Focus
December 22, 2023 | 13:10
5 Fun Factoids of ’23, 5 Fab Forecasts for ’24
Economics
Economics
Economics
Fixed Income Strategy
Economics
Economics
Economics
Economics
Fixed Income Strategy
Economics
5 Fun Factoids of ’23, 5 Fab Forecasts for ’24For a change, not all of the economic surprises were sour in 2023. Many economies held up better than expected even as headline inflation receded largely as anticipated. Still, the firm growth backdrop kept the flame squarely on borrowing costs, as central banks stayed at the tightening wheel longer than nearly anyone expected, spiking bond yields to the highest level since 2007. But resilient economies helped most job markets avoid a serious softening, while also contributing to solid earnings and thus a hearty rebound in equity markets. Here are our nominations for the top 5 economic and/or financial surprises (or quirks) of the year: |
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1) U.S. growth: We can talk about how the global economy held up better than expected, but it was first and foremost a story about U.S. resiliency. Favourite economic factoid of the year: U.S. GDP growth did better in 2023 than in 2022, a reality that no one was forecasting at the start of the year. Making a mockery of widespread recession calls a year ago, U.S. GDP looks to have accelerated to an above-trend 2.4% pace this year, punctuated by 4.9% growth in Q3. The consumer held strong, supported by pandemic savings, solid real wage gains, and Taylor Swift; fiscal policy provided a big boost; and, non-residential construction saw a factory building boom. But all three of those sources of strength are likely to fade. 2) Financial market comeback: After one of the worst performances in decades for the traditional 60/40 equity-bond portfolio in 2022, markets churned out one of the best combined returns of the past 25 years in 2023. U.S. equities led the way, especially the Magnificent 7, with the Nasdaq rising a crackling 40%+, but even the dowdy Dow hit record highs late in the year. The Nikkei’s near-30% rise was the best for major international markets, but cryptocurrencies take the cake for best overall financial returns, sad to say. Best factoid: The Nasdaq will rise more than 4000 points this year, the largest annual rise on record, generating huge wealth increases. |
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3) Bonds: A dominant theme for much of the year was higher-for-longer, briefly interrupted by the U.S. regional banking crisis in March. Yet, the late-year perceived Fed pivot and generally tamer inflation promptly reversed much of 2023’s back-up in yields in the final months of the year. So, after punching above the 5% threshold for the first time since 2007 in October, 10-year Treasuries plunged back below 4% by late December, a fast fade. Yields almost around the world followed suit, largely reversing the bond sell-off that dominated the summer and fall. Best factoid: Many benchmark bonds are going to end 2023 with lower yields than where they began the year—yes, lower—including everything from 2s to 30s in Canada, 2s to 5s in the U.S., and 10s in the U.K. and Germany. |
4) Inflation: We started by suggesting that headline inflation mostly followed the script this year, but that doesn’t mean there were no surprises on the price front. The pullback in inflation was largely thanks to calmer energy prices—oil averaged almost 20% lower than in 2022, while natural gas was down 60%—as well as less fierce food inflation. But core proved sticky, as services fully took the inflation baton. By late 2023, the U.S. core goods CPI was down slightly from a year ago, while core services were up 5.5%. Best factoid: At one point this year, U.S. inflation was 6 percentage points lower than the prior year (in June), the second-fastest annual drop in the past 70 years—even as the economy stayed well clear of recession. Inflation tumbled almost everywhere, including outright declines in China and some European economies by late in the year. To wit, Italy reported inflation of just 0.6% in November, more than 2 percentage points below Japan, a rare reversal to be sure. Italy also now boasts the lowest inflation rate in the G7, a clear contender for best factoid. |
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5) China’s auto industry: Despite a variety of domestic economic challenges and trade actions aimed at its exports, China’s economy continues to make major strides in many key sectors. With the chip shortage mostly in the rear-view mirror, auto production rebounded with purpose, led by the country’s burgeoning electric vehicle industry. China produced a record 3 million autos in November alone, and is on track to hit an annual record high of nearly 30 million vehicles for all of 2023. (For perspective, NAFTA production will be just under 16 million.) Best factoid: Long the largest producer in the world, China surpassed Japan as the largest exporter of autos in 2023, courtesy of its dominant position in EVs. Some honourable mentions include the factoid that the KBW Regional Banking Index is now almost flat on the year, despite suffering a 34% plunge in the spring; Canada’s population sprinted up 3.2% this year, a 65-year high and roughly triple the average growth rate of the past four decades; perhaps related, Canadian home prices managed to rise from the start of the year, despite further BoC hikes and a soft economy. Having dispensed with the fun factoids, we now turn to the hard part—trying to discern what lies ahead, in a year that will no doubt be dominated by the U.S. election. Here are five of the key trends we expect for 2024: 1) Most major central banks will begin to bring policy rates down starting around mid-year. Admittedly, this is not the bravest call, given recent official remarks as well as hyper-aggressive market pricing on rate cuts in the year ahead. But there are three points here: 1) We continue to suspect that central bankers will be more cautious than widely anticipated in both the timing and pace of rate reductions, fearful of declaring victory prematurely in the inflation fight. 2) Even our semi-cautious call on cuts is a crucial development, given our generally hawkish tilt on inflation. 3) Despite a much softer forecast for Canada’s economy compared with the U.S., we don’t look for the BoC to move much ahead of the Fed. In fact, our Stretch Call would be that the Bank actually waits for longer than the Fed to start cutting, with the U.S. focus on the election, and the BoC’s eyes on the bubbly Canadian housing market (see next item). |
2) Canada’s housing market frustrates policymakers all around. While currently pining for the fjords, Canada’s latent housing demand could easily revive as BoC rate cuts come into view early next year, and as long-term mortgage rates ease. As noted earlier, the all-important 5-year bond yield is now lower than at the start of the year, and off a whopping 115 bps from the October peak. As seen this past spring, it doesn’t take much to revive Canadian home sales and prices, especially with the population rising a fiery 3% y/y. Meantime, we would again expect housing starts to drop in 2024, the third annual decline in a row, running precisely counter to widespread calls for more-more-more supply. When it comes to new home building, politicians propose, but markets dispose. Stretch call: Affordability doesn’t improve on average next year, and may in fact deteriorate further from already dreadful levels. 3) Even with a soft domestic economic outlook, the TSX performs well. The TSX has a very heavy weighting of high-yielding dividend payers—financials, telecom, pipelines, REITs, and even some oil producers—which struggled this year as long-term real yields spiked. The S&P 500 outclassed the TSX for the 11th time in 13 years in 2023, powered by the surge in the megacap tech companies. This sustained outperformance by the S&P is more a positive story about tech, rather than a strike against Canada’s major index—which has held up reasonably well against the NYSE Composite (for instance). Now, the big dividend payers stand to benefit, at least somewhat, from impending rate relief. Stretch Call: The TSX outperforms other major markets amid a calmer rate backdrop and even amid a sluggish global economy. It’s brave to suggest that the TSX can reverse the recent trend, as there is persistence in the Canada vs. U.S. stock performance—the former usually only fares well during periods of real commodity price gains, or turmoil in tech. |
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4) The U.S. dollar loses altitude. We look for the greenback to lose ground in the coming year. A more dovish Fed, a cooler U.S. economy, and a drive by many emerging markets to move away from the big dollar point to some softening in the year ahead. We will again point out that China has cut its holdings of Treasuries by nearly 30% just since early 2021 (a slice of $330 billion). Meantime, the Canadian dollar now largely dances to the tune of the U.S. dollar itself. The old link between commodity prices—particularly oil—and the loonie has all but gone away. With U.S. oil production hitting record highs in recent months, and a perception of less torque from higher energy prices for Canada’s economy, the CAD now barely responds to crude. While we are no Canadian dollar bulls, the currency could mildly benefit relative to a sagging U.S. dollar. Meantime, its NAFTA counterpart has been on fire, as the Mexican peso has strengthened to 17/US$, its best level since 2015. Stretch Call: The trade-weighted U.S. dollar has its biggest annual drop since 2011, when it fell by 4.5%. 5) Canada’s unemployment rate will rise by 1 percentage point on average from this year, while the U.S. rate only nudges up roughly half a point. While our 0.5% GDP growth call does not quite meet the recession definition in Canada, only twice in the past 30 years has growth been weaker (in the deep recessions in 2009 and 2020). Combined with near-record population growth, that’s the makings of a sustained rise in the jobless rate. The 0.8 ppt rise in the unemployment rate from early this year already meets the Sahm Rule as a recession flag. Our own recession rule is triggered when the number of unemployed people rises by 25% in Canada—it’s now up 22% from the 2022 low. Yet, while Canada’s jobless rate is rising, it’s flattening out among regions, as the population growth spreads out across the country. Stretch Call: The spread between the highest unemployment rate in the country by province and the lowest will be the smallest on record; excluding Newfoundland, the gap may be less than 2 ppts between the other nine provinces. The World is flat. |
Judging Last Year’s Calls:In a year that was a little less shocking than the three prior tumultuous sessions, we managed to (mostly) hit on 4 of our 5 main calls, and even on 3.5 of our 5 stretch calls. To briefly recap:
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