Financial Panorama

The return shown is the total return, which includes the reinvestment of income and capital gains distributions.

Source: Morningstar Direct.

Results – Canadian bonds

The FTSE Canada Universe Bond Index, which includes Canadian government and corporate bonds, has posted a positive return of 4.23% year to date (at December 31, 2024).

Source : Morningstar Direct.

Our analysis of events

Key interest rates continue their slow decline

• As expected by the markets, the U.S. Federal Reserve (Fed) cut its rate by 0.25% on December 18. Comments made by Fed Chair Jerome Powell suggest that the next cuts (if required) will come much later in 2025. The markets did not appreciate the central bank’s new stance.
• The Bank of Canada had lowered its policy rate by 50% a few days earlier, on December 11. Following this second consecutive 0.50% cut, Bank of Canada Governor Tiff Macklem suggested that future reductions would be based on economic data, and that they would be smaller. At present, the market is anticipating one or two cuts in 2025.

Employment situation

• U.S. job creation was stronger than expected in December, with 256,000 jobs added, versus expectations of 165,000. Wage inflation, however, remains high at 3.9% year-on-year.
• The creation of 90,900 jobs in Canada in December was well above expectations, but the increase in the participation rate also led to a rise in the unemployment rate. Wage growth, which fell from 3.8% to 3.7% on an annual basis, remained below expectations.
• In both Canada and the U.S., strong employment moderates recession risks and reduces the likelihood of multiple policy rate cuts in 2025.

How is the Canadian dollar doing?

• The robustness of the U.S. economy is reducing the urgency of rate cuts. The main consequence of the divergence between Canadian (more frequent rate cuts) and U.S. (more spaced-out cuts) monetary policies will be a loss in the value of the loonie, which has already begun to materialize in recent weeks.
• The use of tariffs by the United States in trade negotiations will be an additional variable to monitor in 2025, in addition to inflation and employment.

Inflation is stabilizing

• In Canada, the annual inflation rate was 1.9% in November, down from the previous month (2.0%) and still within the Bank of Canada’s target.
• In the United States, annual inflation came in at 2.7% in November, virtually unchanged from the previous month.

What can we expect in 2025?

• The best scenario would be sustained growth of the global economy, with minimal trade friction between the U.S. administration and other world governments.
• The weakening of regulations in various sectors of the U.S. economy should help maintain economic growth and encourage investment. This trend towards deregulation will have to be followed by other countries, such as Canada, at the risk of losing competitiveness.
• A trade war supported by the use of indiscriminate tariffs could lead to an economic slowdown and a resurgence in inflation, bringing us closer to an episode of stagflation, which would be the most negative economic scenario.
• Inflationary scenarios that would keep yields on 5-to-10-year maturities at high levels will most likely be avoided, as such a situation would curb business investment and the repatriation of production lines to the U.S.
• Geopolitical uncertainty will persist, with war still raging in Ukraine, regional conflicts in the Middle East and tensions between the U.S. and China, coupled with the possible annexation of Taiwan.

Economic Indicators

Global Purchasing Managers’ Index  

Manufacturing segment indicators improved, with more than half of the thirty countries posting an index reading above 50 (expansion). The services segment continues to improve and remains robust.

Inflation rate 

Overall, inflation is falling and continuing to move in the right direction, but its speed of deceleration is slowing. Central banks are likely to make fewer cuts than anticipated a few months ago. The possibility of global, indiscriminate tariffs being imposed by the new U.S. administration in 2025 could also create inflationary pressures.

Benchmark rates in Canada, Europe and the United States 

Interest rates have been falling for several months now. Fears of renewed inflation and the strength of the U.S. economy should limit further rate cuts. In such a scenario, the upcoming renewal of mortgages and corporate loans could force consumers and businesses to reduce their spending now in anticipation of higher-than-expected rates, which would have a negative effect.

Our strategic monitoring

We are monitoring inflation and consumer spending, as well as leading indicators for manufacturing production, the services sector and employment.

Caution and risk management remain our top priorities.

Our tactical approach

In December, we maintained our equity weighting in the tactical allocation strategy, with the economic outlook and market indicators still dictating an overweight position.

In the United States, we maintained our position in large cap growth stocks, which react positively to stabilizing interest rates, as well as in stocks with a track record of dividend growth which are more defensive.

We maintained our position in small cap stocks, which respond well to rate cuts and a likely reduction in regulations in several industries. We maintained our positions in emerging markets and in the Europe and Japan zone, which had been reduced in November. A strong U.S. dollar, a weak German manufacturing economy and the possibility of rate hikes in Japan led us to reduce our exposure to these markets.

In the fixed-income component, we reduced our weighting in federal bonds and increased our weighting in short-maturity Canadian corporate bonds, high-yield bonds and emerging economy issues.

We continue to favour stocks in developed countries and focus on risk management.

Main risks

• Comprehensive protectionist policies in the U.S., without significant productivity gains, are likely to create more inflation and slow down rate cuts. Canada would be at a disadvantage in such a scenario, since our exports would be less attractive to our neighbour to the south.
• There is also a monetary policy risk.
• High interest rates for an extended period would result in lower corporate profits and sharply curtail household spending.
• The possibility of an episode of stagflation (anemic economic growth and high inflation) persists. This situation is negative for stock markets.
• The Israeli-Palestinian conflict could have repercussions throughout the Middle East. The fall of the Syrian regime is an example.
• An escalation of the war in Ukraine could spread to other European countries.
• There is also a risk of worsening tensions between China and the United States over Taiwan and the possibility of a trade war.

Data source : Bloomberg

The opinions expressed here and on the next page do not necessarily represent the views of Professionals’ Financial. The information contained herein has been obtained from sources deemed reliable, but we do not guarantee the accuracy of this information, and it may be incomplete. The opinions expressed are based upon our analysis and interpretation of this information and are not to be construed as a recommendation. Please consult your Wealth Management Advisor.