Canadian Inflation Cools Slightly In November

Economic

Summary:

Headline CPI inflation cooled to 1.9% year-on-year (y/y) in November, one tick softer than expected.

Slower price growth was broad based across the eight major components. The one exception was transportation costs which rose to 1.1% y/y, from 0.3% in October.

Shelter inflation has been a key challenge for Canadians for some time now and cooled in November to 4.6% y/y, from 4.8% y/y in October. Mortgage interest costs were a key factor, as the year-on-year increased slowed from 14.7% to 13.2% y/y in November. Unfortunately, rent inflation continues to heat up, rising 7.7% y/y in November, up from 7.3% y/y in October.

The Black Friday deals were particularly good this year, keeping goods inflation flat both on the month and versus a year ago. Deals were to be had on cellular services (-6.1% m/m), furniture, clothing, and particularly children’s clothing.

The impact of Taylor Swift’s Eras Tour in Toronto in November was seen in hotel prices, which had their largest November increase ever in Ontario. This drove higher prices for traveller accommodation at the national level (+8.7% y/y).

The Bank of Canada’s preferred “core” inflation measures were steady at 2.7% y/y on average, matching October’s pace.

Key Implications

November’s inflation data came in line with the Bank of Canada’s expectations for inflation to average close to 2% over the next couple of years. Headline was only a tenth cooler than expected, but this was mitigated by a lack of progress in the Bank of Canada’s Core inflation measures.

Our forecast calls for headline inflation to rise somewhat above the Bank’s 2% target next year as likely tariffs raise goods costs (see forecast). However, we don’t expect that this is high enough to dissuade the BoC from cutting interest rates further. With an America-First agenda south of the border, Canada’s economy faces a challenging backdrop, and lower interest rates are required for support. That said, at 3.25% on the overnight rate, we are now at the edge of “neutral” territory, further cuts are expected to come at a more measured pace next year.

To stay updated on all economic events of today, please check out our Economic calendar

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Owen Li

Economic

SEOUL (Reuters) - South Korea's central bank will maintain its inflation target of 2% until the next policy review, as the era of "low-inflation" is unlikely to come in a year or two, the bank's governor said on Wednesday.

"The Bank of Korea (BOK), through consultation with the government, has decided to maintain the current price stability target of 2% until the next review," Governor Rhee Chang-yong said.

Rhee said mechanisms to stabilise high inflation in recent years had been effective. He also said inflation was expected to be stable in the next two years, and other major central banks were also maintaining their targets at 2%.

The central bank will continue to assess if there is any need for improvements in its inflation-targeting system, Rhee said at a press conference held after a bi-annual review of the bank's inflation-targeting monetary policy.

According to the central bank, the economy is "unlikely to enter a low-inflation phase of below 1% in the next year or two," as economic growth is expected to be in the upper-1% range while accumulated price pressure from a strong dollar and climate change persists.

Last month, South Korea's consumer inflation came in weaker than expected at 1.5%, allowing the central bank to lower interest rates for a second straight meeting, to 3.00%, to shore up a slowing economy.

In 2025, consumer inflation is expected to rise to the upper-1% range in the first half and show a stable trend near the target from the second half, the BOK said.

The BOK cited a weaker local currency and higher public utility costs as factors increasing upward price pressures and lower oil prices as a factor offsetting them.

Source: Reuters

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JPMorgan

Central Bank

Economic

When testifying to the Senate Banking Committee back in 1987, the newly-appointed Fed Chairman, Alan Greenspan, provided some insight into his views on communication: “Since becoming a central banker”, he said, “I have learned to mumble with great incoherence. If I seem unduly clear to you, you must have misunderstood what I said.”

His successors have generally tried to be more open with regard to both their opinions and their intentions. However, there are times, when the Fed will want to communicate to financial markets without piquing the interest of either the general public or the administration.

At this Wednesday’s meeting, the Fed may well signal a shallower path for interest rate cuts over the next year or two. The reasons for this will be recent data showing more resilient economic growth and stickier inflation, frothier equity markets and the potential for the policies of the new administration to add to inflation pressures. The Fed will also likely be concerned that if they cut too much and ought to reverse course, they could be bullied into too easy a policy by the incoming administration or, at an extreme, see their independence threatened. They will not want to communicate most of this on Wednesday, so investors will need to read between the lines, and ask themselves whether, given high valuations and market concentration, they are appropriately positioned for a higher path on interest rates and the volatility that could emerge from a period of conflict between monetary and fiscal policy.

The Statement, the Press Conference and the Summary of Economic Projections

Recently, futures markets have priced in a roughly 95% chance of a 25-basis-point cut in the federal funds rate this week and this is what the Fed will likely deliver. However, apart from noting this cut, it’s not clear what other edits the FOMC will make to their statement.

They might indicate that recent indicators suggest that economic activity has continued to expand at a “strong” pace, rather than the “solid” pace they mentioned in their November statement. At that time, the Atlanta Fed’s GDPNow model was forecasting 2.5% real GDP growth for the fourth quarter – now that number has climbed to 3.3%. Moreover, the November jobs report showed a strong 227,000 increase in non-farm payrolls, while job openings rose in October. However, the unemployment rate is 4.2% compared to 4.1% in October and wage growth remains muted, so it is still accurate to say that labor market conditions have eased since earlier in the year. Nor will the Fed likely want to change its characterization of inflation progress, at this stage.

However, in his press conference, Jay Powell may be a bit more explicit about the strength in recent economic data. Apart from GDP and jobs data, the stock market has continued to rally, with the S&P500 climbing by a further 2.1% since the last FOMC meeting. This could continue to fuel strong consumer spending, as could further gains in real wages and rising consumer confidence.

In addition, he will have to acknowledge changes to the Fed’s Summary of Economic Projections. For the fourth quarter of 2024, recent data suggest that, relative to their September forecasts, they will have to boost year-over-year real GDP growth from 2.0% to 2.5% and year-over-year PCE inflation from 2.3% to 2.5%, while cutting their estimate of the unemployment rate from 4.4% to 4.2%. Beyond this, forecasts for the next few years may well show somewhat stronger economic growth and inflation and somewhat lower unemployment than they projected in September. They might even increase their estimate of long-term real economic growth from 1.8% to 1.9%, in a nod to recent strong productivity data.

However, the most important piece of information conveyed on Wednesday will be the expected path of the federal funds rate in 2025, 2026 and in the long run. In September, having delivered an initial 50-basis point cut, they projected another 50 basis points in cuts in 2024, 100 basis points in 2025 and 50 basis points in 2026, bringing the rate down to their estimate of the long-run neutral rate of between 2.75% and 3.00%.

Futures markets are now expecting just a further 50 basis points in rate cuts in 2025, following this week’s cut, bringing the rate down to a range of 3.75% to 4.00% by the end of the year, and Fed officials, when putting together their own projections, may be tempted to validate this view. If they do, long-term interest rates could edge higher, as the Fed signals that they expect growth to be too strong and inflation to be too hot for a full normalization of monetary policy.

Valuations and Concentration

Higher long-term rates would obviously be a negative for the stock market. However, investors should also continue to pay attention to valuation and concentration.

Despite a small pullback in the last few days, the S&P500 has seen a spectacular 27% gain year-to-date, following a 24% increase last year. While this has added over $27 trillion to household wealth over the past two years, it has left valuations elevated, with the S&P500 trading at 22.1 times forward earnings – about 1.7 standard deviations above its 30-year average.

Overall index valuations, however, mask some very significant concentration issues. The top 10 stocks in the S&P500 now account for an astonishing 39% of its market cap and sport an average forward P/E ratio of 30.5 times compared to a much more reasonable 18.8 times for the rest of the index. In addition, the P/E range between the 20th and 80th percentiles among S&P500 stocks has now climbed to 17.3 P/E points – wider than it has been 92% of the time over the past 28 years.

Investors have every reason to be concerned about high valuations at a time when the economy is already at full employment, margins are already high and there is limited room for long-term interest rates to fall, in the absence of recession. Sometimes, people argue that it is a TINA market – that There Is No Alternative to continuing to overweight mega-cap U.S. growth stocks. However, there are, in fact, many alternatives.

Within public markets, while large-cap growth stocks have led the way in 2024, all the other styles in the U.S. style-box have provided double-digit returns so far this year, with most of them trading at much cheaper valuations. The dispersion among valuations also suggests that there are plenty of undervalued individual stocks within U.S. indices. Despite a rising U.S. dollar, international equities have also provided nearly double-digit dollar-denominated returns this year and generally have much cheaper valuations. Fixed income, while not cheap by pre-financial crisis standards, does generally offer positive real yields. Finally, a wide swath of alternative investments should be able to add return and income to a portfolio while providing some diversification relative to richly-valued U.S. equity indices.

In short, there are plenty of ways to reallocate within a portfolio to reduce overall risk, although doing so in a tax-efficient manner is, as always, more tricky. The last two years have seen extraordinary returns from one particular sector of global financial markets. However, managing risk, going forward, will require a broader, more diversified approach to investing.

To stay updated on all economic events of today, please check out our Economic calendar

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Justin

Economic

SYDNEY (Dec 18): Australia's government on Wednesday trimmed its likely budget deficit for the current fiscal year, but flagged bigger shortfalls ahead due to "unavoidable spending" on health, cost-of-living relief and veterans care.

Facing a tough election next year, the centre-left Labor government said the economy had slowed under the weight of high interest rates and elevated inflation, but insisted public spending would help ensure a soft landing.

Recent data for the third quarter showed that without public investment in infrastructure and rebates on electricity costs, the economy would have been in recession.

In its Mid-Year Economic and Fiscal Outlook (MYEFO), the government still had to trim its forecast for economic growth in the current fiscal year to end June 2025 to 1.75%, down from 2.0% in its main Budget last May.

Wage growth was also marked down to 3.0% in a blow to government claims it would deliver faster pay gains than the Liberal National opposition.

The economic slowdown was enough for the Reserve Bank of Australia (RBA) last week to open the door to policy easing, having held interest rates at 4.35% for all of this year.

Treasurer Jim Chalmers on Wednesday suggested more cost of living relief could be on the way, on top of the tax cuts, electricity rebates, cheaper medicines and other policies the government has already delivered to date.

"From budget to budget, if we can afford to do more and there is a case to do more to help people with the cost of living, of course then we will consider that," Chalmers said in a press briefing.

All this government spending meant its budget was back in deficit after two years of rare surpluses, though the shortfall this year was not as large as first feared.

The Treasury projected a deficit of A$26.9 billion (US$17.04 billion or RM76.06 billion) for the current 2024/25 year. That compared with a forecast of A$28.3 billion in its main Budget last May.

From there, the red ink only gets worse due to A$25 billion in extra payments. The projected deficit for the three years to 2027/28 is now A$117 billion, or A$23 billion more than expected in May.

"The slippage in subsequent years is largely because of urgent, unavoidable or automatic increases in spending in areas like pensions, Medicare and medicines," Treasury said in a statement.

Expected tax revenues from companies have also been downgraded as subdued demand in China weighs on prices for some of Australia's main commodity exports, notably iron ore. It retained the long-term iron ore price assumption at US$60 per tonne by the third quarter 2025, compared with US$104 per tonne currently.

The government's net debt was now seen expanding to A$1.16 trillion by 2027/28, from an expected A$940 billion this year. At 36.7% of gross domestic product, net debt would still be low by international standards.

Estimated overseas migration has been revised up to 340,000 for the 2024/25, from 260,000, as the government struggled to bring migration to more sustainable levels.

Source: Theedgemarkets

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IC Markets

Economic

US Markets Ease Ahead of Federal Reserve – Dow Down 0.6%

US stocks eased lower again in trading yesterday as investors looked ahead to today’s key Fed rate decision, with the Dow marking its ninth consecutive day of losses. The Dow fell 0.61% on the day, followed by the S&P, which dropped 0.39%, and the Nasdaq, which closed 0.32% lower. Treasury yields ended the session near flat, with the 2-year yield finishing at 4.245% and the 10-year at 3.99%. Currencies remained relatively quiet, but the dollar edged higher against most of the majors, with the DXY gaining 0.13% to reach 106.98. Oil prices fell further as investor concerns over future demand persisted, with Brent down 0.97% to $73.19 and WTI slipping 0.90% to $70.08. Meanwhile, gold continued to trade within recent ranges, easing 0.28% to $2,646.15.

All About the Fed Today

The long-awaited conclusion of the Federal Reserve Bank’s final meeting of the year is now just a few trading hours away, and traders are anticipating subdued markets ahead of the rate announcement. Expectations heavily favour a 25-basis-point cut today, and any deviation from this outcome is likely to trigger significant market movements. Excluding the unlikely scenarios of no change or a 50-point cut, volatility is expected to stem from any updates to the dot plot and forward guidance from the committee. The market is leaning towards a less dovish stance as it looks ahead to 2025 and the incoming Trump administration. Regardless of the outcome, traders anticipate immediate reactions following the rate decision and subsequent press conference, as markets digest the updates or continue recent trends if there are no surprises.

Famine and Feast Ahead for Traders

Today has the potential to be the most volatile trading day of the week, though most of the action is expected to take place in the final hours of trading following the Federal Reserve’s rate announcement. The macroeconomic calendar is relatively sparse during the Asian session, and markets are expected to remain muted. However, the European session features significant tier-1 data from the UK, with CPI figures set to be released. A deviation from the anticipated 2.6% increase could create heightened activity among sterling traders, particularly as it comes just a day ahead of the Bank of England’s rate decision. Despite this, most market participants expect rangebound conditions until the US session, when the Fed announcement is scheduled late in the day.

To stay updated on all economic events of today, please check out our Economic calendar

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TD Securities

Economic

Much of the last month’s growth in retail trade was due to a sizeable increase in sales of vehicles and parts, which rose by 2.6% m/m. Sales at gasoline stations edged up just 0.1%, weighed down by lower prices at the pump. Sales at the building materials and equipment stores increased for the sixth consecutive month (+0.4%).

Sales in the “control group”, which excludes the volatile components above (i.e., gasoline, autos and building supplies) and is used in the estimate of personal consumption expenditures (PCE), rose 0.3% m/m, an acceleration relative to 0.1% gain in October.

Sales at non-store retailers increased by 1.8% and were up 9.7% on a year-over-year basis, making it the fastest growing category. Online sales continue to increase as a share of total sales, reaching 20% in November. In contrast, sales growth was soft at the general merchandize stores (-0.1%), with weakness concentrated in department store sales (-0.6%).

Food services & drinking places – the only services category in the retail sales report – declined by 0.4%. October’s data was revised up to 0.9% (previously 0.7%).

Key Implications

U.S. consumers are finishing 2024 in strong financial shape. A rally in equity markets and gains in home prices have bolstered household wealth. While job growth has slowed, the labor market remains healthy and continues to generate jobs. Consumer confidence has also improved, especially following Trump’s election victory, with the prospect of lower taxes lifting households’ spirits. For this quarter, we expect inflation-adjusted consumer spending to increase by 3% (annualized), a small step down from 3.5% in Q3 but still strong growth.

Inflation, however, remains an issue. Nominal retail sales are up 3.8% from the year ago but the picture looks less upbeat after adjusting for inflation, with sales up just 1%. The latest uptick in inflation reaffirmed that progress in bringing inflation lower is stalling, and the coming year could bring more inflationary surprises, due to potential tax cuts, tariffs, and changes in immigration policy. These factors would likely prompt the Fed proceeding more cautiously next year, leading to higher interest rates for consumers than otherwise would be the case. Along with a slowing labor market, these are some of the reasons why we expect consumer spending to moderate to a trend-like pace of 2% next year (forecast).

To stay updated on all economic events of today, please check out our Economic calendar

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