Lexicon Financial Group Weekly Update — August 21, 2024
“Never try to time the bond market. Anyone who claims to know the future of interest rates is certifiable.”
From the desk of Craig Swistun, CIM, MFA-P, Portfolio Manager, Raymond James Investment Counsel, and Wayne Hendry, Client Relationship Manager, Raymond James Investment Counsel
Looking Around
We kept an eye on the Paris Olympics. Why? We enjoy watching elite athletes compete in sports that rarely get international attention. Water polo? Breakdancing? Aerobic gymnastics? Also, who knew that after the Paris Olympics, Canada would be known as a powerhouse in the world of hammer throw? Congratulations, gold medalists Camryn Rogers and Ethan Katzberg in this field!
We both threw discus and shot put at high school, but never a hammer. The footwork required for the athletes to swing the hammer wildly but in a controlled manner before a perfect release is, in a word, amazing!
At the beginning of the year, if we had swung a hammer in a room full of industry analysts, no amount of fancy footwork would have made it possible to avoid injuring at least one or two analysts who were predicting several or more interest rate cuts early during the year to tame inflation. And they would have been wrong! Because as we all have witnessed, interest rates were held higher for longer, as governments continued the battle against inflation.
That is, until this summer. Some central banks started to cut interest rates. The Bank of Canada (BoC) and the European Central Bank (ECB) began cutting in June and the Bank of England (BoE) put their scissors to work at the beginning of August. These central banks have begun to shift from talking about cuts to actually making them. And now, analysts are holding their moistened fingers in the air, trying to determine once again “how fast and how far” interest rates will be reduced.
Current expectations are that the pace of interest rate reductions will be ‘gradual’ in all regions but slightly larger and faster in Canada, given its underperforming economy relative to others. The Royal Bank of Canada (RBC) is looking for two per cent interest rate cut overall from the BoC by the end of 2025 and one per cent cut overall by the ECB and the BoE. (1)
Read and Watch
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The consensus is that the BoC will announce another 0.25 per cent cut on September 2, which will be followed by three more cuts before the end of 2024. This view is supported by the fact that Statistics Canada’s July consumer price index showed a significant cooling in inflation, with the rate easing to 2.5 per cent — its slowest pace since March of 2021. Claire Fan, an economist at Royal Bank of Canada, says this inflation reading is good news for the BoC, as it can now focus on Canada’s weakening economic backdrop. Olivia Cross, an economist with Capital Economics, feels that core inflation measures may surprise to the downside of the BoC’s forecasts, which raises the possibility of a an even steeper policy cut this year. (2)
As always, changes to interest rate policy takes time to play out in the real economy. According to RBC, interest rate cuts will not provide an immediate boost to Canada’s lagging economy or the debt payment relief some households are desperately seeking. Indebted households may be cheered by the rate cuts, but the lagged impact of past interest rate increases will continue to push debt payments higher. (3)
The United States (U.S.) Federal Reserve (Fed) has yet to even signal that it will cut rates. Remember that at the beginning of the year, the number of Fed interest rate cuts being forecasted was more than five. So much for those forecasts, as we are now in the eighth month of 2024 and the Fed has yet to make its first interest rate cut. This may all be about to change as inflation is coming down. (4)
Fed officials have said they are increasingly confident that they’ve nearly tamed inflation in the U.S. With inflation cooling toward its two per cent target, the pace of hiring slowing and the unemployment rate edging up, the Fed is possibly poised to cut its benchmark interest rate in September from its 23-year high.
[As an aside, take a look at our Lexicon Financial Group logo. Is the small cube at the centre emerging from or retreating into the larger cube? With a bit of practice, you should be able to see it both ways.]
Source: Bloomberg
How fast it may cut rates after that, though, will be determined mainly by what happens in the U.S. economy and to employment. A lower rate would be welcomed as it will eventually lead to lower rates for auto loans, mortgages and other forms of consumer and business borrowing. It is expected that Fed Chair Jerome Powell will provide some hints about how the Fed sees the economy and what its next steps may be, in his speech this Friday at the Fed’s annual conference of central bankers in Jackson Hole, Wyoming.
Industry pundits still expect a quarter-point Fed rate cut in September, November and December. December, though, could be a coin-toss between a quarter- and a half-point cut. (5)
But nobody knows for sure.
This is a presidential election year in the U.S. and no president wants people to go to the polls with the economy floundering. Decisions on interest rate policy are not supposed to be political, but that won’t stop analysts and pundits from talking about these policies as if they are.
The amount of data (economic, political, behavioural, etc.) to sift through continues to grow and this is where portfolio managers come in. They must make the best decision they can based on all available information. The key to building success for clients is sticking with “gold medal” principles that have stood the test of time and are proven to help guide that decision-making process. In our case:
Keep portfolios diversified across a number of key variables such as asset class (fixed income versus equities), country/region (U.S., Canada, European Union, emerging markets), market capitalisation (large companies, small companies) and industry sector (technology, consumer discretionary, precious metals, etc.).
Focus on keeping underlying investment costs low.
Use of exchange -raded funds to ensure the liquidity of client portfolios.
Robust system for reviewing portfolio composition and implementing changes as market conditions evolve or a client’s needs or investment objectives change.
Regular review of non-registered client accounts for tax-saving opportunities.
From a client perspective, there are some “gold medal” standards when it comes to communication. Examples here include:
A Risk Profile Questionnaire that helps determine how comfortable each client is with taking investment risk in the market.
A written Investment Policy Statement that outlines their risk level and tolerance.
Regular statements (available online or by regular mail) and custom statements available upon request for clients with more specific reporting needs.
Consultation on financial planning, tax and estate, insurance and charitable giving strategies for clients and their families.
Consultation on donor engagement, donor motivation, and donor education strategies for nonprofits and charity clients.
Of course, Lexicon Financial Group at Raymond James Investment Counsel’s true “gold medal” standard is our ability to create custom strategies for each client. This level of personalisation is only available to our clients because we are fiercely independent. We do not sell proprietary investment products, nor do we succumb to pressure to sell any product or service. As a fiduciary, we are required to act in the best interest of clients. That is what we have done and will continue to do.
Looking Back
The S&P/TSX composite index (TSX), Canada’s main stock index, ended up 3.3 per cent last week and recorded its seventh straight day of gains - the longest daily winning streak since April 2023. This is its biggest weekly advance since October 2023 and puts the TSX back in reach of the record closing high it posted last month.
The materials group, which includes metal miners and fertilizer companies, was up 1.5 per cent as the price of gold climbed more than two per cent to notch an all-time high. The financial sector, which accounts for 29 per cent of the TSX’s weighting, added 0.6 per cent, while energy was a drag, falling 1.1 per cent, as the price of oil settled 1.9 per cent lower at $76.65 a barrel on tempered expectations of demand growth from China.
Industrials also lost ground, pressured by declines for Canadian National Railway Co and Canadian Pacific Kansas City Ltd. Both railroad companies have issued embargoes on certain shipments, in advance to a potential strike from the Teamsters Canada Rail Conference Union that could begin this week. (6)
Weekly North American Market Statistics
| Index | Week's Change | Year to Date |
| S&P 500 | 3.9%% | 16.4% |
| Nasdaq Composite | 5.3% | 11.6% |
| Dow Jones Industrial Average | 2.9% | 7.9% |
| S&P/TSX Composite Index | 3.3% | 10.0% |
Source: Associated Press and Morningstar Direct 08/16/2024
Last week, U.S. stocks recorded a solid week of gains, as investors appeared to celebrate positive news on both the inflation and growth fronts. This has bolstered hopes that the economy might achieve a “soft landing.” The technology-heavy Nasdaq Composite led the gains, as artificial intelligence chip giant NVIDIA gained 18.93 per cent over the week. U.S. growth stocks handily outpaced value shares last week.
Consumer discretionary stocks also performed well, with Starbucks surging 24.50 per cent last Tuesday on news that it was replacing its CEO with one credited with engineering a turnaround at Chipotle. Likewise, Walmart gained 6.58 per cent last Thursday following its earnings report, which beat consensus expectations. Shares of Google parent Alphabet fell last week due to reports that the U.S. Department of Justice was investigating breaking up the company. If this does happen, it would mark the largest such action since AT&T was dismantled in the 1980s. That said, by the end of last week, analysts polled by FactSet were estimating that the overall earnings for the S&P 500 had expanded by 10.9 per cent in the second quarter versus the year before - the fastest pace since the end of 2021.
Also last Tuesday, the Labor Department reported that core (excluding food and energy) prices paid by producers was flat in July, ending three months of solid increases. The consumer price index (CPI) inflation, reported Wednesday, was more in line with expectations and seemed to reassure investors. Notably, the year-over-year increase in CPI fell below 3.0 per cent for the first time in well over three years.
Housing sector was less encouraging as the Commerce Department reported that building permits fell below 1.4 million for the first time since the depths of the pandemic in 2020. Actual housing starts also fell to their lowest level in four years. The yield on the benchmark 10-year Treasury note decreased through most of the week on the benign inflation data but jumped Thursday morning following the strong retail sales data.
In local currency terms, the pan-European STOXX Europe 600 Index ended 2.46 per cent higher as hopes grew for another round of interest rate cuts by the ECB as early as September. Major stock indexes posted strong gains. Germany’s DAX climbed 3.38 per cent, France’s CAC 40 Index advanced 2.48 per cent, and Italy’s FTSE MIB added 4.09 per cent. The UK’s FTSE 100 Index tacked on 1.75 per cent.
Japan’s stock markets rebounded strongly last week. Despite a holiday-shortened week, the Nikkei 225 Index gained 8.7 per cent and the broader TOPIX Index was up 7.9 per cent. The yen weakened to the high-JPY 148 range against the U.S. dollar, from around JPY 146.6 the prior week, which gave Japan’s exporters a tailwind. Investor sentiment was boosted by better-than-expected U.S. economic data, which soothed concerns about a recession in the world’s largest economy. Japan’s gross domestic product also expanded by more than anticipated in the second quarter of the year which provided further support.
On the political front, Japan’s Prime Minister Fumio Kishida reportedly will not seek re-election as leader of the Liberal Democratic Party (LDP) in September. He will end his premiership once the party chooses a new leader. The decision follows low approval ratings, partly due to his handling of various LDP scandals, including the slush money scandal where party factions had concealed income received through fundraising. Political uncertainty, however, is unlikely to drive asset prices in the near term unless there are large shifts in views on monetary and fiscal policy.
Equity markets in China rose as investor sentiment was largely unaffected by weaker-than-expected economic activity. The Shanghai Composite Index gained 0.6 per cent while the blue chip CSI 300 added 0.42 per cent. In Hong Kong, the benchmark Hang Seng Index ended last week up by 1.99 per cent. July economic highlighted weakness in China’s economy as industrial production rose a below-consensus 5.1 per cent in July from a year earlier, slowing from June’s 5.3 per cent increase, partly due to lower auto sales. Retail sales, however, expanded a better-than-expected 2.7 per cent in July from a year earlier, up from a 2 per cent increase in June. Fixed asset investment lagged expectations as it rose 3.6 per cent in the January to July period from a year ago, while property investment fell 10.2 per cent year on year. The urban unemployment rate ended up to 5.2 per cent from 5 per cent the prior month. July’s weak credit data also raised speculation that China’s central bank may cut interest rates further to fuel demand as China’s prolonged property market slump continues to hit consumer confidence. (7)
The opinions expressed are those of Craig Swistun and not necessarily those of Raymond James Investment Counsel which is a subsidiary of Raymond James Ltd. Statistics and factual data and other information presented are from sources believed to be reliable, but their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Raymond James advisors are not tax advisors, and we recommend that clients seek independent advice from a professional advisor on tax-related matters.
Let me see you get low: central banks kick off rate cutting cycle, Claire Fan, Financial Markets Monthly, Royal Bank of Canada, June 13, 2024
'Inflation risks fading:' Latest data has economists predicting multiple rate cuts by Bank of Canada, Jordan Gowling, Financial Post, August 20, 2024
Posthaste: 4 interest rate cuts expected this year likely won't boost Canadian economy, RBC says, Gigi Suhanic, Financial Post, June 14, 2024
Fed is predicted to deliver three quarter-point rate cuts this year: Reuters poll, Indradip Ghosh, Reuters, August 19, 2024
How fast and how far could the Fed cut rates? Powell may give hint during Friday speech, Christopher Rugaber, Associated Press, August 20, 2024
The close: TSX posts biggest in 10 months as gold hits record high, The Globe and Mail, August 16, 2024.
Global Markets Weekly Update, T. Rowe Price, August 16, 2024
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Looking to Learn?
If you want to know more about some of the topics we wrote about this week, just click on the links below:
What the BoC’s Rate Cuts Could Mean For Investors, Consumers
How Interest Rate Cuts Affect Consumers
Fed officials agreed September interest rate cut looks likely