Recent Updates on Inflation and Interest Rates

Sep 19, 2024

Inflation and Interest Rates Update

Canada's August Inflation Numbers

  • Expected drop to 2.1% according to economists (lowest since March 2021).
  • July's rate was 2.5%.
  • Decline driven by lower gas prices.
  • Core inflation measures also expected to decline.

Bank of Canada's Response

  • Cutting rates in response to falling inflation.
  • Key rate lowered by a quarter point to 4.25% (third consecutive cut).
  • Further cuts possible if inflation slows faster than expected.
    • Governor Tiff Macklem mentioned more than 25 basis points cut possible if economy weakens.

Predictions by Economists

  • BEO Chief Economist Douglas Porter: Rates may continue to be cut until mid-2025, potentially dropping to 2.5%.
  • High shelter costs (rent, mortgage payments) are keeping inflation above 2% target.

US Federal Reserve's Rate Decision

  • First interest rate cut in four years expected.
  • Debate on 25 vs. 50 basis point cut.
  • Odds favor 50 basis points.
  • Effects of rate cuts will be gradual; immediate relief not expected for borrowers.
    • Interest rates not expected to drop below 4% until mid-2025.
    • Credit card holders, mortgage, and auto loan rates may see modest improvements.

Political Ramifications

  • Presidential election in November could affect rate decisions.
  • Bigger rate cuts could lead to accusations of political interference.

Impact on ETFs

  • Rate-sensitive Harvest ETFs hit 52-week highs in August.
  • Potential beneficiaries of rate cuts:
    • Harvest Equal Weight Global Utilities ETF (HL Utilities): Lower borrowing costs increase profitability.
    • Harvest Global REIT Leaders Income ETF (HGR): Lower rates reduce borrowing costs, make real estate investments attractive.
    • Harvest US Bank Leaders Income ETF (HUBL): Lower rates stimulate borrowing and economic activity.

Aviation Sector Updates

Air Canada Labor Dispute

  • Tentative agreement with Union representing 5200 pilots, avoiding strike.
  • Key issue was pay, with pilots taking second jobs.
  • Air Canada offered a 30% salary increase over 4 years.
  • Deal adds $1.9 billion in value, addressing compensation, retirement, and work rules.

Boeing Factory Workers Strike

  • Workers on strike after rejecting labor contract.
  • Key issues: dissatisfaction with wage increases and cost of living adjustments.
  • Strike could delay airplane deliveries and disrupt production.
  • Boeing's new CEO urged workers to avoid strike but had little impact.

Upcoming Events

  • Canada's inflation numbers to be reported tomorrow.
  • US rate decision on Wednesday.

Thank you for watching; see you next time.