Hello everyone and welcome to Economic Impact. Today is May 14, 2024
an I am with our Chief Economist, Stéfane Marion allows the fan.
Good morning, Denis. How are you today? I'm good.
Good, once again. we are going to talk about performance on the
stock market.
Yes, it wasn't a very good month in April. As you recall, we spoke
to that last month. But so far this month we've regained some of the
loss ground. Then global equities are slightly up on the quarter,
Denis. Still comfortably up year to date, but on the quarter, we've
regained the ground lost in April. Note that Canada is actually
outperforming by a little bit the global index, so that's a bit of a change.
Is this widespread in Canada or is it only very few sectors?
No, it's quite narrow, Denis. It's, it's, it's mostly a reflection
of what's happening in materials, gold prices, mining stocks and also
the energy sector, up 3.7% in the quarter. Note that, year-to-date
materials up almost 18%, almost 16% for energy. Were it not for these
two sectors, we wouldn't have a positive return year to date on the
S&P TSX. So, it's still narrow.
But, because of expectation on rates and rates seem to be reaching a
plateau right now.
Well, I think the reason the market has been expected, you know, has
done well year-to-date as a reflection of expectations that you know
central banks are done with monetary tightening. You can see that in
emerging markets, I mean some countries that I actually slightly
lowered interest rates. As for the advanced economies, we saw Sweden
coming down with rates. Europe's about to start, but the big question
is what will happen in you as the second-half this year. This is what
the stock market is looking at right now.
Yeah, but when we're talking about rates in North America, we're
talking about inflation. But inflation has to come down to see rates
coming down.
But it's not right now. Not collaborating. Not so far. This is CPI
week this year. But if this week is CPI week - if you look at the PCE
deflator, which is the Fed's preferred measure of inflation, we have 3
consecutive months where the monthly change in inflation annualizes
well above the 2% Fed target the last reading. We had was close to 4%,
so clearly this is not a Fed friendly number. An you know it's all due
because of labour market once again. Well, I mean if inflation is not
collaborating then you got to look at what's happening in wages and
clearly that's not helping either. And labour compensation is actually
accelerating on the quarter. This is what's happening when you deploy
massive fiscal stimulus would on an unemployment rate below 4%. So at
4.8% , Denis, it's just not Fed friendly. And, so I'm not saying that
the Fed won't be cutting rates this year, but I think it's going to be
at the very end of this year. So right, cuts are coming, but maybe not
as aggressively as we thought. So hands from the stock market
perspective, you might limit somebody upside.
Yeah, and if we're coming back in Canada. So we just had the
employment numbers, still a good number.
90,000 jobs created in April. That is almost five times above
expectations. But you know what, Denis, the unemployment rate did not
come down, so the door is still open for bank account or rate cuts.
And the reason the unemployment rate did not come down is that, unlike
expectations, population growth is actually accelerating so far in
2024. So note that historically over the first four months of the year
normally population rose 110 thousand, last year was 280,000 on the
first four months, which was an all time record high, but you know,
new record this year. Up 47% above the all-time high recorded last
year. More than 400,000 individuals, Denis, that is a new record, all
time record, this is unprecedented.
Are you predicting a new record this year in terms of population
growth once again. Well, to be honest, it's been 2 years in a row now.
Yeah, I know to be honest I thought that we might decelerate this
year but based on these numbers you're likely to accelerate. And the
reason for that, Denis, is Ottawa has warned people that starting in
2025, there will be some limits on foreign students and temporary
workers. So, some people have probably front loaded their decisions to
come to Canada. So, it's likely to be a new record in terms of
population growth again this year.
And when we're talking about inflation, rent inflation also big part
of that huge number that we have.
Remember when we said in the passage you quote David Foot, the most
famous Canadian demographer, he once said demographics explain two
thirds of everything. So would you have this type of demographic
shock, you shouldn't be surprised to see rent inflation moving higher.
So, Canada wide, where at 8.5%, which is the highest level since 1980.
In provinces such as Alberta where population growth is the fastest in
the world. We're talking about rent inflation at 14%. So, at 8.5% you
have limited downside. So what that means it keeps inflation slightly
elevated versus expectations. So, it means it doesn't mean that the
Bank and I won't be able to cut rates. I think they will be able to
cut rates, but it won't be as aggressive as what we've seen in the
past. So, you have to be prepared for rate cuts, but not massive rate cuts.
Yeah, Thank you. Last month you started talking about electricity
consumption in the US. If we do the same thing in Canada, how does it look?
Big surprise here too. So, in the US we know electricity demand is
surging on the basis of manufacturing reshoring. From a Canadian
perspective, it's not the case is not manufacturing reshoring. Again,
it goes back to demographics explain two thirds of everything, and
with surging population we've had it 4 million people over the past
four years. We're on track to add four million people in the past 4
years, but that's what we normally do in 10 years, right? So yeah, I
don't think Ottawa was ready for this type of growth or this change in
trend in terms of electricity demand. So, after 15 years where we
outsource manufacturing production to China or the rest of Asia
manufacturing, electricity demand was quite stable and we're now at an
inflection point. This is surprising. Everyone, every country is being
surprised by this right now, this surge in demand for electricity.
It's population growth, but also massive demand from AI, right?
For sure. But at the same time, because of that, it's the first time
that we're seeing deficit in electricity production in Canada.
Well, you want to see how surprised you can be when you don't plan
for that, do you? And, when there's less hydroelectricity available
from BC or Quebec, because the water reservoirs are a little bit
depleted, you end up having the first Canadian electricity deficit on
records. So last winter we were forced to import electricity from the
US. Which is produced from natural gas and coal. So that's a big
surprise. I don't think anybody expected this and that's a big deal.
So, you have to be prepared for rising demand that might lead to that.
So, we need to add capacity here too.
Yeah, I'm talking about natural gas because now Ontario needs more
electricity. They need more natural gas to produce that electricity.
Well, which is a big change.
Again, demographics explain two thirds of everything. So from an
Ontario perspective, think about the GTA. The Greater Toronto Area saw
its population growth accelerating 66% above last year's level, which
was in all-time high. So, on the GTA alone, you've added 100,000
people in the first four months, which is unprecedented. That means
there's more demand for electricity, and the electricity capacity at
Ontario has at this point in time comes from natural gas. Hence the
reason why the natural gas electricity production, well the
electricity production from natural gas actually more than doubled
over the previous year. And it's likely to remain on an uptrend,
Denis, because we have even yet to start producing all these
electrical vehicles that will demand a high proportion of electricity.
And what population growth so strong. I think what it does the need it
argues for probably the need to probably push back those
decarbonization objectives that have been put forward from a Canadian
perspective again, we never thought we would get this type of
demographic surge, so we need to adjust to this situation.
Thank you, Stéfane probably more question marks that we have in our
head now than we had previously, but very interesting and thank you
all for being with us. Above all, don't miss the next meeting early
June until then, thank you.