Market Update: Weakening Rates and US Dollar, Pushes Up Gold, Utilities, and Energy
In this environment can the Turtles catch the Hare?
One week into March and we are starting to see some beaten down sectors try and catch up. The best-performing areas in the market to start this month are Materials (commodities and precious metals), Financials, Utilities, and Energy. All these are starting to catch up to Technology and have a lot of room to grow. Also, Canada decided to pause interest rates for the 5th straight month despite staring at very low GDP growth. Canada is one of 15 countries experiencing GDP growth problems right now and are either close or in a recession.
Topics
Sectors Playing Catch Up
Canada Pauses Rates
15 Countries Below 2% GDP Growth
Sectors Playing Catch Up
Every headline reads Nvidia, but some sectors are competing for the top dawg award to start 2024 after a painful 2023.
Over the past week Materials, Financials, Utilities, and Energy have been pushing higher and continuing off their strong Februarys. This is in a large part due to a decrease in US interest rates and a lower valuation of the US Dollar vs. its peers. If this combination continues these sectors should continue to rally as those are the very same factors that kept them subdued in 2023. This reversal could be what is needed to have a broadening out in this market which has been dominated by Big Technology for the last year.
The US has been able to keep their rates high up until this point based on strong economic growth but there is some fear, they will share the fate of many other countries around the globe that are expected to see GDP growth below 2% in 2024.
Canada Pauses Rates
Canada decided to leave the rate at 5% in March, it would have been a surprise to not see Canada pause again for the 5th month in a row. The comments given were as expected also. Inflation worries, global concern, blah, blah, blah. There is some worry out there, but their goal is apparent, don’t let housing get out of control and stay as close to the US as possible. Housing is the largest concern and the spike in housing prices in February didn’t help things.
Core inflation is at 2.4% and GDP Growth is below 1%. Given the numbers they can wait a little, but we are trending in the direction of large cuts coming. From the sounds of things, they will wait until inflation is below 2% and they must cut.
The mortgage rates are reflecting cuts coming, especially at the consistency they are falling week to week already this year. This does make sense for the long-term health of the economy, but they are flirting with a larger economic drop if they hold off too long and damage the labour market.
15 Countries Below 2% GDP Growth
A lot of the issues right now are overshadowed by high housing prices, record high stock markets, and Bitcoin billionaires but the reality is the sharp increase in interest rates and global instability have put the brakes on many countries economies around the globe. Here are 15 countries that are seeing high debt issues and below 2% Real GDP Growth (growth factoring out inflation).
There are many other countries with below 2% growth, but these are just the ones that are sitting around 100% or above debt to GDP.
The reason this is a topic is because the simple math of the situation. If your Debt to GDP is 100% and your Real GDP is below 2%, and inflation is at 3% then you cannot have interest rates at 5%. You are not growing fast enough to cover the interest on your debt. You have two options, grow faster or cut rates. If you do not do one of the two or both, you are making the problem worse every year and creating a larger and larger problem down the road. Also, Canada’s annual GDP growth is expected to slow to 0.5% in 2024 and the US to remain at 1.5%. This makes a hard case for 5% interest rates.
Summary
The sectors that are performing well may not be just a catch-up trade but a reflection of what is happening globally right now. One week or one month does not make a trend but the fundamentals do make a difference at some point. Countries will need to either grow faster or cut rates to manage debt to GDP, if they do not their currency may lose value. While Canada has managed to cut Gross Debt over the past few years, the US has been seeing this number rise. Expect some volatility in the spring as there is a disconnect right now of what the market expects (rate cuts soon) and what the central banks want to do (rate cuts later). Many data points will either prove or disprove each party’s case.
Justin, Konrad, and Merriel
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