Markets anticipate easing policies from major central banks starting in June, driven by ongoing inflation normalization and a shift toward recession prevention. For Canada, we look for a first cut in June compared to the first expected move from the Fed in December as higher interest rates are having a large impact on the Canadian labor market. In April we maintained our U.S. twelve -month forward looking outlook to reflect our view for Stagnation (U.S. Real GDP growth between 0 and 2.5%), over the entire period. Stagnation will put downward pressure on rates, as moderating inflation will lead to less restrictive monetary policy.
The Chinese economy grew by a seasonally adjusted 1.6% in Q1 of 2024, quickening from an upwardly revised 1.2% increase in the previous quarter.1 The Consumer Price Index in China decreased 1% in March over the previous month.2 China’s trade surplus declined to USD 58.55 billion in March. Exports shrank by 7.5%, while imports fell by 1.9%.3 The consumer price inflation rate in the Euro Area was confirmed at 2.4% year-on-year in March.4 The unemployment rate in the Euro Area stood at a record low of 6.5% in February 2024. Across the major Euro Area economies, Spain continues to report the highest jobless rate at 11.5%, followed by Italy at 7.5% and France at 7.4%.5
The U.S. economy expanded an annualized 3.4% in Q4 2023. Government spending rose 4.6%.6 Annual inflation in the U.S. accelerated for a second month to 3.5% in March. Energy costs rose 2.1%.7 The unemployment rate in the United States dipped to 3.8% in March. The labor force participation rate increased to 62.7%.8 The trade deficit in the U.S. widened to $68.9 billion in February 2024, the highest in ten months.9 The annual inflation rate in Canada rose to 2.9% in March of 2024. A sharp rise in gasoline prices (4.5% vs 0.8% in February) pushed transportation inflation to 3%. Looking further, a prolonged period of restrictive interest rates by the Bank of Canada, in addition to increasing Treasury yields in the U.S., lifted mortgage interest costs by 25.4% annually. As a result, average rents grew faster (8.5%), keeping rents inflation at 6.5%.10 The unemployment rate in Canada jumped to 6.1% in March from 5.8% in the earlier month.11
Despite uncertainty surrounding potential Fed rate cuts, economic strength and diminishing recession fears led to the best Q1 U.S. market performance since 2019, with the S&P 500 up 10.6%. The broadening of the rally continued in March, with the S&P Mid Cap 400 up 5.6%, outpacing the S&P 500 3.2% gain. Canadian equities finished the month up 4.1%. The S&P Europe 350 soared 4.1% in March, its best month since November 2023. All but one of 16 countries contributed positively to the pan-European equity returns in March, with the United Kingdom the biggest contributor with 1.0%. Pan Asia equities rebounded but continued to lag the global market, with the S&P Pan Asia BMI rising 2.6% in March.
In April we reversed the asset allocation shift from March, reintroducing exposure to 3-to-7-year treasuries and removing the 20-year plus treasury bond. We no longer anticipate the commencement of rate reductions in the U.S. in June due to current strong economic factors and recent comments made by the Fed. Alternatively, due to an underperforming Canadian economy, we expect the BoC to cut interest rates earlier and more than the Fed this year. U.S. Mid-cap equities continue to provide an industrial-centric sector allocation, ebbing refinancing risk and less demanding valuations relative to mega caps. Gold is held across all models as a long-term strategic asset as it will continue to benefit our portfolio models during stagnation.
The nature of economic cycles is changing. Fiscal policy and electoral cycles will increasingly dominate outlooks. A long list of fiscal commitments, ranging from military to climate-transition expenditure, will keep government budgets in deficit, particularly in Europe. As elections approach, countries will likely loosen fiscal policy further—the U.S. and the U.K. being prime examples in 2024. Our twelve- month forward outlook focuses on the size and scale of the U.S. budget deficit, coupled with the substantial Treasury debt issuance required to address it. We will continue to monitor this as we move through 2024. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.
Deborah Frame, President and CIO
Drew Millard, Portfolio Manager
1 Trading Economics. China GDP. April 16, 2024.
2 Trading Economics. China Inflation. April 11, 2024.
3 Trading Economics. China Trade. April 12, 2024.
4 Trading Economics. EU GDP. April 17, 2024.
5 Trading Economics. EU Unemployment. April 3, 2024.
6 Trading Economics. U.S. GDP. March 28, 2024.
7 Trading Economics. U.S. Inflation. April 10, 2024.
8 Trading Economics. U.S. Unemployment. April 5, 2024.
9 Trading Economics. U.S. Trade. April 4, 2024.
10 Trading Economics. Canada Inflation. April 16, 2024.
11 Trading Economics. Canada Unemployment. April 5, 2024.
Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. March 31, 2024. Index performance is based on total returns and expressed in the local currency of the index.
