October 2024: Attempting to Stick the Soft Landing
Quarterly Asset Allocation (October 2024): Attempting to Stick the Soft Landing
As we head into the home stretch of 2024, we seem to be in a good environment for equities. We continue to see strong economic data out of the U.S., despite signs that growth will weaken, resilient employment reports, with unemployment slowly pulling back after ticking up and triggering the Sahm rule, and further strength in the equity markets as we head into earnings season with optimism. All this is combined with a rate easing cycle that has lowered recession concerns and even brought the “no landing” scenario (2-3% GDP growth with high inflation) back into the discussion. For our part, we remain cautiously optimistic about the U.S. economy and markets continuing to forge ahead.
For Canada, we see a lot more weakness than in the U.S., with minimal economic growth in 3Q24, although the more advanced rate easing cycle helped the TSX Composite record double the performance of the S&P 500 in Q3. Despite a surprisingly better labour report for September (+47k jobs), the unemployment rate has risen as population and labour force growth has outpaced overall weak job creation. Year-over-year, employment was up 1.5% in September, while the population in the labour force (individuals aged 15 and older) is up 3.6%. We expect the rate cutting cycle in Canada to proceed with regular cuts, as the Canadian economy needs more support. As inflation in Canada is now firmly in the Bank of Canada’s (BoC’s) control band, the policy interest rate needs to drop further, and perhaps more quickly, to ease the still restrictive environment and to lessen the negative impact of a coming wave of pressure as mortgages that were locked in for five years at ultra-low rates from before the pandemic come up for renewal at considerably higher rates. Still, the easing rate environment and good corporate earnings has allowed the TSX to post strong Q3 and YTD performance.
From a geopolitical perspective, factors to watch include the upcoming election in the U.S. and the escalating tensions in the Middle East. In our Washington Policy section, and his other reports, Ed Mills provides in-depth analysis on his forecasts and potential impacts from the election. Additionally, our Chief Economist, Eugenio Alemán, delves into the impact of tariffs, a major policy issue that has been discussed throughout this political campaign. Switching to the siuation in the Middle East, aside from the horrific humanitarian impact playing out, there is also a potential economic impact in the disruption of oil, specifically with the risk of Iran disrupting shipping through the Strait of Hormuz. In the near-term, oil, which has been under pressure from growing supply and weaker demand forecasts, has settled down to around US$70/bbl despite starting Q3 around US$84/bbl, and spiking quickly to US$77/bbl recently. Any extreme or sustained jump could affect economic growth and inflation forecasts.
Key Takeaways:
- The U.S. economy seems well on track for a soft landing, with growing discussion about “no landing” as economic growth continues, with recent positive surprises in the labour market. While the Fed is likely to continue on its rate easing path, there appears little need for further 50 bp cuts as the economy seems resilient enough to accept more gradual easing with inflation slowly continuing toward the 2% target.
- In Canada, with a much weaker economic picture, we expect a continuation of 25 bp cuts from the BoC at each meeting until the policy rate reaches at least 3% by the April 16, 2025 announcement. We could also envision 50 bp cuts at one or more of those meetings, especially since the September CPI headline print of 1.6%. If we continue to see further weakening economic data over the next few months, we could see the BoC reducing the policy rate even further towards the 2.25% level.
- Equity markets generally seem to be well positioned as recession fears have been reduced, inflation seems increasingly under control, rate easing cycles are well under way, and although unemployment rates remain a concern (more so in Canada than in the U.S.), they seem primarily driven by labour force growth and constrained hiring activity than employers resorting to widespread layoffs.