Intelligent Investment

The Ties That Bind

Canada Monthly Market Commentary

November 29, 2024 2 Minute Read

Impacts from the U.S. election results are already being felt in Canada and leading to some heightened risks for the Canadian economy. In the latest development, the incoming U.S. administration has pledged 25% tariffs on all goods imported from Canada and Mexico as early as January 20th, 2025. Such widespread and high tariffs would pose a material drag on the Canadian economic outlook. The U.S. is Canada’s largest trading partner by far and account for over 77% of Canada’s total exports. At the previously considered level of 10% universal tariffs, the Canadian Chamber of Commerce had estimated it could shrink the Canadian economy by $30 billion per year. So far, there appears to be some skepticism on whether these 25% tariffs will become reality, especially given the potential economic damage to both sides of the border. However, given how closely tied the Canadian and U.S. economies are, growth outlooks will likely face elevated levels of uncertainty over the near term.

Bond yields in Canada also closely track with their U.S. equivalents and accordingly as U.S. yields swung so too did Canada yields. Since the U.S. election, the prospect of inflationary fiscal policies had tempered some of the expectations on interest rate cuts by the Federal Reserve and translated into higher U.S. Treasury yields. In tandem, the Canada 10-year bond yield also rose, increasing as much as 22 bps to a monthly peak of 3.45%. However, the increase in bond yields was subsequently reversed and the Canada 10-year bond yield is on track to close flat month-over-month at around 3.22%. Driving this reversal was the announcement of a U.S. Treasury Secretary pick that markets favoured as a more fiscally conservative and stable nomination.

In Canada, the economic outlook has also been positively impacted by the recent announcement of an upcoming two-month holiday on the federal goods and sales tax (GST) as well as stimulus cheques to be sent to millions of Canadians. In particular, the federal stimulus cheques totaling $4.7 billion are expected to create the greater short term lift to consumption and economic growth, through not until Q2 2025. For Ontario residents, an additional round of stimulus cheques from the provincial government stands to boost short term economic growth in the region even further. Meanwhile, the smaller temporary $1.6 billion GST break is expected to have a more modest effect over the immediate future and could actually result in logistical challenges for retailers.

The combination of recent domestic and cross-border developments is expected to lead to a more cautious approach by the Bank of Canada. Interest rate cut expectations have been tempered accordingly and a 25 bps decrease in December to bring the policy rate to 3.50% is the new base case scenario. Odds for a larger decrease of 50 bps have fallen to about 12%, down from around 60% earlier in the month.

Economic Highlights:

  • Headline inflation rose to 2.0% in October 2024 and core measures CPI-median and CPI-trim also increased to 2.5% and 2.6%, respectively.
  • Retail sales grew 0.4% month-over-month in September 2024 and advanced estimates indicate a 0.7% increase for October.
  • Employment grew by 14,500 jobs in October 2024 and the unemployment rate held flat month-over-month at 6.5%.

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