Financial Panorama

The return shown is the total return which includes the reinvestment of income and capital gains distributions.
Source: Morningstar Direct.

Results – Canadian bonds

The FTSE Canada Universe Bond Index, which includes Canadian government and corporate bonds, has posted a positive return of 4.27% year to date (at September 30, 2024).
(Source: Morningstar Direct)

Our analysis of events

Further rate cuts on the horizon

• On September 18, the U.S. Federal Reserve made its first rate cut, to the tune of 0.50%, which was at the high end of market expectations. The policy rate was thus reduced from 5.50% to 5.00%, and two further cuts are expected before the end of the year.
• For its part, the Bank of Canada is expected to continue lowering its policy rate when it makes its next announcements, scheduled for October 23 and December 11. Although the Bank of Canada’s mandate is essentially focused on inflation, it also tends, like the Fed’s, to foster a healthy job market. On both sides of the border, employment has thus become the most important variable, now that inflation seems under control.
• U.S. job creation was stronger than expected in September, reducing the urgency of a rate cut. The main consequence of a divergence between Canadian (more cuts) and U.S. (fewer cuts) monetary policies would be to reduce the value of the Canadian dollar. On the other hand, problems in the Middle East and a stronger Chinese economy could lead to higher oil prices, which could counter the weakness of our currency.
• In Japan, after the sudden rise in interest rates in August, the anticipated corporate reforms long sought by foreign investors have been undermined by the Japanese government’s plans to protect Seven & i Holdings as Couche-Tard seeks to acquire its 7-Eleven convenience store chain.
• The variables with the greatest impact on the markets continue to be the rate of inflation and how quickly it falls. Employment and the speed of rate cuts are now equally if not more important variables.
• In Canada, the annual inflation rate was 1.6% for September, down on the previous month (2.0%) and moving in the right direction. In the United States, the annual inflation rate eased to 2.4% in September, slightly down from the previous month, which was viewed positively by the markets.

Scenarios still possible between now and the end of 2024

• The most positive scenario would be a rate cut due solely to a decline in inflation, with no pronounced economic slowdown. The latest U.S. employment data show strong and better-than-expected job creation, underscoring the vitality of the U.S. economy.
• A strong U.S. economy, requiring fewer rate cuts, could cause the U.S. dollar to appreciate against other currencies. This would be negative for the Canadian dollar and would keep inflation higher in Canada.
• The final scenario remains reaccelerating inflation with a worsening economy, which would signify stagflation, the most negative situation. This seems less and less plausible as inflation continues to fall; however, more protectionist policies under a new Trump administration could stimulate a resurgence in inflation.

Employment situation

In Canada, the unemployment rate fell slightly, from 6.6% to 6.5% in September. 46,700 jobs, mainly full-time, were added, versus expectations of 27,000. At 4.5%, hourly wage growth is still too high on an annual basis, but down from August.

The latest U.S. employment data showed the addition of 254,000 jobs, versus forecasts of 150,000. The unemployment rate was 4.1%, down from August. Wage growth was still too high at 4.0%, up 0.2% from last month.

Economic indicators

Global Purchasing Managers’ Index

Once again in September, the manufacturing segment indicators deteriorated, with less than a third of the thirty countries represented posting an index reading above 50 (which signifies expansion). By contrast, the services segment remains robust.

Inflation rate

Overall, inflation is falling and continuing to move in the right direction. This positive trend should enable central banks to begin or continue their rate cuts.

Benchmark rates in Canada, Europe and the United States

Interest rates have been high for some time now, but several central banks have begun their rate cutting cycle. Upcoming mortgage and corporate loan renewals could force consumers and businesses to reduce their spending now, in anticipation of rates that are higher than initially expected.

Our strategic monitoring

We are monitoring inflation and consumer spending, as well as leading indicators for manufacturing production, the services sector and employment.

Our priorities: caution and risk management.

Our tactical approach

In September, we maintained our equity weighting in the tactical allocation strategy, with the economic outlook and market indicators still dictating an overweight position.

In the United States, we maintained our position in large cap growth stocks, which react positively to stabilizing interest rates, as well as in stocks with a track record of dividend growth which are more defensive.

We also kept our position in small cap stocks, which react well to rate cuts, and increased our position in emerging markets, mainly due to economic growth in countries other than China.

In September, we reduced our positions in Japan and increased those in Europe. We eliminated our overweight in Japan, because the Bank of Japan is more aggressive than expected and hints of corporate protectionism are harming market growth prospects.

We reduced the weighting of emerging markets and increased that of Canadian equities.

In the fixed-income component, we reduced the weighting of corporate bonds and U.S. government bonds and invested in short-term bonds in order to reduce the duration of the portfolio.

We continue to favour stocks in developed countries and focus on risk management.

Main risks

• Comprehensive protectionist policies in the U.S., without significant productivity gains, are likely to increase inflation and slow down rate cuts. Such policies would also put Canada at a disadvantage, as our exports would become less attractive to our southern neighbor.
• An overly restrictive monetary policy could cause a major recession or other problems, like the U.S. regional bank crisis.
• Another monetary policy risk is emerging, as evidenced by the rapid and significant impact of the recent rate hike in Japan on all the world’s markets.
• High interest rates for an extended period would reduce corporate profits and sharply curtail household spending.
• The possibility of an episode of stagflation, i.e. anemic economic growth and high inflation, persists. This situation is negative for stock markets.
• The escalation of the Israeli-Palestinian conflict could have repercussions throughout the Middle East.
• The war in Ukraine could spread to other European countries.
• There is also a risk of worsening tensions between China and the United States over Taiwan.

Data source : Bloomberg

The opinions expressed here and on the next page do not necessarily represent the views of Professionals’ Financial. The information contained herein has been obtained from sources deemed reliable, but we do not guarantee the accuracy of this information, and it may be incomplete. The opinions expressed are based upon our analysis and interpretation of this information and are not to be construed as a recommendation. Please consult your Wealth Management Advisor.