Global equity markets swung between gains and losses as investors continued to closely monitor incoming economic data to predict the timing and size of interest rate cuts this year. In Canada, the S&P/TSX Composite Index advanced, led by the Materials sector. U.S. equities declined, dragged by the Real Estate sector. Yields on 10-year government bonds in Canada and the U.S. moved higher. Oil prices rose, while the price of gold declined.
Stocks drive up Canadians’ net worth
Statistics Canada reported that Canadian household net worth rose by 1.8% to $16.4 trillion over the fourth quarter of 2023.
Household net worth was boosted by strong stock and bond market returns over the quarter. The S&P/TSX Composite Index rose over 7% in the fourth quarter, while Canadian bonds advanced by 8%. Global equities and bond prices also increased.
However, real estate weighed on the growth of net worth with the value of real estate falling by 1.9% over the quarter.
Meanwhile, the debt-to-income ratio fell to 178.7% in the fourth quarter from 179.2% in the previous quarter, largely in response to slower mortgage borrowing and overall credit growth.
Canadian households have proved their relative resilience despite ultra-tight financial conditions. The ongoing growth in wealth has helped the Canadian economy avoid any major recessions since the Bank of Canada started tightening monetary policy.
U.S. inflation unexpectedly rises
The U.S. inflation rate was 3.2% in February, up slightly from the 3.1% rate in January, which was also the amount expected by economists.
Gasoline prices continued to decline in February, but at a much slower pace compared to January. Shelter and food prices remained elevated over the month.
Core inflation remained elevated in February, likely reinforcing the U.S. Federal Reserve Board’s (“Fed”) position to keep interest rates higher for longer. The core inflation rate, which excludes volatile items such as energy and food, was 3.8% in February, which was a tick above the 3.7% rate economists had expected.
The Fed’s policy interest rate sits at a target range of 5.25%–5.50%. Its next meeting is on March 20 where it is expected to hold steady.
Demand appears to be letting up in the U.S. economy. Retail sales rose by 0.6% in February, underwhelming economists who were expecting a 0.8% increase. This follows a 1.1% decline in the previous month.
Japan avoids a technical recession
A second and final estimate showed Japan’s economy expanded by 0.4%, annualized, in the fourth quarter of 2023.
Japan’s economy avoided falling into a technical recession after falling by 3.2% in the third quarter. There were fears the economy entered a technical recession when the first estimate showed a 0.4% decline.
The economy was boosted by strong business investment and net exports. Exports, a critical component of Japan’s economy, grew by 2.6% over the quarter. However, domestic demand remained relatively weak with consumer spending falling again.
Market participants are considering whether this could put the Bank of Japan on a path to begin raising its key interest rate from −0.10%.
U.K. gross domestic product grows to start 2024
The U.K. economy expanded by 0.2% in January, reversing a 0.1% decline in December.
Economic conditions in the U.K. are showing signs of improving early this year after falling into a technical recession in the fourth quarter of 2023.
January’s growth was buoyed by a relatively strong services sector. Retail trade and education services grew. Conversely, industrial output continued to struggle amid relatively weak demand.
The U.K. economy is showing signs of improvement as we begin 2024, but tight financial conditions are likely to persist with the Bank of England appearing content on leaving interest rates higher for longer.
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