Weekly Newsletter – January 12, 2024 – Rates are dropping like the Temperature

This morning, U.S. PPI numbers were reported, revealing deflation in some input prices – I guess this was a surprise! The actual headline for December PPI declined by 0.1%, with energy being the largest drag down (negative 1.2%). Core PPI (excluding food and energy) remained flat from the previous month (November), and November itself showed no change. Areas experiencing increases included airline passenger services, software publishing, and security services. However, these were more than offset by a significant drop in machinery/vehicle wholesaling (negative 5.5%).

In Canada, a staggering 88% of all Canadians believe that the country is already in a recession, and 20% of restaurant owners have stated that they may need to close their operations if required to repay their CERB loans now. Remember that the deadline to repay these loans has already been extended twice. Given the food inflation observed over the past two years, it makes sense that these small businesses would face challenges with their cash flow.

What does all this mean? It appears that the supply/demand issues created during Covid have mostly resolved themselves, consumers have finished spending their extra savings on basement renovations and backyard upgrades, revenge travel has subsided, and the U.S. Fed is nearing an interest rate cut. However, inflation has taken a toll on many small businesses, as their margins have been squeezed due to the lack in pricing power enjoyed by larger companies.

If all the above holds true, then we are about to fall off an economic cliff in Canada. Until recently, the U.S. has been the only country experiencing positive growth over the past two years globally. I am skeptical of the government data because when countries like China and most of Europe are slowing, it seems illogical that the U.S. continues to grow. But who knows, maybe the politicians are actually truthful – I don’t think so! Rates are coming down regardless of what Tiff Macklem says publicly. Expect the bank rate to be at least 200 basis points lower by the end of the year.

Other points to consider:

1. Olivia Chow, Mayor of Toronto, is proposing to raise property taxes by 10.5% or 16.5% this year. The 10.5% is deemed doable if the Feds pony up $250 million to help the city. Such a percentage increase is substantial, emphasizing the limits to spending other people's money.
2. The global share of the economy is undergoing seismic shifts. Over the past 30 years, the U.S. and its allies have seen their share drop from 90% of the global economy to only 67%. China and its allies now make up 27%.
3. What would we do without oil and gas? Minus 46 in Calgary today and getting colder. Much of Canada and the US are under extreme cold warnings. I was thinking of turning my thermostat down to reduce my carbon footprint but I thought staying alive was the better option! Or maybe I could climb on my roof and clear the snow off of the solar panels!