Serves as the global Chief Economist and a strategist at manual Life Investment Management and we are pleased to have her here with us nice to see you nice to see you John never a day where we're not digesting economic data on any economy around the world but it's nice to have both the US and Canadian economy in Focus right now and the stock market's.
Attention very keyed in to all of this uh generally when you look at the economic numbers whether it's Canada or the US is there something that's sort of the big theme that's keeping you sort of glued together of of of what the Market's trying to figure out right now Market's trying to figure out are we going towards a classical recession or.
Not and if we are what will central banks do in that situation especially because inflation while coming down is not quite back to those 2% targets now Canada has a little bit more of a leg to stand on when it comes to rate cuts the data is unfortunately much weaker here at home than it is in the United States that's why the Bank of Canada has said.
To us a pivot is on its way is it next week we think so could be July but we know we're shifting towards easing the FED in a little bit of a hotter situation their jobs numbers just really strong their economy not showing that weakness just yet so they're on hold a little bit longer I will say you said North American economies but the rest of.
The world also engaged in the beginning of an easing cycle Europe probably going to cut rates next week so if you're a tactical Trader and you're looking what the next six months theme is going to be I think you're going to be talking about the US diverging from the rest of the world just a little bit more when it comes to Cuts versus holding if you're.
Looking out over a year you probably got a factor in that recession risk more than is currently in there if you're looking out over three to five years you know what this is all distractions focus on those long-term rates heading back towards 3% over that time a proper asset allocation uh a lot of this commentary over the 3 to fiveyear Horizon less.
Relevant to you than maybe over the next six months to 12 months okay well all fair points and before we get more into the long term just coming back to the short term I think coming into this year or maybe go back 6 months or eight months ago that idea of the recession risk was definitely constantly part of the narrative and and people thought.
That you might have seen a pivot to rate Cuts faster so I guess against that backdrop what happened what happened so 100% of economists at the end of 2022 surveyed by Bloomberg were calling for a recession in 2023 it didn't materialize and so what's happened is people have said it didn't happen therefore it won't now there's a couple reasons we didn't.
Get that forecasted recession in 2023 one is econ models just didn't behave as we would have expected them to one issue is we're still in a postco economy so the uh interaction between manufacturing activity and services activity it's just not doing what it used to there's still a really strong preference from consumers towards Services activity we.
Use example all the time but it's just true Taylor Swift con uh I was going to say conferences uh no she could do it I would attend uh Taylor of concerts for example uh restaurant activity so the behavior that we anticipated from consumers didn't materialize the second big issue huge amounts of procyclical government spending governments globally.
But also in Canada have been keeping this economy afloat more so that if you uh took an econ 101 class you learned about key in economics governments we were told uh spend in bad times pull back in good times that didn't happen and it broke our economic models a couple other things around the sidelines but I will say uh the average time from.
The First Rate hike to its impact on the economy is two years John we are now entering the window in which we would traditionally see rate hikes impact your economy that's why the Canadian economy is losing a lot more momentum right now and I think that even though we were wrong in 2023 you got to come into work look at the data as it is now forget.
Your priors and say what is the main point of the data the data Contin to tell us that recession risk is higher it's just uncomfortable to say it if you've been saying it like I have for 18 months and what about uh what makes sense to say about inflation itself which I think at the end of the day was one of those balancing acts any time we.
Were worried about recessionary risks well if you want to play the throwback game four years ago we were talking about is inflation supply side or demand side you to pick a camp turns out it was a little bit of both or a lot of both inflation globally is coming down in fact in Emerging Markets it's effectively solved it's back to pre-co.
Levels in developed markets a little bit stickier a big part of that is just the unwinding of the postco supply chain issues I think we are under uh emphasizing just how much we are still in this distorted postco economy but it's coming down pretty quickly in places like Canada where interest rates bite more the demand side to inflation.
Is also coming back that's why we have inflation in Canada back to 2.7 on a headline basis that's within the bank of Canada's Target it's not 2% the target for the Bank of Canada it's one to three with the midpoint being two in the US their economy is still a little bit hotter they haven't seen the same decline they got to wait a little bit.
Longer and then going longer term which you were alluding earlier you think all signs are pointing to eventally lower rates and that's something to to to consider for one's portfolio oh we are absolutely at a Tipping Point when it comes to monetary policy now remember that usually the Federal Reserve is the first to move the US is the first to.
Move the rest of the world follows we're in a peculiar environment where actually the US may be last close to last uh I think the Reserve Bank of Australia might hold on a little bit longer the bank of Japan's still hiking but if my long list of global central banks the US probably will go near the end but there is no question rate hikes in almost.
Every major economy over we're heading towards rate Cuts but I don't think the main question is you know is the Bank of Canada going to cut in June or July or even is the Fed going to go in September or December number the question is how big will that easing cycle be if it's 1995 type Styles and we're only cutting three or four times that's a very.
Different investment prescription than if for example in our base case we're going to a proper easing cycle with 200 basis points of cuts and heading back towards 3% in in that kind of environment what what what would historically happen historically if we have a garden variety of recession then we see Garden variety easing which means.
Going back to what we call the neutral rate John I know we talk ofous very Economist type conversation neutral rate being the rate that is neither tightening nor easing in the economy that's probably higher now than it was before covid so going back to 2% 1% probably not likely but back towards a neutral of three that seems like uh the.
Most probable outcome in our Outlook okay
Optimistic Aprils fools joke from BNN, oh wait its June 1st no longer April 1st.
No rate lower unless September 2024. Here is my personal thought.
In conjunction with GIC rates and every day ardour rates on my money. Thanks Financial institution of Canada I bid I'll honest appropriate put aside it into U.S. bonds or certificates of deposit.