Economic Update

So there’s really good news on the inflation front… The Consumer price index only rose 2% year over year in August, the slowest pace since February 2021, down from 2.5% in July 2024.

Excluding mortgage interest, inflation was a mere 1.2%, well below the bank’s target rate of 2%.

Did you see that? Inflation, if you exclude mortgage interest costs, is 1.2%… This is too low, and below the 2%-3% target of the Bank of Canada (BoC).

This definitely opens the door to a possible 0.50% rate cut on October 23rd.

Want to know what’s also interesting? As the interest rates decrease, so does mortgage interest costs. Basically, when the BoC decreases interest rates, they will also be decreasing mortgage interest costs, which will further decrease the inflation numbers…

Recent indicators suggest the economy is weakening. We’ve had higher unemployment and some moderate growth but most of the growth that we did have was due to government spending and aircraft purchases.

With low inflation and a weakening economy, the BoC knows it’ll have to do something to stem the tide of a hard landing (recession).

Remember back in July 2022 when inflation was taking off? You know what the BoC did? They increased the overnight rate by a full 100 bps in one sitting! It was meant to shock the market and signal that the economy needed to slow down. It was meant to stop consumer/business spending! Did it? Yes, but it took a while.

Turn the page to now: prices declined in five of eight economic subsectors month over month, which could trigger worries about deflation among central bank officials if it becomes a trend. The BoC governor, Tiff Macklem has recently said the bank cares as much about undershooting the 2% inflation target as it does overshooting it. The issue now is that people are not spending and the economy is softening. I’ve personally had several of my past clients reach out to me to tell me they have lost their jobs too!

So what to do? Recently, the US Federal Reserve decreased their overnight rate by a “shocking” 50 bps.

It is this American “shock” plus the current economic data that will force the BoC to cut again on October 23rd and December 11th. It’s widely expected that both dates will have cuts, but the September inflation numbers coming out on October 15th will solidify whether or not October 23rd will be an outsized 0.50% cut or a .25% cut.

The Stock Market

It’s interesting to note that during the rate hikes of 2022 and 2023, it was expected that the stock market and the economy would go down. This was not the case. After July’s 100 basis point increase in 2022, the TSX rose but an additional 28%!! And, American stocks rose by 62.4% since their 2022 lows. Currently American stocks are 35% higher than pre-hike levels.

So, long story short, stocks really haven’t followed interest rate changes in the same way that the “economy” (inflation, wages, employment, etc.;) has. 

My two cents 🙂