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December 20, 2024 | 13:13
5 Fizzy Facts from ’24, 5 Fuzzy Forecasts for ’25
Economics
Economics
Economics
Economics
Economics
Economics
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Fixed Income Strategy
Economics
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Fixed Income Strategy
5 Fizzy Facts from ’24, 5 Fuzzy Forecasts for ’25 |
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The election cycle dominated the headlines this year, while the economy largely followed the script. Growth globally stayed steady, inflation cooled toward 2% in most mature economies, allowing central bank easing to proceed broadly as expected. And equities thrived against this backdrop, even with a late-year wobble. The latter kicks off our list of top five notable facts from 2024: 1) Amid mostly rollicking global equity markets, the Nasdaq emerged as the leader yet again with a sizzling 30% advance, after a world-leading 43% pop in 2023. There was much talk of a broadening rally, both by sector and region—the Nikkei finally topped its 1989 highs, 35 years later! Even the TSX had a solid year, despite a soggy economy. But non-U.S. gains were blunted by a strong U.S. dollar. It was thus a tech world after all, with each of the Magnificent 7 buoyant, and welcoming some new tech stars to the main stage. |
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2) Bitcoin was another huge winner, especially post election, briefly topping $100k by December. But the notable fact here is that each of crypto, gold, and the U.S. dollar had big gains this year—quashing the view that the three were substitutes. Plus, in some way all three are often seen as safe havens, but there was little to shelter from this year, as almost all financial markets were mostly robust. 3) Central banks eased almost everywhere, in some cases aggressively so, and yet long-term bond yields rose. It’s not unheard of to have long-term yields going in the opposite direction from central bank policy rates. But Canada took it to an extreme this year—the Bank of Canada led the world with 175 bps of easing, and yet 10-year GoC yields rose 15 bps on net from end-2023 levels. That huge shift saw the yield curve go from deeply inverted to upward sloping by the end of 2024 (Chart 1). 4) The tilt was almost as sharp in the U.S., with 10-year Treasuries rising 60 bps on the year, even amid 100 bps of Fed easing. The big back-up in 10-year Treasury yields left them 125 bps north of 10-year GoCs, a record wide spread. Of course the deeply negative Canada-U.S. spreads weighed heavily on the loonie, sending it skittering to a drop of more than 7% on the year. 5) Part of the reason Canadian rates fell so much and the loonie was so weak was the big underperformance by Canadian GDP growth versus the U.S. for a second consecutive year (1.3% vs 2.8%), and the widest gap in unemployment rates since 2001 (6.8% in Canada vs 4.2% in the U.S.). Yet, Canadian employment growth was actually stronger than the U.S. in 2024: the average growth in the two Canadian measures 1.2% y/y (and 1.6% in the LFS alone) topped 0.5% in the U.S. (1.4% in payrolls). The issue is that Canada’s economy just couldn’t keep pace with still-raging population growth. |
That’s the easy/fun part. Now let’s turn to the more challenging top 5 forecasts for 2025. 1) Some of the Trump Trade begins to unwind as the reality of governing and trade wars dawns. We saw this in 2017-19: After an initial bounce in Treasury yields, the U.S. dollar, and commodities, all were fading even before the pandemic erupted (although the equity portion of the Trump Trade mostly soldiered on). The nub of the concerted market move is the view that the Red Wave is good for growth, but could put some upward pressure on the deficit and inflation, thus putting upward pressure on yields. We suspect that the groaning U.S. budget deficit will constrain tax relief (which is likely a 2026 story in any event), and be accompanied by spending restraint, so fiscal policy will not be loose next year. Stretch call: Despite all the concern over the inflationary impact of tariffs and fiscal stimulus, U.S. core inflation will ebb in 2025. 2) In a similar vein, we suspect much of the gloom surrounding Canada is overdone. Yes, the threat of 25% U.S. tariffs could quickly torpedo this call, but we are nevertheless above consensus on Canadian growth at 2.0% for 2025. Canada is one of the most interest-sensitive economies in the world, and we are now firmly on the other side of that coin, with housing and consumer spending clearly rebounding. In addition, love it or hate it, we are looking at fiscal stimulus heading into elections at the federal level and possibly Ontario as well in the year ahead. Stretch call: Canadian GDP growth not only picks up, it manages to top the U.S. on Q4/Q4 basis, as domestic engines kick back to life, and even amid much cooler population growth. Again, 25% tariffs would deep-six this call. 3) Canadian home prices pick up after three long years of flat to down. Following a lengthy lull, home sales are clearly stirring in response to the aggressive BoC rate cuts, while new listings have simmered down. Like night follows day, this tighter market points to a rebound in prices next year, even without the heavy-duty support of strong population growth. Stretch call: Even with rebounding home prices, affordability continues to improve, as the intense pressure from population growth relaxes and short-term borrowing costs fall further. 4) Central bank easing continues apace. Markets have become much more cautious about the prospect for rate cuts from many central banks in 2025; for the Fed, it’s due to the relentless strength in the economy and sticky inflation, while the BoC and some European banks have already done a lot. But rates are still in restrictive terrain in most economies, especially so stateside, and trade uncertainty will weigh on sentiment and growth. Stretch call: G10 central banks on average ease as much next year as in 2024 (a super stretch call would be “including even the BoC”, in a world of 25% tariffs). 5) It’s always darkest before the dawn. And it certainly is dark times for the Canadian dollar at the moment, as it flirts with 20-year lows. But there is a lot of bad news currently piled on top of the loonie, and a lot of good news for the greenback. With positions leaning so heavily one way, it wouldn’t take much for the ever-flighty currency to rebound. We expect the Canadian dollar to find bottom in early 2025, and end the year stronger. Stretch call: The TSX gets into the act, and manages to outperform the S&P 500—admittedly a call we seem to make often! | Judging Last Year’s CallsIt was an odd year for forecasters. While the economy and inflation mostly unfolded as expected, there were just enough serious wrinkles to flummox a few key projections. So while we got the big picture mostly right, we barely had a passing grade on last year’s calls… we were right (mostly) on 4 of the 5 big calls, but only 1-2 of the stretch calls panned out. 1) Central banks will begin bringing down rates around mid-year, and the Fed may even lead the BoC. Yes, and no. 2) Canada’s housing market will continue to frustrate policymakers, and affordability will not improve. Yes, and no. 3) The TSX will perform well even with a weak economy, and could outperform other major markets. Yes, and not completely. 4) The U.S. dollar loses altitude, possibly even heavily so. No and no. 5) Canada’s unemployment rate will rise by 1 ppt while the U.S. is up half a point. By province, the divergences will narrow to a record low. Yes and yes. |