Market Update: October 19th, 2023
Inflation Update: The US holding better than expected and Canada weakening more than expected
US
Inflation in the US remains in line with expectations, while energy and food have pushed the top line number slightly higher than the targeted 3.66 to 3.7%. Factoring out energy prices, food, and rent this inflation number was only 2.5%. Showing the weakness in the non-essential categories.
Canada
Canadian inflation came in at 3.8% vs. the targeted 4%. Our core inflation (inflation minus energy and food) came in significantly lower at 2.8%. Almost every area of prices decreased except alcohol/tobacco/cannabis and transportation (mostly gas). This data is slowing faster and more broadly than in the US.
Topics
- Inflation and Interest Rates - What will the future hold for interest rates with inflation persistently above the 2% target?
- Used Cars - Prices have dropped dramatically this year, higher rates and stretched consumers have led to this. What does this tell us about the economy?
Inflation and Interest Rates
Inflation remains persistently above the 2% target set by the governments and without something drastic happening it does not appear to be closing in on 2% unless energy and housing can substantially drop. Energy is really out of the control of the domestic governments and is being pushed up by tightened supply and political/military conflicts. Housing is an ever-cycling problem, the cost of housing will not drop unless either they lower rates, the economy breaks, or we slowly keep spending less. We are currently enduring the last option which may take a while unless one of the first two happens.
All this being said the economy is weakening and there are very few people predicting anything more than one rate hike in our future. In fact, economists are pricing in potential rate cuts next year due to a slowing economy.
Below Desjardins does predict the US to cut by 1.50% next year and Canada to cut by 2%.
We believe this to be true as most of the market is dictating an upcoming recession for an economy with many sectors at recessionary levels. This does appear to be worse in Canada than in the US with our predicted GDP growth to be around 1% this year. Also, Canadian inflation is slowing at the rate the US wished their inflation was slowing. This is due to weaker economic data and higher variable debt in Canada. Canada is more likely to cut rates than the US.
Used Cars
We highlight this area because cars are one the best items to look at when trying to factor in all variables of an economy that affect whether a consumer buys a car.
Interest Rates - Many people finance a car when they purchase, therefore the current interest rates do factor in when deciding.
Need vs. Want - Cars can last a very long time, few people need to purchase a new car and most people want to buy a new car. Therefore, if it’s financially not the best time most people can hold off for a year or two.
Expense - Cars are not cheap, most people do not buy spur of the moment. This is a longer-term decision that is often based on financial position more than emotion.
Let’s look at the data. For about a year, used car prices have dropped in price (year-over-year) every month for the last year.
Prices have been falling, higher rates and lower disposable income have driven these prices lower and there is not an end in sight. Many people bought more expensive cars over the past 2-3 years and no longer can afford them with all their other expenses rising.
The area that shows this the most is used car delinquencies and credit card delinquencies.
These delinquency levels have started to move higher seemingly every month for the past 2 years. These rates rise as mortgage rates remain low, which shows consumers are prioritizing their mortgage payments but cannot afford to pay for everything. In the US car loan delinquency rates are now at 1.69%, which is higher than the 2008 recession.
Summary
Without a rise in inflation, the recent rise in bond rates seems to be doing the job of the central banks in Canada and in the United States. They have slowed the economy and have the consumer doing financial yoga to make ends meet. The longer-term rates are getting stickier due to bond renewals and high short-term rates, which will most likely persist. The stickier the long-term rates give the government the ability to cut short-term rates, if inflation is tame. This may provide some relief to the markets but may keep longer-term asset prices low. This means assets that have higher income in the future vs. higher income today or long streams of low income. If this were to happen it would be a better environment for Value stocks vs. Growth stocks, which would be a relief to the most beaten-up areas of the market.
Justin, Konrad, and Merriel
More articles and information are available at www.lkwealth.ca
Content Sources: Bloomberg, Trading Economics, Yahoo Finance, BCA Research
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