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, posted a positive return of 4.95% year to date (as of November 30, 2024).

Source : Morningstar Direct..

Our analysis of events

Good news for the economy, but uncertainty remains

• On December 18, the U.S. Federal Reserve (Fed) announced a 0.25% cut to its key interest rate, which is now between 4.25% and 4.50%. Should the U.S. economy remain strong in 2025, the Fed may cut rates only twice—or even not at all.
• Economic vitality in the U.S. has made rate cuts less urgent. We are currently seeing Canadian and U.S. monetary policies diverge: more rate cuts in Canada, fewer in the U.S. The primary effect will be a reduction in the value of the Canadian dollar. We have been observing this trend for several weeks.
• The Bank of Canada (BoC) lowered its policy rate again on December 11, making this the second 0.50% cut in a row. The BoC’s Governor indicated that the central bank’s next policy rate announcements would depend on economic data and be more gradual overall. For now, the market is expecting two more cuts before fall 2025.
• U.S. job growth was stronger than expected in November, but wage inflation remained high at 4% year over year.
• Canada recorded 50,500 new jobs in November, surpassing expectations, but an uptick in the labour force participation rate caused unemployment to rise. Wages are up less than 4% from one year earlier, coming in under forecasts of 4.7%—good news for monetary policy.
• Canada’s annual inflation rate was 1.9% in November, slightly down from October’s 2.0% but still within the Bank of Canada’s target range. In the United States, the annual inflation rate climbed to 2.7% in November, staying in line with expectations.
• In 2025, the U.S. government’s use of tariffs in trade negotiations will be one more variable to watch, alongside inflation and employment.

Global economies in 2025: Factors to watch out for

• The best-case scenario would be sustained growth for the global economy, with minimal trade friction between the U.S. administration and the rest of the world.
• Reduced regulation in various U.S. sectors will likely enable continued economic growth and stimulate investment. Other countries, including Canada, will have to follow the trend towards deregulation to avoid becoming less competitive.
• A trade war fuelled by the indiscriminate use of tariffs could slow the economy and spike inflation, creating something not unlike stagflation. This is the worst-case economic scenario.
• We will very likely avoid any inflationary climates in which 5- to 10-year interest rates remain high, since this would hinder corporate investment and the repatriation of supply chains back to the U.S.
• Geopolitical uncertainty will remain, with the war in Ukraine, regional conflicts in the Middle East and tensions between the U.S. and China as the Chinese government threatens to annex Taiwan.

Economic indicators

Global Purchasing Managers’ Index 

Manufacturing segment indicators improved, with nearly half of the thirty countries represented posting an index above 50 (expansion). The services segment remains robust.

Inflation rate

Globally, inflation is still headed in the right direction: cooling down, albeit at a slower pace. Central banks will almost certainly make fewer rate cuts than the markets were expecting a few months ago. However, if the new U.S. administration does impose indiscriminate worldwide tariffs in 2025, the resulting inflationary pressures could limit the Fed’s manoeuvring room.

Benchmark rates in Canada, Europe, and the United States

Interest rates have been falling for several months. Fear that inflation will take off again, along with the robust U.S. economy, should limit further rate cuts. If that holds true, 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. This would not be a positive change.

Our strategic monitoring

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

Caution and risk management remain our priorities.

Our tactical positioning

In December, 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 maintained our position in small cap stocks, which react well to both rate cuts and the strong possibility of deregulation across various sectors. Likewise, we held our positions in emerging markets, the euro zone, and Japan after decreasing them in November. This decrease was motivated by the strong U.S. dollar, Germany’s weak manufacturing economy and the prospect of a rate increase in Japan.

In terms of fixed income, we decreased the weighting of Canadian federal bonds while increasing the weighting of Canadian short-term corporate bonds, high-yield bonds and emerging market issues.

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

Main risks

• Without significant productivity gains, aggressive protectionist policies in the U.S. will likely drive up inflation and reduce rate cuts. This would put Canada at a disadvantage, since our exports would become less attractive to our southern neighbours.
• There is a risk on the monetary policy front.
• High interest rates for an extended period would reduce corporate profits and sharply curtail household spending.
• The possibility of an episode of stagflation (weak economic growth with high inflation) remains. This would be bad news for stock markets.
• The Israeli-Palestinian conflict could have repercussions across the Middle East, as evidenced by the fall of the Syrian regime and its ripple effects throughout the region.
• The conflict in Ukraine could escalate and spread to other European countries.
• Tensions between China and the United States over Taiwan could also worsen, with the possibility of a trade war between the two superpowers.

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.