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Investors Heave Sigh of Relief As Worst Fears Go Unrealized

The Federal Reserve’s preferred inflation measure accelerated in January, helping further ratify the Federal Reserve’s cautious stance on rate cuts. Data released by the Bureau of Economic Analysis this morning showed the core personal consumption expenditures index rising 0.4 percent in January from the prior month, bringing the three-month annualized pace up to 2.6 percent – still within the central bank’s target range but headed in the wrong direction. On a year over year basis, base effects saw core price growth slowing to 2.8 percent from 2.9 percent prior, closely aligning with consensus estimates. 

The overall personal consumption expenditures index was up 0.3 percent from the prior month, 2.4 percent higher than a year ago. Personal income rose 1.0 percent month-over-month, accelerating from December’s 0.3-percent pace as cost-of-living adjustments lifted the headline. Inflation-adjusted household spending shrank -0.1 percent after a stronger-than-expected holiday season. 

Jerome Powell’s favourite “supercore” inflation measure – core services excluding housing rents – climbed 0.6 percent month-over-month in January, up from 0.1 percent the prior month, clocking in the strongest gain since December of 2021. 

Front-end yields are inching lower and the greenback is retreating as the worst fears among investor fears are alleviated, but reaction could shift as the day unfolds. With seasonality issues and a self-reinforcing improvement in financial conditions likely playing havoc with January’s numbers, it’s difficult to extrapolate firm conclusions – and Federal Reserve officials are likely to avoid formulating a policy response until more information is in. 

Change in core personal consumption expenditures index, %

The Canadian economy avoided recession in the last quarter of 2023 and accelerated at the fastest monthly pace in a year in January, helping reduce market-implied odds on an imminent pivot to easing at the Bank of Canada. Numbers released by Statistics Canada this morning show real gross domestic product flatlining in December, bringing the annualized quarterly growth rate to 1.0 percent and defying expectations for a deeper slowdown. 

A burgeoning population did a lot of the heavy lifting – estimates suggest that at least 1.2 million people were added during the year – but surprisingly resilient US demand growth helped boost exports, and hopes for monetary easing also played a role in lifting household demand. An advance estimate showed the economy speeding up in January, with gross domestic product rising 0.4 percent – although this may be largely attributable to the ending of public sector strikes. 

With odds on a cut at the Bank of Canada’s June meeting slipping somewhat, the Canadian dollar is rising, and rate differentials are narrowing across the front end of the curve. We think a continued financial conditions-driven melt-up in Canadian housing markets and consumer demand could be on tap in the months ahead, but with borrowing burdens set to continue rising across much of the country’s private sector, a downturn looks likely to come later in the year. On a per-capita basis, the economy looks set to continue a long run of underperformance. 

Change in real gross domestic product, %

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