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 2.32% year to date (at August 31, 2024).
(Source: Morningstar Direct)

Our analysis of events

Will the Fed live up to market expectations?

• On September 4, the Bank of Canada cut its policy rate for the third time, by 0.25%, to 4.25%. The market is expecting two or three more cuts this year.
• At its meeting on July 31, the U.S. Federal Reserve (Fed) kept its key rate within a range of 5.25% to 5.50%. The latest employment data differed significantly from expectations and a first rate cut of 0.50% was announced on September 18. The consensus scenario is now four rate cuts by the end of the year in the U.S.
• Note that the Canadian dollar could still experience a significant devaluation if the Bank of Canada continues to cut its policy rate without concomitant Fed cuts: such a situation would have a negative impact on the Canadian economy. However, the Canadian currency has appreciated since the Fed’s last meeting in Jackson Hole, when Chairman Jerome Powell indicated his intention to begin rate cuts soon. Against this backdrop, the loonie’s appreciation should stabilize.
• Markets have recovered from the shock of Japan’s abrupt interest rate hike in early August. Fears of a U.S. recession, fueled by the release of employment data, had contributed to this disruption.
• The inflation rate and how quickly it falls remain the variables that most directly impact the markets, closely followed by employment and the frequency of rate cuts.
• In Canada, the annual inflation rate was 2% in July, still falling and now in line with the Bank of Canada’s expectations. In the United States, the annual inflation rate eased to 5% in August, a further decline which was viewed positively by the markets.

Employment situation

In Canada, the unemployment rate rose from 6.4% to 6.6% in August. 22,100 jobs were added, versus expectations of 25,000. Hourly wage growth remained too high at 4.9% on an annual basis, albeit down from the previous month, but still exceeding expectations.

The latest U.S. employment data showed the addition of 142,000 new jobs, versus forecasts of 165,000. The unemployment rate was 4.2% in August. Wage growth was still too high at 3.8%, up 0.2% on last month.

Economic indicators

Global Purchasing Managers’ Index

Indicators for the manufacturing segment deteriorated, with less than half of the 30 countries posting an index reading above 50 (expansion). The services segment, however, remains strong. The only downside is that the German composite index is still contracting, while those of other European countries are expanding.

Inflation rate

Overall, inflation remains high, but continues to move in the right direction and should enable central banks to initiate or continue their rate cuts.

Benchmark rates in Canada, Europe and the United States

Interest rates have been high for some time now. 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.

Caution and risk management remain our priorities.

Our tactical approach

In August, 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 August, we reduced our weightings in Japan and Europe. However, we maintained our overweight in Japan, since the Japanese economic outlook still seems brighter.

We increased our weighting in emerging markets and Canadian equities.

In the fixed-income component, we increased the weighting of corporate bonds and reduced that of high-yield bonds. In July, we took a position in government issues in emerging economies that are showing attractive economic growth.

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

Main risks

• An overly restrictive monetary policy could cause a major recession or other problems, like the U.S. regional bank crisis.
• A monetary policy risk is emerging, as witness Japan’s rate hike, which had a marked effect 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 Israeli-Palestinian conflict could have repercussions throughout the Middle East.
• An escalation of the conflict in Ukraine could spread to other European countries.

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.