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Economic Impact
To keep you informed and stimulate your thinking, Stéfane Marion and Denis Girouard take a look at economic news and share their perspectives in our monthly informative videos.
Hello everyone, Welcome to Economic Impact. Today is Feb 11th, 2025 and as usual I am with our chief Economist Stéfane Marion. Stéfane, surprisingly once again, assets are doing well.
All the countries that are in the crosshairs of the US President of Washington on a tariff war are out actually outperforming the S&P 500. But more tellingly, Denis, all-asset classes are up this year so far this year. And as I said, might be surprising to see a stock market behaving so well outside the US on the premise that we understand that there's a global trade war. But whether it will be as punitive as what we think for the global economy is not the baseline scenario at this point in time. So, the market is thinking otherwise versus what the president is saying at this point in time.
At this stage, it seems that Europe and Asia are not too concerned.
Exactly. I mean, again, these are the countries that are facing the
biggest threat of US tariffs right now. And yet the market's saying it
will be too punitive for the US to proceed with a 25%. Doesn't mean
there won't be any tariffs, Denis, but 25% tariffs will be too
punitive on US inflation. Therefore, they're not, markets are not
buying it right now. I think it's interesting to look at this this
way, market expectations. But again, let's not be complacent because
you know, something might still happen in the next few years.
Surprisingly, in Canada, we see up 3.1%. But it's not all
sectors. In fact, it's only two.
That's the point, because just the sheer threat of these tariffs is fragilizing the Canadian economy. In case in point, most sectors are not behaving so well year to date. But the sector that's carrying the TSX, actually there's two. Well, you know, technology, but that's a small component of the S&P TSX, but mostly it's the materials sector up 13% year to date, really enabling the Canadian stock market to outperform the US, for example.
And with the uncertainty, there's gold and there's materials and gold is in a new high.
Well, if you're going to look at materials, you cannot not speak to gold prices because we're a big producer and that's a large chunk of the S&P TSX and gold price is that new all-time high. In nominal terms, $2900 or so U.S. dollars. Adjusted for inflation, you go back more than 50 years and it's a new all-time high. So, basically some components of financial markets saying while you were not so sure about this tariff war and the way to protect myself is to buy a tangible asset and one of them would be gold. There's probably still upside for that.
And in history gold has been, you know, a safe haven against inflation.
It could be a safe haven against U.S. dollar depreciation, but the US dollar is a new all-time high. But you're absolutely right against inflation. Gold is looking at inflation expectations right now. And this is a poll made at the consumer level and say, Denis, what do you think inflation might be a year from now? It actually has surged more than 100 basis points in the past month or so. And people saying, you know, it might be 4%, Denis, I'm telling you, if we have 4% inflation, there's no way that the Federal Reserve can ease monetary policy. So, this is why gold price is saying if you want to be aggressive on a tariff war, a global tariff war, we might keep you in check because inflation is going to be going to be higher.
Yeah. And at the same time, you know, we have rates staying pretty high in the states and the stock market doesn't go down. Then we have that, you know, what we call the first-time negative equity premium that we haven't seen for a long, long period of time, almost 20 years.
Yeah. So, if you're an investor, you say if I'm willing to take the risk to invest in the stock market, there's a there's a premium I'm willing to cope with. But if at some point the equity risk premium turns negative, that means I'm not necessarily compensated to take that type of risk in the stock market not knowing what whatever tariff war will unfold or not versus what I get to invest in something perceived to be safer. 10 year treasury yield. This is the first negative equity risk premium in a generation. That's a generation. So, this is why the stock market is vulnerable to this global tariff war. This is why we said last month that we don't think 25% users baseline scenario. We know there will be some tariffs on China. Right now, there are some, but whether they can be aggressive, or Washington can be aggressive remains to be seen without fragilizing the stock market and creating a negative wealth effect for US consumers.
And back in Canada, there's a big concern. Uncertainty is at the highest level that we haven't seen.
The Canadian economy is fragilizing. You're absolutely right. We saw it in some certain industries of the S&P TSX that we showed previously. But at the same time, if you want to go put a number on it, if you look at the index of policy, economic policy uncertainty, record high. So, it doesn't matter that we've signed free trade agreements with more than fifty countries. Corporations right now don't know how to manage their business plan because we don't know if these tariffs threats will unfold or not. That we saw this week a 25% tariff on aluminum and steel. That would be a big impact on the Canadian economy. But the tariffs are not to be applied. well, might come into effect on March 4. So we'll see what happens over the next three weeks. But clearly, you are fragilizing the Canadian economy right now with tariff uncertainty. You don't need to have the tariffs in place. The uncertainty itself is fragilizing the Canadian economy.
Yeah. And investors in those new factories and, you know, and so on. They're frozen right now. They won't do anything.
You're going to get weak investment and therefore probably weak economic activity in the first half of 2025.
That's why we need the government to be in place and put, you know, stuff that will help those industries to invest and keep the economy going, you know, up and working despite the fact what's going on South of the border.
I think there are discussions on that. Remember when we spoke to interprovincial trade barriers. Now there's more talk about this. People are talking about, you know, energy security is very important for economic sovereignty. So, we're saying, you know, a big change. We could actually aspire to policies that will be, you know, positive for the Canadian economy in the second half of 2025. The first half will be shaky, but the second half, in the meantime, what it means, Denis, is that the Bank of Canada is forced to be more aggressive on monetary policies in which they mentioned just a week ago when they ease monetary policy.
And with that uncertainty, you know, the Loonie the Canadian dollar keeps going down.
Well, since the Bank of Canada is saying that, you know, this uncertainty is fragilizing the Canadian economy. So, they're opening the door to further rate cuts. Therefore, the interest rate differential is driving the value of the Canadian dollar, which early in February when we thought that the tariffs would be imposed at the beginning of this month, it's been delayed till March, Canadian dollars went to 147, came back to 143 where we stand right now. But again, you can't forecast an appreciating dollar until we have a better visibility on tariffs or not. But at the same time, having visibility on Canadian policies will be very important to support the currency. And Denis, you know what, we want to put a positive spin on that. We believe that what's going to happen in the second half of this year should be more positive for the Canadian economy, but there's still a few weeks of uncertainty to cope with.
Well, we'll keep the positivism of your comments and thank you once again. Thank you all for joining us. We'll be back early March. Thank you. Have a good day.
Property Perspective
Our National Bank specialists decode the latest trends in the real estate market, including interest rates, the resale market and forecasts for the coming months.
Hello everyone and welcome to this November 28th edition of Property Perspective. Today I have the pleasure to be with Matthieu Arseneau, hello Matthieu.
Hi Simon.
And with Andrée Desrosiers.
Hello Simon.
Hello Andrée. Our topic of the day, what's best for my mortgage, a fixed or a variable rate. But before we enter that interesting discussion with Andrée, let's talk with Matthieu about recent economic news that influence the real estate market. So Matthieu, a number of events have occurred since we last spoke, all of which have an impact on the economic outlook, obviously. First, what are the implication of the Republican sweep in the US presidential election for economic growth and interest rates?
Yes, this was a big event and there will be application for that for Canada over the next four years. Higher uncertainty, we saw that with the announcement of potential tariff on Canada. We'll see. But clearly, in my mind, the big event and this has implication for the housing market in Canada, particularly for interest rates. It's the fact that there could be much more fiscal stimulus South of the border given the promises of Trump during the campaign. As you can see on that chart, while the Congressional Budget Office was expecting roughly 6% of GDP deficit, which is already very high, it could be as high as 8% if all those promises are realized by Mr. Trump. So at the moment the Federal Reserve is trying to calm inflation in the US, calm the economy. There's government that could support growth over the next few years. So before the election, the Federal Reserve started to decline rates. They did already 75 basis points. But you can see that at the same time it didn't mean that longer term rates decline. In fact, it increased because of risk of tariffs and its implication for inflation because of stronger growth, though that's something we have to keep in mind. And the problem with that increase is given a global correlation in interest rates, when you have the largest economy in the world supporting the economy and having those rates it has an impact on rates in countries with economies not as strong as the US and has to cope with those increases. And that could be difficult for a couple of other economies in the world given the increase of those of those rates. So big implication and that has implications for Canada as well.
Very interesting Matthieu, so the ability to lower the prime rate in the US now looks more limited. What about Canada?
In Canada, so we saw that in fact for investors expectation for the policy rate in the US, it was expected at 3%. Now it's much more closer to 4% by the end of next year. So clearly investors revised their optimism for rate cuts in the US. In Canada, the situation is clearly different in our view when you look at the labour market here, I'm showing the jobless wait for the prime age workers, the 25-54, it has continued to increase over the past few months. And that's diverging with the US and it's now its highest since 2017. And we don't see stabilization over the next few months given the hiring intention of corporations. So for us that's a sign that the economy has cooled significantly and this is reflected in inflation. When you look at services, core services excluding shelter in the US, it's running at 4.4% because they didn't have that weakness that we got in Canada, it's so it's running at 1.3%. So clearly inflation is under control here. So yes, we expect the Bank of Canada to continue to decline rates. Prior to recent announcements, we were expecting policy rate as low as 2% by the end of next year. But given the transfer that was also announced by the federal government, it could lead to upwardly revise a bit. We'll see if it will be implemented. But clearly as you can see on that chart, while Bank of Canada is declining rates, 10 year rate is increasing and is essentially in its last two years average at this point. So not that much relief for long term rates. So that's something to keep in mind. But for that reason, perhaps it's another reason for the Canada to try to push down those rates by having short term rates very low. So that's our expectation at this time, OK.
Matthieu, the government has announced recently an additional break on population growth for the next three years. What are the implications of this new announcement on the real estate market?
We talked about it very often over the past few months. Housing shortage is still very acute in Canada. We see that in the rental market with rent still increasing at a tepid pace. Same thing for first time home buyers. It's where affordability is still a problem. So I think it's the good decision to calm down population growth. In fact, with the recent announcement about the declining non permanent resident to 5% of population over a 2 year. Reducing permanent resident temporarily, that will lead for— when you look at the five year period, when we look in 2028, the pace for the next 5 years will be similar to what we had prior to the pandemic level, much more sustainable and much more in line with our capacity to welcome. So, I think it's a good decision at this point given housing shortage. And we have to keep in mind newcomers have problems to integrate the labour market in the current context. So let's fix that situation and get back to normal after this three-year period of slow growth and we will be able to get back to the model we had that was benefiting the Canadian economy prior to the pandemic.
So finally good news. Thank you, Matthieu for your very interesting comments. Let's now discuss with Andrée, hello Andrée. In the context of the anticipated drop of the interest rate by the end of this year and obviously in 2025, should we go with a fixed rate or variable rate for our mortgage?
Very good questions Simon and indeed very relevant. The choice between a fixed rate and a variable rate for a mortgage depends on several factors, especially in the context of falling rates. Our risk tolerance, financial situation and short and mid economic outlook are key, you know, considerations to look at. We must first understand the bearish rate context, however, When the Bank of Canada lowers its prime rate, financial institutions typically adjust, you know, their mortgage rates in response to that downsize. Variable rates will generally follow primary fluctuations and become particularly advantageous in the short term. Fixed rates, although often higher than variable rates at the time of subscription, offer protection against potential future increases. We must however remember that they usually follow the interest rate on long term bonds and not the Bank of Canada prime rate. Therefore, a quarter point drop in the prime rate does not mean that fixed rate will fall by the same amount.
OK. We must therefore understand this context carefully before making our decision. You're right, Andrée. Many people assume that when there's a drop in the prime rate, all rates fluctuate in the same way. However, as we have just seen, that isn't the case since different rates are influenced by different factors. With that in mind, Andrée, what are the advantages of one or the other?
Yeah. If we look first, you know, at the variable rate, you should consider that rate if you believe that interest rates will continue to decline or stay low for an extended period of time. You can also choose the variable rate if you're comfortable with some level of risk and can handle or afford, you know, potential payment increases if rates rise. Also if you want to benefit from lower penalties, if you decide to pay off your mortgage early or switch lenders. Also, some variable rates loans offer the option to switch to a fixed rate if rates increase. On the other hand, you should consider, you know, a fixed rate if you prefer stability and want to avoid uncertainty, if you think rates might rise in the midterm and again, if your budget cannot accommodate sudden increases in monthly payments.
So once again, Andrée, the choice does not automatically go towards one or the other. Even if we are in the context of falling rates. As you mentioned, we must make sure to take other elements into account in our decision. You are very right Simon. And we must also not forget that some lenders offer mixed rate mortgages, you know, part fixed, part variables. So this approach allows you to balance the advantages of both options and reducing risk while still benefiting partially from falling rates. So in summary, you know in a falling rate environment, a variable rate may seem more advantageous in the short term, but it remains a bet on future rate trends. If you're comfortable with some uncertainty, a variable rate could maximize your savings. However, if peace of mind is your priority, a fixed rate is the safer choice. It all depends like usual on your financial profile and financial goals. To help you in your choice as usual, do not hesitate to consider or consult a mortgage specialist to assess your personal situation and provide you the right advice for that choice.
Thank you Andrée for sharing your insights. As you suggested, having a discussion with a mortgage specialist will help make the right decision. There's no point about that. So thank you all for watching and join us again very soon for our next edition of Property Perspective.
5 • 4 • 3 Market Outlook
5 minutes, 4 graphs, 3 key takeaways! Discover a fresh focused quarterly review of markets, the economy and investments with expert Louis Lajoie from our CIO Office.
Hello everyone. Today, December 4, we're going to take 5 minutes to look back on the year that's just about the end and look forward to the year that's right around the corner.
So, if we start by looking in the rear-view mirror, as you can see, 2024 turned out to be quite a spectacular year for investors. Returns of about 30% for global equities in Canadian dollars. There were some bouts of volatility from time to time, but ultimately with inflation moving down broadly and the labour market in the U.S. remaining relatively strong, the uptrend was sustained on the equity market front. The flip side of this is that without any substantial slowdown in growth, bonds gains were much more modest, but nonetheless in line with running yields. And if you combine these two key asset classes as we often see in a balanced portfolio of 60% equities and 40% bonds, again, as you can see, a spectacular year for investors.
And just to put things into perspective, let's look at how that specific balanced typical portfolio has performed historically on a year-to-year basis. And there are two things, two takeaways from this chart. The first one being just how much the chances of success are skewed towards investors, in favour of investors essentially 8 years out of 10. That portfolio has been positive since the 1990s by an average of about 8%. So, the point here is that whenever we may think at any point in time, just keep in mind that these are the odds that we're facing as investors. The second point is to show how the last few years have been rather extreme in many ways, and specifically in 2022, when that inflation shock spared no asset classes virtually. But since then, we've had quite a positive comeback in 2023, but even more so this year. And the fact that we've been so much in extremes in recent years is definitely a reflection of the reality that the economic landscape has been anything but normal in recent years as we've moved away from the pandemic.
And the reality is that even in as we approach 2025, there's still quite a bit of uncertainty and even fragility in this economic backdrop, all reliant on how the U.S. labour market will evolve. And for now, what we see is that businesses are very cautious, with hiring rates well below historical averages, and consequently, workers are also very much prudent, much less willing to quit their job on their own, the quit rate is at its slowest point in essentially 8 years. But the positive thing here is that despite all of this, layoffs remain very low. And the labour market picture that you see on the screen here, that was literally the best-case scenario in the eyes of the Fed and by extension, in the eyes of the markets. And that's what we got thus far. But let's be clear, these trends, specifically these two, need to stabilize in 2025 because otherwise the logical next step would be to ultimately see that layoff rate pick up.
So, we'll have to remain cautious, but there's ground for optimism. There are some promising signs that are starting to show up on our screen. Specifically, we like to monitor manufacturing activity, which has been relatively weak over the past two years. But when you take into account a series of factors and most importantly, the fact that global central banks have been cutting rates, most of them have been cutting rates since 2024, that suggests that we may get a rebound next year. And if that happens, that would be very much welcome news for markets.
All right. So, 3 takeaways for today. As I alluded to, it's essentially the best-case scenario that came to fruition in 2024 and markets have responded accordingly. But when we look at 2025, we technically see less and fewer cyclical clouds, but we're faced with much more political fog with the arrival of U.S. administration that you know, as well as I do, is fundamentally unpredictable. And there's a lot of things that will likely happen on the fiscal policy front, the trade policy front, foreign policy front. There will definitely be surprises on these fronts next year. And as such, as investors, we must expect sustained volatility next year and ultimately, perhaps gains that are much closer to historical averages and perhaps less extreme than what we've seen in recent years.
If you'd like more details on our outlook for next year, make sure to check out a report that came out in early December. And until then, I wish you all happy holidays and we will talk again in March 2025.
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