Will the Bank of Canada react to new GDP data and lower rates this week?

Big rate decision upcoming; and consumer debt problem is getting worse.

The Week in Review

Weekly Market Recap: U.S. and Canada

It wasn’t a stellar week for the markets, but take a look at that 11th hour kick in the last hour or so of Friday! Talk about finishing strong!

The major indexes ended the week (holiday-shortened in the US) with losses or very modest gains. The TSX was up 0.39%, the S&P 500 was just into positive territory with a gain of 0.18%, and both the Nasdaq and Dow Jones ended the week with losses, down 0.47% and 0.97% respectively.

Week ending May 31, 2024

Canadian Economy

In economic news this week, we saw Canadian GDP expand by 1.7% in annualized terms in the first quarter of 2024, up from a downwardly revised 0.1% increase in the fourth quarter but still coming below market expectations of a 2.2% growth.

On a quarterly basis, the economy expanded by 0.4% in Q1 2024, up from a revised flat reading in the previous period.

I’ll cover these numbers in more detail a bit later in this newsletter.

Inflation and the Federal Reserve

South of the border, the Federal Reserve’s preferred gauge for tracking inflation, the Personal Consumption Expenditures (PCE) Price Index, remained steady at 2.7% annually in April, consistent with March. Core inflation (excluding food and energy) stayed at 2.8% for the third consecutive month, indicating persistent inflation above the Fed’s 2.0% target.

United States PCE Price Index, Annual Change | April 2024

Economic Growth and GDP Downgrade

First-quarter U.S. GDP growth wasn’t as strong as originally estimated, and was revised down to 1.3% from an initial estimate of 1.6%, reflecting weaker-than-expected consumer spending. This was a significant drop from the 3.4% growth recorded in Q4 of 2023.

United States GDP Growth Rate

📊 Putting it all into Context

To summarize what we saw this past week, the markets saw mixed performance. Tech stocks continued to lead, but broader market gains were held back by inflation concerns and mixed economic data.

By most account, the outlook remains positive, with expectations of continued earnings growth and the long-term potential of AI supporting market sentiment.

(Results in Next Week’s Newsletter)

One of the troubling stories in this week’s Pulse is the report on the latest Equifax consumer debt troubles, which see no real signs of getting better.

What do you think: Are the current debt challenges the younger generation is facing just a current phase that we need to work through, or is it a sign of a systemic change in the way we manage debt, and spells trouble ahead?

Specific to the younger generation, are today's debt challenges a passing phase or a sign of a systemic change with more trouble ahead?

Login or Subscribe to participate in polls.


S&P 500 Weekly Overview

Week ending May 31, 2024 | Market Cap >$100B

S&P TSX Weekly Overview

Week ending May 31, 2024 | Market Cap >$10B

Most 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.

Week ending May 31, 2024 | Most Overbought Stocks, based on 14-Day RSI

Most 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.

Week ending May 31, 2024 | Most Oversold Stocks, based on 14-Day RSI

A Spark of Good News as Canada’s GDP show Signs of Life

Let’s start things off this week with a bit of good news.

According to data released by Statistics Canada this week, the Canadian economy saw a slight uptick in the first quarter of 2024.

These data points are showing a mixed but cautiously optimistic picture for the Canadian economy. And when I say cautiously, I mean cautiously. It’s too early to get overly optimistic, but it’s a start.

All that said, the results are mixed. On an annualized basis, real GDP grew at a rate of 1.7% in Q1, missing the 2.2% analysts expected.

🛍️ Let’s Break Down the Numbers:

  • Household Spending rose by 0.7%, driven by a 1.1% increase in services like telecommunications, rent, and air transport.

  • Goods spending edged up 0.3%, mainly on new trucks, vans, and SUVs.

  • Exports increased by 0.5%

  • Gains moderated by lower exports of passenger cars, light trucks, crude oil, and bitumen.

  • Imports rose by 0.4%, driven by clothing, footwear, and industrial machinery.

🏡 On the Housing Front:

  • Housing investment increased by 0.3%, mainly due to a 7.1% rise in resale activity.

  • New construction remained flat.

💼 Employment:

  • Wages and Salaries rose by 1.5%, with educational services up 5.9%.

  • Federal government public administration wages dropped by 6.4%.

💰 And a Few More Data Points:

  • Housing Savings reached 7.0%, the highest since early 2022.

  • Corporate Incomes fell by 4.9%, primarily due to reduced profits in the oil and gas sector.

All About Asset Allocation

 While many think about diversification as not keeping all your eggs in one basket, it's technically a tad more complex than buying a few different stocks.

True diversification means having assets that zig when others zag. Combine them, and your portfolio is less like a rollercoaster.

Enter asset allocation ETFs. They do the heavy lifting, selecting a global mix of stocks and bonds in various proportions.

For Canadians, examples for risk-tolerant investors include the BMO All-Equity ETF (ZEQT) for 100% stocks, or dial it back with the BMO Growth ETF (ZGRO) at 80% stocks and 20% bonds.

Prefer a middle ground? BMO Balanced ETF (ZBAL) has 60% stocks and 40% bonds. And for the cautious among us, the BMO Conservative ETF (ZCON) flips it to 40% stocks and 60% bonds.

This content is sponsored by BMO Exchange Traded Funds.
This content is intended for information purposes only. Beavis Wealth is compensated under this arrangement by BMO Exchange Traded Funds.
Click here for the full disclaimer: https://thehub.bmosalessupport.com/system/files/Beavis%20Wealth_Newsletter_Partnership_Disclaimer.pdf

GDP Data Sparks Rate Cut Bets

So we know from our first story that Canada’s real GDP, on an annualized basis, missed analysts’ expectations.

With this new data now public, traders and economists are gearing up for a potential Bank of Canada (BoC) rate cut this coming week, driven by a mix of soft GDP figures and favorable inflation trends.

📅 Rate Cut Forecast: This Coming Week

The anticipation for a rate reduction stems from economic data that shows the Canadian economy grew at an annualized rate of just 1.7% in Q1, below the 2.2% expected by analysts, and significantly below the BoC's 2.8% projection. When you pair this with positive inflation developments from the U.S., market expectations have gone up, now sitting with an 80% likelihood of a quarter-point rate cut on June 5, up from 66% previously.

📉 Immediate Market Reactions

The release of Friday's GDP report, which underperformed last year's figures, prompted an immediate response in the bond market. The yield on the Canada five-year government bond fell by about 10 basis points, reflecting the softened economic outlook.

🏦 Majority View: Rate Cuts on the Horizon

RBC's Chief Economist Nathan Janzen is representative of the majority opinion, suggesting that the disappointing Q1 GDP is the final hurdle cleared for the BoC to ease monetary policy.

"Canada’s weaker-than-expected Q1 GDP growth likely removes the last potential barrier preventing the BoC from easing off the monetary policy brakes with an interest rate cut next week."

Nathan Janzen | RBC Chief Economist

🔄 Contrasting Views

However, not all analysts are on the same page. Olivia Cross from Capital Economics posits that stronger-than-expected consumer spending might push the rate cut to July, offering a slightly different perspective on the timing.

🌐 Big Picture Perspective

Douglas Porter, Chief Economist at BMO, provides a broader view, indicating that regardless of the BoC's decision next week, the overarching trend points to a sluggish economy.

"Canada’s economy has expanded by a meagre 0.5% in the past year, looking through all the monthly and quarterly fluctuations."

Douglas Porter | BMO Chief Economist

🎲 My Bet: Rate Cuts Imminent

When I look at the combination of weak GDP data and controlled inflation, it seems very possible to me that a rate cut by the BoC is imminent, potentially as early as this week. From my perspective, the direction toward easing seems clear, but we’ll have to wait until Wednesday to see what the Bank of Canada thinks. I’ll put in a good word to them.

My Portfolio

Have a look at my current portfolio on the blossom app, by searching @MarcB

Manage and Analyze your portfolio with powerful tools, seamlessly connected to your brokerage account.

Understanding the Impact of PCE Data on Economic Indicators and Strategy

The Personal Consumption Expenditure (PCE) index, which is distinct from the Consumer Price Index (CPI), serves as the Federal Reserve's preferred inflation measure, providing a more comprehensive view of economic dynamics.

📊 Key Economic Indicator: Economic Health

The PCE data reflects consumer spending, which contributes to about two-thirds of the U.S. GDP. This measurement acts as a barometer for the economy's overall health, signaling shifts and trends in economic activity.

The index is considered a vital inflation measure, and it guides the Federal Reserve in its monetary policy and interest rate decisions. Its insights are pivotal in understanding inflationary pressures across various sectors.

📅 April 2024 Update

In April 2024, the U.S. core PCE price index rose by a modest 0.2%, which is the slowest increase seen this year and below the anticipated 0.3%. Despite this, the annual PCE inflation remained stable at 2.7%, tying a four-month peak, while the core rate, which excludes food and energy, softened to 2.8%—its lowest since March 2021.

United States PCE Price Index, Annual Change | April 2024

📊 Income and Spending Trends

April also saw a rise in personal income by 0.3%, driven by increases in compensation, asset income, and government benefits. Adjusted for inflation though, real disposable personal income (DPI) and real PCE both dipped by 0.1%, which shows that inflation is still having an impact on purchasing power despite nominal gains.

🔍 Sector-Specific Spending Changes

The detailed expenditure report showed a decline in goods spending, particularly in recreational items and vehicles, which contrasts with a modest increase in services, driven primarily by higher costs in housing, healthcare, and financial services.

📈 What can we learn from Corporate Earnings Insights

We can use this data to help us draw assumptions about where we might want to invest our money, given current economic conditions. We can analyze spending trends through the PCE data, and with this information investors and analysts can predict future corporate earnings and identify which sectors might experience growth or decline.

🛠️ Adjustments in Investment Strategies

Also, investors can use the PCE data to refine investment strategies, possibly shifting towards assets that are resistant to inflation or adopting more conservative positions during economic downturns.

The release of PCE data can lead to significant shifts in market sentiment and volatility, and investors use the report to adjust positions based on the latest economic outlook.

Listen On the Go

Whether you're on the road, in the kitchen, or winding down for the night, our YouTube content is accessible in podcast form.
Tune in to The Beavis Wealth Podcast on your preferred platform and enjoy our content anytime, anywhere!
Apple Podcasts | Spotify

Rising Credit Stress in Canada Amid Economic Strain

A recent report from TransUnion tells a worrying story of the trend among Canadian consumers: an increasing number are only making the minimum payments on their credit cards. This development is largely attributed to the ongoing cost-of-living crisis and rising interest rates, which continue to strain household budgets.

📅 Trend Analysis: First Quarter Report

The data shows that the percentage of Canadians who pay only the minimum on their credit cards climbed to 1.3% in the first quarter, which is an increase of eight basis points from the previous year. This isn’t a huge jump, but it does underscore the growing financial pressure on families across the country.

Matthew Fabian, Director of Financial Services Research at TransUnion Canada, highlights the dual impact of inflation and higher interest rates on household incomes and the ability to service household debt:

"Consumers that have had significant increases in their mortgage payment have made that deliberate trade-off to pay less on their credit card and, in some cases, they're missing their payments."

Matthew Fabian | Director of Financial Services Research at TransUnion Canada

Fabian notes that this strategy, while necessary for some, has led to a higher delinquency rate among credit card holders with mortgages compared to those without.

📊 Debt and Demographics

The report also sheds light on the overall debt landscape in Canada, which reached $2.38 trillion in the first quarter. Although this is a slight decrease from the record $2.4 trillion in the previous quarter, it represents an increase from $2.32 trillion recorded the same time last year.

An interesting demographic shift is also taking place: the number of Canadians with one or more credit products rose by 3.75% year-over-year, driven primarily by newcomers and Gen Z consumers. Notably, Gen Z's outstanding credit card balances surged by 30% compared to last year.

Fabian further discusses the distribution of debt among different generations, noting that millennials hold the largest share at approximately 38%:

"They're in the life stage where they're probably having children, getting houses, and have auto loans."

Matthew Fabian

Despite the challenges outlined in this report, Fabian remains optimistic about the resilience of Canadian consumers, and believes the Canadian consumer base is still decently resilient.

🔄 Looking Forward

As the financial landscape evolves, Fabian also points to anticipated interest rate cuts that could help alleviate some of the financial pressures on households, potentially stabilizing the market back to more sustainable levels over time.

Please share your opinion in this week’s Poll. Are you finding yourself in a tough situation and possibly even missing debt payments, or are you managing well in these more challenging times. Vote above.

The Investing Academy

Are you a DIY investor and don’t know where to start? Our on-line training takes you from raw beginner to a fully confident investor.
Visit our site

Market Movers

Top 10 Weekly Gainers

TSX, NYSE & Nasdaq Exchanges | Market Cap >$10B | Week ending May 31, 2024

Top 10 Weekly Losers

TSX, NYSE & Nasdaq Exchanges | Market Cap >$10B | Week ending May 31, 2024

The views expressed herein by Beavis Wealth regarding a particular company, security, industry, or market sector should not be considered as an indication of trading intent of any investment funds managed by BMO Global Asset Management. Any reference to a particular company is for illustrative purposes only and should not be considered as investment advice or a recommendation to buy or sell nor should it be considered as an indication of how the portfolio of any investment fund managed by BMO Global Asset Management is or will be invested. This social media network is an independent organization and is not affiliated with BMO Global Asset Management.

BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate.