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Hello everyone. Welcome to the weekly roundup.

Today we will cover interest rates, inflation, and market sentiments. Hello Ben.

Hi Eva.

Nice looking weather behind you.

I see that little Canadian flag right here in the Peace Tower over here.

We should frame this picture. Very Canadian.

Exactly. I feel patriotic.

Yeah.

Okay, we're going to start off with some economic data. So, Canada's GDP contracted more than expected last quarter, and the manufacturing PMI has been negative for most of this year. What does this mean for interest rate decisions and is the slowdown here to stay?

Yeah, thanks. It's a good question. I think PMI, which is the manufacturing index, has come down. You'd expect that should help pull down inflationary pressures as well in Canada. Our base case coming into this last quarter was three cuts from the Bank of Canada, and now we're probably looking at two cuts. I'm a little surprised given what you just referenced: GDP is slow, PMI is slow, inflation's got to be slower too, unemployment's rising. So I can't balance that super well because the Canadian economy is slowing. We saw a slight positive uptick today with our exports, which were a little bit better to the US last month than the previous six months. So that was a slight uptick, but we still think rates come down. If our economy continues to slow like this, then we still think rates continue to move lower in Canada.

Okay. Speaking on inflation, recent trends in both the US and the Eurozone have shown persistent price pressure. Could this also influence the Fed and the ECB to do something different in terms of interest rate decisions?

Yeah. So, a few things on that. Certainly we had Jackson Hole not too long ago and they were talking a lot about this inflation targeting, starting to be a flexible inflation targeting, which gives them a bit more flexibility to cut into an inflationary uptick. I think there's a bit of a recency bias: we went through COVID and so we expect inflation could take off and we're at 10–15% again before we know it. I think that is an anomaly and looking back probably 20 years from now, you're going to see that as just a blip on the radar. So I don't think there's a giant risk to the upside there, at least in the US. Tariffs could potentially continue to keep pressure up. Obviously, if companies decide to pass that through to the consumer, then there's pressure to the upside from an inflation perspective. But you're seeing unemployment start to rise and their economy slow. So I think Powell is going to take that into account.

As for Europe, I saw a speech from Christine Lagarde a couple of days ago talking about the many challenges they have in Europe. One of the things she talked about is the scale at which the non-financial sector is taking over the banking sector there, making it a bit more difficult to see what the economic activity is like because the data is not as consistent or prevalent. Money is flowing into different financial institutions. So I think it continues to be challenging for the world's central bankers as the system changes so dramatically. I think you'll see them try to move more toward giving themselves flexibility to cut even into an inflationary environment because ultimately they don't have much choice. If they want the economy to continue to grow, they need to make financial conditions easier.

We've seen the central banks juggle inflation, growth, job numbers. What's the likely tipping point for their decisions? What should we be focused on?

I think there's been so much focus on CPI the last couple of years. That becomes less relevant now and we should be looking at GDP and unemployment numbers more. I'd be watching those two. If we continue to see unemployment rise, the other side of that is slowing economic activity. I'd also look at financial conditions: are they getting easier or harder? And probably the last piece would be defaults: are they starting to pick up in certain areas like auto loans or credit cards? But I'd say unemployment and GDP are probably the key economic ones to look at.

Okay. Let's just go into the market a bit. Historically, September has been a challenging month for the equity markets. What contributes to this volatility and how can an investor position themselves for the potential bumps ahead?

It's true, September can be and has been. We have September 11th coming up next week, which was a dramatic event in the world and caused a lot of anxiety in the financial system. The markets were closed for a couple of days at that point. But September tends to be a time where the financial system wakes up again. You get everybody back into trading, paying attention, more activity, volumes start to pick up. We've had a pretty good start to the year from an economy and market perspective. As everyone comes back to work, things start to move dramatically in one direction or the other.

From a preparation perspective, if you've had a good year to date and your portfolios have performed quite well like ours have, we'd look to take advantage of reducing risk: either selling, trimming, buying insurance through puts, or something like that. The third piece would be bonds. If you've been catching the headlines, in the US and Europe you're starting to see those bond rates, at least on the long end, up around that 5% level. UK gilts, the 30 years are up around 5%, and everyone seems to be in panic mode that this can only go higher from here. I'd be in the opposite camp: government intervention, either by a central bank or fiscal authorities, will likely make changes to keep that level muted. In a market correction, if you're buying 4–5% bonds, you're going to get some protection as money flows into safety if we saw a crack in the market. So trimming, buying insurance, and some bonds can put you in a position to reduce risk. I'm starting to get calls about everyone wanting to take more risk. Clients think everything goes up all the time. These are good indicators that we're probably closer to the end of the immediate run than the beginning. I don't think it's over now, but being cautious and making wise risk management decisions is key right now.

Makes sense. Let's see the charts.

All right. Just let me know when you can see it.

Loading… all good.

Perfect. So we are recording this around 1:00 on September 4th. Anything that happens between now and the end of the week, we'll comment on next week. I'll add a couple of comments around what we see happening tomorrow after we get through the charts today.

Some interesting things to look at: there's a lot of talk about debt and deficits. There's a general feeling that the US is spending all this money and Canada is much more fiscally responsible. I'd say that's not necessarily the case. Canada issues debt as a country, but also the provincial governments issue a tremendous amount of debt as well, which is quite different from the US where the majority of issuance is federal. We've issued more bonds in the last quarter than we did in a very long time—around 144 billion, a 28% increase year over year. So we certainly have debt issues in both Canada and the US.

Part of the reason why I think you see some kind of management of the yield curve at some point—not saying it's happening tomorrow, but at some point—you would likely see some type of action that pulls down the long end of the yield curve because if you're in a position where you can push rates down, that helps the government and the economy. Big debt levels in Canada, the US, and pretty much any developed market.

One of the things that's happened in Canada the last five years is the amount of international market funding that's been helping us. This is starting to be a concern for me. Lots of questions around the resiliency of the Canadian dollar. We've had lots of international investors buying Canadian bonds, supporting both the bond market and the Canadian dollar. This is a place of concern for me to watch. For the most part, foreign investors have been buying Canadian bonds to diversify away from the US dollar. That's interesting to watch.

Looking globally, we continue to talk about EVs and electrification. There aren't a lot of copper mines out there. Ivanhoe Electric is building a copper mine in Arizona and has a project in Saudi Arabia. If you're looking to be in a place friendly for mining and future development, being in the US developing a copper mine is interesting. Ivanhoe Electric ticker is IE—something to watch.

Then the yield curve: as I mentioned, I could see the yield curve start to come down. Right now we have a natural yield curve, a little inversion on the short end in the US, but further out we have a natural curve. In Canada, we have a natural curve. Governments can do what Bernanke did back in the day: sell short-dated stuff and buy long-dated to flatten the curve—Operation Twist. We could see some of that in North America to push down the long end and reduce pressure on individuals and governments.

Prime rate: the Fed's rate is at 4.25–4.5%. The market right now anticipates a 97.6% chance of a cut on September 17th. I'd expect we see that cut. For the next two meetings after that—October and December—October is about a coin toss, December is similar: 90% and 45% chance of two cuts. We'll watch those numbers, contingent on unemployment and GDP. In Canada, we start to see rates come down. We thought 75 basis points earlier; now it looks like 50 basis points before year-end. Interesting to watch the curve.

As always, the opinions expressed do not necessarily reflect those of National Bank Financial. If you have any questions, feel free to reach out to your advisor or to us. Not all of the things we discussed today fit your risk profile, so happy to answer any questions if needed.

Thank you Ben.

What's on the agenda for next week?

A few things. Tomorrow we have non-farm payroll in the US and Canadian unemployment and PMI numbers. Fast forward a week, we get jobless numbers and CPI in the US. Those will be important points. It's all but baked in for a rate cut by the FOMC on the 17th. I don't think there'll be much to happen between now and then except for what future cuts look like. Canada is a coin toss on whether they cut this month, so tomorrow's numbers could be relevant. We'll comment on that next week.

I've been watching markets because gold touched new highs. I posted that chart last week about the breakouts. Gold bugs are happy, and we saw 52-week highs on miners this week. We have exposure to gold and silver, either directly with companies or bullion. I'm spending time figuring out what to switch into, how to take profits and move into something else. Energy, oil and gas are looking more attractive, so there could be an opportunity there. But gold and gold miners continuing to run will be something I'll watch closely.

Okay, sounds good. Thank you everyone for listening. Remember to visit, subscribe, and follow us on YouTube and LinkedIn at Heart Investment Group. The link to our daily financial heartbeat newsletters will be in the caption of this video and in your inbox as well. For our clients, reach out to me if you have any questions or if you'd like to book a meeting with Ben. Thank you everyone and have a great weekend after you get through Friday.

Thanks everybody. Take care. Bye.