗 Gasoline declined 3.9%, vs -6.4%
🔥 Utility Gas Service prices fell 8.8% vs 17.8%
🛢️ Fuel Oil was down 5.4%, vs -14.2%
🍞 Food Prices were up 2.2% vs 2.6%
🏠 Shelter prices were up 5.7% vs 6.5%

The annual core consumer price inflation rate in the United States, which excludes volatile items such as food and energy, eased to a near three-year low of 3.8% in February , down slightly from 3.9% in January but above market forecasts of 3.7%.

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INTEREST RATES AND HOUSING
Tiff’s Dilemma

At its last meeting, The Bank of Canada kept interest rates steady at 5% and an area that bank governor Tiff Macklem brought up are concerns that a rate cut might overheat the spring housing market and reverse progress made in controlling inflation.

This decision comes as the housing market shows signs of recovery, with a potential rebound that could fuel inflation further, especially during the traditionally active spring season.

To my eye, the bank's cautious stance here is reflecting fears that lower rates could exacerbate the housing market's activity, making homes even less affordable.

Also, housing costs make a huge contribution to inflation, through rising mortgage interest and rent prices, so the dilemma is whether to cut rates to alleviate household financial pressure or maintain them to prevent inflation from spiraling.

Looking forward, the Bank of Canada's next move in April will hinge on new economic data, including inflation rates and housing market activity.

The bank really does face a tough balancing act, aiming to ensure long-term stability while navigating immediate economic challenges.

Despite the desire for lower inflation and interest rates, the bank's priority has to be on preventing premature actions that could allow inflation to make a comeback, and jeopardize economic progress.

RESTAURANTS
Even Fast-Food is Too Expensive?

McDonald's has noticed a shift in consumer behavior, with lower-income Americans opting to cook at home rather than dine out due to increasing restaurant prices.

Ian Borden, McDonald's Chief Financial Officer, highlighted at an investor conference that the company is navigating through a tough consumer environment, which is made worse by inflation, higher interest rates, and shrinking savings.

Even at fast-food chains, this combination of factors has made dining out feel more like a luxury, as recent inflation data shows restaurant prices rising by 4.5% over the last year, making it more expensive compared to grocery shopping, which saw a 1% increase in prices.

Historically, McDonald’s has prided itself on offering value and affordability, but the current economic climate has altered consumer priorities. With the cost of dining out becoming less feasible for many, people are choosing to eat at home to manage their budgets better. This marks a significant change from last year, where the cost dynamics favored eating out over grocery shopping due to a higher increase in grocery prices compared to restaurant prices.

In response, McDonald’s is striving to attract customers back by providing more value for their money, particularly through special offers and bundles priced at $4 and below at most of its U.S. locations.

It’s clear that McDonald’s is facing a pivotal moment in adapting to changing consumer habits brought on by broader economic challenges.

As consumers tighten their belts, companies like McDonald’s have to find innovative ways to offer value and convenience without compromising quality. We saw this with recent news out from Burger King.

The current shift in consumer behavior also highlights a growing trend towards more prudent financial management among consumers, a lesson that extends beyond the fast-food industry.

HOUSING & WEALTH
Rent or Own? The Gap Grows.

Rent or Own? That’s an ageless question that is actually far more complicated than it appears at first glance.

But there was some light shed on the question in an RBC report released Thursday and economist Carrie Freestone casts a stark light on the widening wealth gap between renters and homeowners, revealing the increasing financial hurdles faced by Canadian renters.

The report underscores a troubling trend: as homeowners' net worth has surged from nine to 13 times household disposable income since 2010, renters have seen only marginal gains, with their net wealth growing from three to 3.5 times income. This disparity highlights a longer-term trend where homeownership has been a principal driver of wealth accumulation over the past three decades.

The quest for homeownership, with its significant financial benefits, is becoming an ever more distant dream for renters.

This group finds themselves in a tightening squeeze, allocating a growing share of their income to housing costs, which rose from 25% of take-home pay in 1999 to 29% in 2022. Compare that with homeowners, who spent a smaller portion of their income on housing over the same period.

This discrepancy is made worse by ever-increasing rent prices, which jumped by 10.5% year-over-year in February, leaving renters with even less capacity to save for a down payment. In 2023, the report highlights a particularly concerning statistic: renters spent nearly 9% more than their disposable income, whereas homeowners managed to save 7% of theirs.

The report aligns with the results in a TD study last October, which pointed out a growing wealth chasm between homeowner and non-homeowner baby boomers, a disparity that is likely to worsen for younger generations due to current affordability crises.

So what needs to be done?

Experts argue that the housing system, with its array of policies favoring homeowners, from tax exemptions to credits, perpetuates this inequality. It’s true that changes to these policies could potentially rebalance the scales, but such measures taken in the past have usually faced strong opposition.

Whatever the solution is, if there even is one, this report sheds light on the critical need for a paradigm shift in how wealth is generated and distributed, and is another call to action for policymakers to address the root causes of housing inequality in Canada.

YOUTUBE INSIGHTS

The Bank of Canada recently held interest rates at 5%. I posted a YouTube video that went through a number of factors that went into the Bank’s decision. If you’re curious, have a watch here.

TRANSPORTATION
Uber and Lyft Drive Away

Lyft and Uber have announced plans to halt operations in Minneapolis starting May 1, following the city council's decision to implement a minimum wage for rideshare drivers. The new ordinance, which was passed with a 10-3 vote, mandates that rideshare drivers earn at least $15.57 per hour, a move that both companies have criticized as unsustainable for their business models.

Lyft labeled the bill "deeply flawed," arguing that while it supports a minimum earning standard for drivers, the ordinance does not achieve this goal in a practical manner.

Uber echoed similar sentiments, expressing disappointment over the council's disregard for data and warning that the decision would lead to 10,000 job losses and leave many residents without reliable transportation options.

Minneapolis Mayor Jacob Frey, despite advocating for higher wages for rideshare drivers, opposed the ordinance based on a Minnesota state study that recommended lower pay rates to ensure drivers meet the minimum wage. The mayor emphasized the importance of data-driven policy-making and voiced concerns about the significant impact the ordinance would have on the region.

The new law stipulates that rideshare drivers must be paid at least $1.40 per mile and $0.51 per minute within Minneapolis, rates significantly higher than those recommended by the state study. As a result, rideshare companies have warned that staying in the city would necessitate a doubling of user prices, making rides unaffordable for many.

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