Thursday, 2/29/2024 a.m.

  • Markets get a lift from latest economic readings – Stocks moved higher in early trading on Thursday, responding favourably to a heavy batch of economic data, including a fresh read on U.S. inflation. While markets hadn't yet started to worry dramatically over this week's U.S. budget deadline, a report late yesterday indicating that Washington lawmakers reached an agreement to push back two funding deadlines and avert a government shutdown is also likely offering a little help to the market's mood. The bond market is fairly flat, though short-term yields are down modestly, while longer-term yields are little changed, which in our view reflects today's inflation data and the bit of additional flexibility it offers central banks around this year's rate cuts. Looking across markets, global equities are generally higher, as are gold and crude oil prices, with the latter boosted by an expectation for extended production cuts from OPEC+.*
  • Inflation data in focus – Today brought the latest look at U.S. inflation in the form of the personal consumption expenditures (PCE) reading. While the consumer price index (CPI) is typically more recognized, core PCE is the Fed's preferred measure of inflation, making this data important to the markets. The outcome was fairly positive, if for no other reason than that it was in line with expectations and perhaps alleviated some anxiousness around a hotter-than-expected surprise, as was the case with the last U.S. CPI reading. In any event, we'd characterize the figures as confirmation that the broader trend in inflation is still one of moderation. January core PCE was up 0.4% versus the prior month and up 2.8% year-over-year, a slight downtick from the December reading. Underpinning the overall move was an outright decline (0.5%) in goods prices, while services prices continue to see some persistence, up 3.9% over the last year.* All told, this is consistent with our view that inflation remains on a downward track this year, though we don't think it will play out without a few kinks and disruptions along the way. This latest PCE figure doesn't materially alter the Fed's plans, in our view, but it does support confidence in the ability for policymakers to begin cutting rates later in the year.
  • Consumers still in control – Domestic GDP, along with the U.S. labour-market, income and spending data, was also on the docket today, providing a fresh take on the state of the consumer. The first look at Canadian fourth-quarter GDP revealed that the economy expanded by an annualized rate of 1%. While still fairly tepid growth, this was a marked improvement from the 0.5% contraction in output in the prior quarter, with the fourth-quarter seeing a boost from household consumption. At the same time, business investment was weak (down 5%), which we'd attribute to some cautiousness from businesses around capital investment, given the deceleration in Canadian growth as 2023 progressed. This means average quarterly growth in the second half of last year was just slightly positive, consistent with our view that the domestic economy is hitting a soft patch, but not destined for a significant or prolonged recession. Also released today were weekly U.S. initial jobless claims, which ticked up slightly to 215,000, but remain near a historical low, indicating that employment conditions remain fairly healthy despite headlines of certain layoff announcements within the technology industry.  The U.S. personal-income and spending report showed that incomes rose an impressive 1% in January versus the prior month, triple the rate of income growth in December. At the same time, spending growth did not match that pace, rising 0.2% month-over-month. We'd offer a bit of perspective on both, as total combined income in January was flattered by an upward adjustment to Social Security payments, while spending growth is coming off of a strong gain from December's holiday shopping. Overall, we look at the entirety of this data as an indication that the consumer is still in a good spot but likely to pull back a bit from the pace of spending in 2023. We expect labour-market conditions (hiring, wage gains) to soften moderately as we advance this year, which, coupled with excess savings that were drawn down last year, suggests household consumption will provide less horsepower to the U.S. economic engine this year.

Craig Fehr, CFA
Investment Strategy


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