Market Update: Market Bulls Frozen as Data is Less Impressive
The S&P 500 is up today on a recovery from Technology, but data suggests things are not as great as hoped
The S&P 500 is up today on a recovery from Technology, but data suggests things are not as great as hoped.
Topics
Inflation being persistent
US Consumers Tightening the Belt
US Consumer Debt Hits Highs
Interest Rates Climb
Inflation Being Persistent
Headline inflation remains stronger than expected as the US and Canada showed 3.4% in December. This is a rise for both countries following a weaker November with slightly stronger pricing across the board. Core inflation continued to fall, dropping to 3.9% in the US and 2.6% in Canada, both fresh new lows.
Headline inflation remains persistent but Core Inflation (excluding food and energy), continued to fall. This is more what the Federal Reserve looks at when choosing to cut rates, as food and energy are more volatile. This is the first sub-4 % print since June of 2021.
While there are improvements this is showing higher for longer inflation and if this continues rate cuts will be SLOWER than expected in December.
In Canada, Core Inflation dropped to 2.6%. While very close to the 2% target, it still is above and dropping slowly. The fear would be cutting too much which could affect trade with the US and Canadian Real Estate Prices. All that being said, the stage is set for Canada to start cutting rates at a faster pace than the US.
US Consumers Tightening the Belt
A recent survey of US Consumers showed that if they were to receive a 10% increase in pay, 38.4% would put the extra money towards debt, while only 16% would increase spending. This is the lowest number since August of 2015.
The Consumer is 70% of the US economy and their desire to spend is a large driver. This data shows the US consumer is beginning to feel the interest rate shock as their focus on debt grew into the end of the year.
US Consumer Debt Hits Highs
A recent survey found that credit card and car loan debt hit financial distress levels not seen since 2008. This data point continues to grow and solidifies the previous point of the US consumer's focus on paying down debt.
This is a valid point that the US Consumer is not in the best place. But, also shows things are not as bad as in 2008. The majority of debt is on real estate and consumer weakness is unlikely to spill to the real estate market.
What we see is the fragility of the economy and why employment data is so important going forward. High consumer debt is fine if you have a job to pay for it.
Interest Rates Climb
Interest rates reversed their trend and began to climb again in the US, with long-term rates increasing with the persistent inflation and Federal Reserve speaker’s talking down interest rate cuts. Canada saw a larger increase in yields from the same factors.
As we move into 2024 the focus may change from what Jerome Powell says to what Janet Yellen says. Jerome Powell and the Federal Reserve have been adamant on their higher-for-longer strategy and inflation is coming down but very slowly. The next question is for Janet Yellen and the US Treasury.
Janet Yellen’s job is to find a way to pay for everything in the US, they do this by issuing treasury bills, notes, and bonds. In 2023, they needed to issue an extra $2.36 trillion to pay for their bills. This is the highest NET amount since 2020 when they issued $4 trillion.
The US plans to continue to raise more debt than it pays off in 2024, with an estimated $800 billion of net new debt in the first quarter alone. The more debt they have to raise, the higher the rate they must set to satisfy demand. This could put a lot of pressure on bond yields preventing them from dropping too much.
Summary
Everything seems to be pointing to slower growth. Interest rates should be lower in 12 months, but expect Canada to lower faster than the US. The thing that could drop rates faster would be a decrease in employment, this would force the central bank's hands to stimulate the economy.
Sincerely,
Justin, Konrad, and Merriel
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Content Sources: Bloomberg, Trading Economics, Yahoo Finance, BCA Research
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