Hello and welcome to our latest monthly Economic Webcast. My name is Eric Lascelles. I'm the Chief Economist for RBC Global Asset Management and am happy to share with you our latest economic thinking.

The title of this presentation is Soft landing remains in focus, despite stubborn inflation. That really references two things:

• The one would be we have had some unfortunate inflation numbers, particularly in the U.S., over the last few months. Inflation getting a little hotter as opposed to the cooler trend that we had been seeing and that we were hoping to see.

And so that's not ideal. And I'll speak to that in a bit more detail in a moment.

• Despite that challenge, despite its knock-on implications for interest rates and elsewhere, we do still think a soft landing is the most likely outcome. And for those who maybe aren't versed in the lingo, soft landing refers to the idea the economy can keep growing, can avoid a recession despite some of the challenges that are out there right now.

Okay, we'll jump in.

Report card: We'll start with a report card. Indeed, on the positive side of the ledger, let's start by celebrating that economic growth persisted through the first third of 2024. I'm recording this at the very end of April, by the way, and you're likely listening to this in May. But we've continued to see economic growth right through that time frame.

That was not a foregone conclusion as of the thinking that prevailed going into 2024. It was expected that the first half of the year would be quite a difficult period, and there were debates as to whether there might be a recession, or it might just be quite slow growth. But we're actually getting pretty decent growth for the most part.

As per that, the soft-landing narrative continues to play out, so we do believe it's more likely that economies can continue to grow as opposed to tumble into recession. To that end, some recession signals have reversed in a welcome way. In fact, we have 1 or 2 more that are reversed even compared to a few months ago.

So that's quite nice.

Inflation is lower than its peak. I'm mentioning that not because it's a new trend, but just because we don't want to completely lose sight of that. I'm going to be grumbling in a moment about inflation that's running in the threes. We'd like it to be running at 2% and so everyone's a bit upset about that.

But don't forget inflation was eight, nine, 10% depending on the developed country, in the middle of 2022. We've made enormous progress. I would argue that 10% inflation was probably incompatible with economic growth over any sustained period of time. That was a big, big problem.

We are now stuck with a smaller problem. If we were to be stuck at a 3 or 3.5% inflation level, no one would be all that happy about it.

But the economy could grow. It is not incompatible with economic growth. So we've made a lot of progress. We should celebrate that before grumbling about the further progress that's needed.

I will flag that in China, we are getting a bit of an economic rebound. So that narrative we've had for a while, that maybe there's a bit too much pessimism about China . . .

There’s plenty to be pessimistic about, but maybe a bit too much pessimism. I think that story's holding together fairly well.

Then I'll just flag at the bottom here happy risk assets. That's just to say that we've seen a stock market that's been more inclined to rise than fall – a bit less enthusiastically over the last month. Nevertheless, some impressive gains dating back to 2023 and similarly, credit spreads are narrow and so on.

So to the extent the market is making a bet about the economic outlook, the market is making a mostly positive bet. So that's the positive side.

On the negative side, there are a number here to review. Let's speak to those. The first would just be as mentioned, inflation has disappointed in recent months, mainly in the U.S., though not quite exclusively, so some upside surprises versus the consensus expectation.

As a result of that, bond yields have gone up. And so we're grappling with somewhat higher rates than we had been dealing with a few months ago. ‘Threatens’ is a bit of an overly strong word in terms of the effect it could have on the economy, but it does slow the economy.

And so that slows growth a little bit. By the way, that's part of the solution because slower growth could help to tame inflation. But anyhow, slower growth in and of itself isn't necessarily welcome.

We are still flagging a non-trivial risk of recession. We've been saying, I think a month ago, a 35% chance of a recession over the next year or so.

Let's not completely lose sight of that, even though it's the less likely of the two main possible outcomes. Let's also recognize there are just uncertainties in a broader context. So I think you'd have to concede after recent hot inflation that the risk of getting stuck at a higher inflation level is higher than it was. It’s not our base case.

Our base case is inflation continues to come down. But it's not impossible that we spend more time than we'd like to in the threes. And one scenario, one way you might find yourself there is just if some of the big geopolitical risks in the world were to trigger. You could end up with a higher price of oil were the problems in the Middle East to intensify, or maybe the problems in Ukraine, or elsewhere.

And then one other negative theme, and it's not that the U.S. election is a negative theme whatsoever. I would put that in the neutral bucket, all else equal. But I would say the uncertainty around the outcome of the U.S. election is a negative in and of itself. We don't quite know what policies will be coming to the fore in early 2025. It's quite a close election at this juncture.

And then on the interesting side of things, some central banks have started to cut rates. And so we'll be grumbling in a moment about how the fed has seemingly delayed the beginning of its rate cutting cycle, and maybe justifiably so given the higher inflation. But, you know, we've seen quite a number of emerging market central banks cut rates. The Swiss National Bank in the developed sphere has cut rates.

We're not that far from rate cuts in other countries, including potentially Canada in June or July. And so, we are still likely getting some rate cuts, that's not off the table altogether. I can say that further economic growth – to the extent we get it and we think we are going to get it – should be viewed as a continuation of the existing cycle, not as the beginning of a magical new cycle with 10 years of runway in front of it.

So that is to say, there might be a bit less room for growth to come than if it was a new cycle.

I'll just say something which I'm sure you're getting bored of hearing, but I'll just keep saying it, because from a medium-term perspective, we do need to be thinking about fiscal finances. A lot of countries are running big deficits, and you have to think that's going to become more relevant in the coming years as those deficits mount up into larger debt loads.

Simultaneously, just given that that bonds are rolling into higher interest rates, that just makes it more costly to service all that public debt. Okay.

So that's really the overview of key points and also where we're going to be going over the next little while. Let's now dig into the numbers and dig into some of the specific charts and ideas.

I'm going to run you through a three-chart sequence pretty quickly here, just to set the stage for what people have been nervous about, recently.

Recent U.S. inflation trend going in the wrong direction: It starts, naturally enough, right here, which is, we have seen some hotter inflation prints in the U.S. recently. I can say that the dark blue line, that's the monthly change in U.S. CPI (Consumer Price Index).

We've just seen an acceleration from month to month to month going back over the last 4 or 5 months. So certainly an uptick in general there, though I would maybe counter and say a lot of that is the price of oil, which is far from certain to continue rising. Nevertheless, we've seen higher monthly price pressures.

The line in gold is core inflation. So core inflation hasn't been whipping around quite as substantially. But it's nevertheless the case that there was a moment when core inflation in the U.S. was rising at 0.2% -- a little bit of 0.3% – but in that realm, which was consistent with two and a half, 3% inflation, which was not bad.

We've recently strung together a few 0.4s, and so that's consistent with more like 5% core inflation. And so that's of course not a welcome annual trend. So here we are, again, seeing inflation go a little bit in the wrong direction.

From there we can say, well, as a result of inflation going in the wrong direction, people aren't expecting as much rate cutting out of central banks.

Reducing how much the Fed can realistically cut rates: You can see as an example here, in the U.S., the gold line is where our expectation stood near the start of the year. The market was pricing in I think it was a good six rate cuts, 625 basis point rate cuts in 2024 and then further substantial easing in 2025.

And you can see the market thought maybe the policy rate would get all the way down to about 3%, if not below, by early 2026.

A lot of that has been unwound. The blue line is now the expectation over the next few years. And so the rate cutting starts later. It proceeds more gradually. It descends to a less low level. I'm not personally sold that the lowest level of the fed funds rate is necessarily going to be a whole lot higher than before.

I don't think that we're going to get stuck at a 4.25% fed funds rate personally. But I would say that in the short run over the next quarter or two, it does look as though the Fed's probably not cutting rates in the next few months. Maybe it gets going in the fall, though it gets a little bit tricky when you start a new, monetary action right around a presidential election.

So it gets a bit tricky. The bottom line is there might be only a little bit of rate cutting this year, as opposed to prior expectations for considerably more. The inflation environment just doesn't support it.

Sending bond yields higher – to the possible detriment of the economy: That brings us to the third chart of the sequence. And so that would be bond yields. Maybe unsurprisingly, as the market has priced out rate cuts, we've seen bond yields rise.

Bond yields are many things. But one way of thinking of them is that they are in a weighted expectation of the future policy rate over a period of time. And so the 10-year yield here has gone up recently on the basis of the assumption that the short-term rates are going to be at least a little bit higher over the next several years.

So we now have a U.S. 10-year yield that's closer to 5% than to 4%. It’s still not as high as it was, I should emphasize. In late 2023, there was a moment where it was actually touching 5.0%. Nevertheless it's increased. All else equal, when things like this happen, you could say that it would slow the economy.

Now we've done the modeling and it should slow the economy a little bit. It's not obvious this needs to be a recession. It's just an at the margin kind of thing, but it does slow the economy a bit. And as I mentioned earlier, that's actually maybe a good thing because to get a soft landing, you do need a landing.

You do need the economy to slow somewhat. You do need inflation to come down and higher rates are pretty good at doing that.

So I'll take how this is played out. But certainly it has resulted in higher rates. And of course it's a frustrating thing if you're a borrower or you have a mortgage coming due and those rates just aren't quite as low as they were.

Unfortunately, it's a function of inflation right now.

Soft landing still most likely for the U.S.: So let's just lay out the two main scenarios then. And so we do again focus on the U.S., it very much rhymes with Canada and with other developed countries. And so we still think that soft landing scenario is more likely. That's a 65% chance. Why do we think that? Part of it is just the economy continues to grow, it continues to exceed expectations.

Some is that as time passes, the economy does gradually adapt to higher rates. That process isn't done, by the way. There is still interest rate pain that's coming. But still, we're seeing an adaptation take place and the risk of a recession starts to shrink a little bit as we've now worked a couple of years into this period of higher interest rates.

As mentioned, central banks are now thinking about rate cuts. They may not do that much, and it might happen a little bit later than before, but it is still fundamentally the problem, the thing that's threatening and slowing the economy beginning to be taken away. That's a pretty big deal, we think, whether or not rate cuts are the most likely outcome. We think they are, but whether or not they are the most likely outcome, just keep in mind central banks are now in a position to help if they need to. If the economy were to stumble in a worse-than-expected way, you could get some rate cuts. The central banks are no longer completely beholden to the inflation side of things.

Lastly, and I mentioned this, and I think had a big, long list of them, a month or two ago, some of the recession signals we track have reversed.

Some of the things that were predicting recession are no longer predicting recession. It's very unusual for that pivot to happen without there being a recession first. But that's what's happened. And we believe that increases the prospect of a soft landing.

On the hard landing side of things, well, there’s a 35% chance of recession. That's the just the reciprocal of the soft landing.

Why is that still a risk that we can't quite completely ignore? Well, some recession signals are still intact. Yield curves are still inverted. That is one of the classic signals that we look at. Inflation is, as just mentioned, proving sticky. So it's taking longer to come down, and that is just complicating everything. There's even a risk that rates rise further.

I'm thinking more about bond yields than that central banks actually raise rates, but maybe just that rates stay high for longer.

And then, you know, monetary tightening. I guess consistent with that it’s potentially going to be delivered with a lag. And so there could be some extra economic pain along the way. It's confusing, and it's not ideal to talk about multiple scenarios that are diametric opposites of one another.

I would say simplistically we think the soft landing is more likely. But we shouldn't be investing purely on that basis. There's no guarantee that's the outcome. That is simply the more likely of the two.

Okay, so let's run through some charts that really support the growth story right now.

Tailwind for 2023 and 2024 U.S. growth: Illegal immigration is driving an underappreciated population boom: This is not the whole story whatsoever and Canadians may scoff because the numbers are so much more muted and tame than in Canada. But the U.S. has had sneakily fast population growth over the last few years.

We haven’t even fully appreciated this. We knew that there was a lot of concern about undocumented immigrants coming through the U.S. southern border. It’s certainly been in the news, certainly a central election campaign issue, but we were not getting good numbers as to how many people were actually coming in.

And the Census Bureau, which is tasked primarily with population estimates, was coming up with fairly benign numbers. They were saying that population growth in 2023 was maybe 0.5%, which was really not that different than normal. They do, in theory, include undocumented immigrants, but it seems as though they were very conservative in their methodology. It seems as though they were probably missing some things.

We have now pivoted, and we are leaning more on the Congressional Budget Office, which seems more willing to stick its neck out and make more credible estimates as to the number of undocumented immigrants coming in. That’s where you get this chart and in particular the right side of this chart. And so you can see there has seemingly been a genuine surge in U.S. population growth by virtue of this immigration. Population growth was about 1.2% last year and on track for about 1.2% this year.

It should slow somewhat from there, though really, it's foolish to pretend we can say anything intelligent about immigration in 2025 or beyond because there's an election. Both candidates are making all sorts of promises about curtailing immigration or changing how it occurs. And so it's hard to predict the future. But for 2024, we can say it's still pretty fast. And this has been a tailwind. Normal population growth in the U.S. is about 0.5%.

And so when we think about how it was that the U.S. economy exceeded expectations in 2023, we've usually had a fairly short list. And we've said, well, they delivered a lot of fiscal stimulus, more than had been expected.

We’ve said consumers proved to be really enthusiastic spenders – more than normal. We've often noted just the U.S. economy's less rate sensitive than a lot of economies out there because of less debt and longer amortization periods on mortgages and so on.

But I can say that maybe this was a third factor, which was there was also probably a population boost that came from that.

Importantly, that population boost is continuing into 2024. So it's another reason why there could be a little bit more growth. And if you're not making the connection as to why it matters, it’s because these people come in and then they start buying things and they start working. And those are both things that add to the economy.

Global economy exceeding expectations: Let's talk about economic surprises, not just in the U.S., but in the world. And so we are in a period of notably positive economic surprises. That's a roundabout way of saying that the economy is running faster than people have expected it to. Again, as I mentioned earlier, the first half of this year was thought to be potentially quite a challenging period given high interest rates and so on.

In contrast, we are seeing economic data that just is resilient – that would be a cautious way of describing it. But exceeding expectations. And the reason I've shown the global economic surprises is we all know the U.S. economy is sailing along, but actually it's pretty clear that other economies have picked up as well. We have seen signs of some mild acceleration in Canada by some short-term and real-time indicators.

We just got the Eurozone GDP (gross domestic product) prints for the first quarter of 2024. We are seeing growth after a period of stagnation over the second half of last year. And so on a number of fronts we are getting a sense that the economy, at a minimum, is moving forward as opposed to expectations of weakness.

‘Recession’ mentions in S&P 500 company transcripts keep falling: Now I'm going to take you through two sort of fun things. Or maybe only economists would think these are fun, but just different ways of looking at the economy, using unconventional data.

We are really, truly in a golden age for unconventional data. We don't need to wait just for the GDP number or the statistical agency to print the retail sales print, you know, six weeks after the month ended. We have all sorts of real-time data that we can look at and alternative sources.

This is one of them. This is actually company transcripts where we search for particular keywords across the thousands of pages of transcripts for S&P 500 companies. You can search for whatever you like. Of course. we look for the word ‘recession’ in this context. And so, you see some pretty useful things here.

The term ‘recession’ was on everyone's mind in the second quarter of 2020. That, of course, was the big deep recession associated with pandemic lockdowns. You can see those concerns faded in 2021 as the economy boomed. You can see they really, really came back in 2022 and in particular in early 2023 when we had rates that were rising and China was locked down, all sorts of bad things were happening.

There was a really high recession risk then. Corporate leaders were acutely aware of that and perhaps even seeing weakness in their own balance sheets and income statements. You can see that that term is just fading. And so we're continuing to see in every quarter, there's just fewer references than the prior quarter. And so we can't say that, you know, recession is happening now.

We can't say that businesses are especially concerned about it. And, you know, of course, businesses are forward looking. So this is nice. This isn't just telling us about the first quarter of 2024. This is giving us a bit of a hint as to what businesses are thinking about over the next few quarters, and they really don't seem to be that concerned. At least the big businesses aren't.

This is the other sort of cool indicator we've been playing with recently. So you've heard no doubt a lot about artificial intelligence and natural language models and these sorts of things that are, you know, taking over the world and, this is actually deploying natural language models, to the advantage of our economic forecast.

Real-time economic sentiment has spiked higher: So this is actually a great tool that looks at tweets, Twitter or X tweets. It looks for economic-type tweets and gauges whether they're optimistic or pessimistic essentially. And it tracks those over time and it’s the dark blue line that you get out of it. So there's maybe two things that can be said here.

The first would be, it seems it did a pretty good job of mimicking a more conventional University of Michigan Consumer Sentiment Index, a monthly series that everyone looks at. You can see when the Twitter sentiment is optimistic so is the more conventional measure and vice versa. So that's pretty neat. It's just confirming it seems to be working.

And then the even cooler thing is that we can, of course, to the extent that this Twitter data is real time, it's coming out by the second, so we can actually see what's happening since the last time we got one of these more conventional sentiment indicators. So we'll see if this sticks.

I know there is some choppiness, but if you look on the far right of this slide and look at the blue line, it would appear that economic sentiment actually got a lot better in the span of even just the last few weeks.

I don't know whether that means there's an actual acceleration, but to me it says there's no sudden collapse of the economy. And that's the thing that we're all trying to keep an eye out for. There is some economic optimism coming through AI models as well.

One thing that isn't fully reveling in this world of economic strength are small businesses.

Small businesses are not fully participating in economic strength: We have been tracking and we're more than aware that small businesses have expressed more concern. They've been less optimistic. This is a measure of the fraction of businesses who say their most important problem is poor sales. You can see it's not a large fraction, but it is a rising fraction that are complaining about their sales.

If you want to be an optimist, you could say two things. One would be that this is a luxury because previously they were most concerned about inflation. As inflation concerns go away, you have to say something in the survey – and so maybe they're just moving on to the next biggest problem. And it may not actually mean that this is a growing problem, so much as some other problem is shrinking.

So that would be an optimistic way of viewing this, though maybe a little bit too optimistic.

I think the other way of viewing it, though, is to say that actually small business has been pretty disconnected from the broader economy for a while. As we look back at some of the surveys we track and small business optimism versus overall economic optimism, we find that small businesses have been pretty reliably more pessimistic for years.

This was the norm before the 2020 pandemic as well. And so I don't like that the line is rising here. It does suggest that we need to be a little bit on guard, as per the ‘risk of recession isn't zero’ story. But I would say that to me, this at least takes a backseat to some of the other things that we're tracking right now, though certainly entirely realized and relevant if you are a small business and maybe not enjoying it.

Maybe there's even a side conversation about the extent to which network effects seem to be getting ever more powerful and scale is becoming more powerful. It's just harder for smaller businesses to compete with these big business businesses that are, in some cases, eating their lunch.

Okay. And then recession risks.

Recession risk is higher than normal but far from certain: We've long had this list of recession signals, and we've tracked which ones are saying ‘yes’ to a recession, which are saying ‘no.’ This is new and improved. We've actually added several things from the last go around. I was feeling a bit badly because we keep finding new recession signals and things that we should be watching, and I hadn't actually added them to this.

I was talking about recession signals and then they weren't on the list. So we fixed that, and we've got the full sweep here, more or less subject to change, I guess inevitably. So it’s a big, long list and, gosh, you can almost take what you want from this.

It's very, very symmetrical. You have five things saying ‘yes’ to a recession. You have, I believe, five saying ‘no,’ and you have five saying ‘maybe or likely.’ So maybe we just throw our hands up and give up because we're getting all sorts of conflicting information. But I would say maybe we could tease out a couple of thoughts here.

First of all, the risk of recession is higher than normal. Most of the time, most of these are saying ‘no.’ So the risk of recession is definitely higher than normal, which is the number that we've been sharing with you: 35%.

However, I would say you're far from a slam dunk. Yeah, plenty of things are saying ‘no,’ but some things are saying ‘maybe’. It's not 100%. We could debate whether it's 20% or 60%, I'm sure. But it's not 100%.

And then the thing that you can't see here, but I happen to know because I track this, is that we are seeing some important movement. We have some recession signals that were saying ‘yes,’ that have pivoted to some ‘maybe’s,’ or have become ‘no’s. Fewer and fewer are ‘yes’ over time.

There's no guarantee that trend continues. But, there is some momentum to these kinds of things. So I wouldn't be surprised if we continue to see a subtle evolution more towards ‘no.’ And so we walk away from that and looking at a lot of other things and say, we think the risk recession is about 35%, which is high, but lower than it was and not the most likely outcome.

Okay.

So the extent to which we've dodged a recession, that's an open question. But the extent to which we probably dodged a recession, how should we think of any future growth that happens?

Any further growth should be viewed as a continuation of the prior cycle: It's tempting to say, “Hey, new cycle, 10 more years of growth. Hurray!”

I'm not sure that's right. New cycles normally start with a weak economy, with high unemployment, with low inflation, with low interest rates, and with low risk-asset valuations, a low PE (price-earnings) ratio on the stock market, with wide credit spreads, that kind of thing. Conversely, here we are with none of those things.

We have, you know, pretty strong economies and low unemployment, high inflation, high interest rates, high risk-asset valuations in some cases at least. And so kind of the opposite of a new cycle. I don't think we can say that to the extent we dodge a recession, it's a new cycle with 10 happy years of growth in front of us.

I think, more realistically – and sorry for all the words here, folks – but it’s more realistic to say that it's probably a shorter cycle. We're budgeting for that with plenty of room for error, but we're budgeting for maybe 2-5 years of additional growth coming down the pipe. That's in part because the cycle is already four years old.

That's us actually saying maybe it's a 6-9 year cycle, which is a pretty normal cycle, actually. In part we're saying this because the growth you may recall in the early part of the recovery was absolutely bananas. It was so fast that we ate through a lot of the economic slack that you normally would have spent years and years slowly, slowly chomping through.

So there's just kind of less room to maneuver, if that makes sense, going forward, having already accomplished all of that.  And in part it’s because when we look for parallels and we say, “What were some other times, as an example, when the unemployment rate stopped falling for a while and then actually started falling again?” That's very rare, by the way. 1967 is one instance, 1995 is another. Maybe those are the only two actually in the U.S. that at least look anything like that. You only got two years of extra growth after 1967. You got five years of growth after 1995, before the next recession. So that actually significantly informs the 2-5 year comment.

There is a little aside that maybe cycles can last longer in the modern era. Maybe we're less subject to the whims of the business cycle, and we really can just keep trucking, except when we're hit by exogenous shocks like a pandemic or a financial crisis or a dot.com bust or something. And so all sorts of open questions there. But in general, we're just assuming that we keep going. But maybe it's 2-5 years, not 6-10 years of growth left to come.

Okay, let's talk a bit more about inflation.

So we've already flagged it's disappointed lately. I think I drove that home. I do want to say we believe there is some room for improvement.

Real-time inflation data argues pressures may be starting to abate: So this is more internet-enabled stuff. If you look at the dark blue line - this is an incredible company that puts this together, they trawl the internet for prices and it's just a robot that's doing this.

They are able, in real-time, to estimate where inflation is. So we don't have to wait until the monthly CPI (Consumer Price Index) print comes out weeks and weeks later. And so they're picking up car prices off car websites and they're picking up, I don't know, gas prices off GasBuddy or something, and they're just doing this. I'm sure they're going to Amazon and online retailers galore.

And they're able to capture quite a remarkable, impressive fraction of the CPI basket by doing that. So it's a nice little leading indicator. And you can see that dark blue line is starting to come down. Now, that's consistent with pretty fast monthly price growth. Just less fast than the last few months. So let's not expect miracles when the April number comes out.

But it does look as though maybe we are rolling a little bit lower in terms of the real-time indicator. So maybe we're past the peak there.

U.S. wage growth slowing notably: I can say just looking in general, we do feel better about wage growth. I feel badly saying that. Wage growth is wonderful, it’s how workers make money.

But I would say just from an inflation sustainability perspective, wage growth is really fast in a way that was problematically spurring inflation on. So it's probably for the best we've gone from really fast wage growth to more moderate wage growth. That should help to maybe slow inflation a little bit.

I'll mention as well now, just because I don't have a chart for it later, we've been spending time looking at insurance inflation. a big part of inflation recently has been rising car insurance and home insurance costs. This is mostly true in the U.S. It seems to be a function of many things. There are more car thefts, which adds to the insurance cost. Natural disasters have been taking out, I guess, large swaths of U.S houses and maybe there's climate change linked to that.

But 2023 was also probably a really bad year, even in that context. And it's more expensive to repair cars. There are lots of computers in them and mechanics are harder to find and more expensive. So there's a big, long list of why we're seeing, you know, a 20% increase in auto insurance costs over the last year as a pretty eyebrow-raising example.

I'll just say this, we think we're probably close to the peak of that. Governments actually regulate the amount that the prices can go up. You might think governments could just say, don't raise the prices anymore. But insurance companies are actually leaving various U.S. states because they just they can't make money. For example, a number of insurance companies have left California.

There are just too many wildfires, too many problems. I think that is a signal that probably those fees do have to go up. Governments have capitulated and so the prices have gone up quite a bit. But it's not an endless procession. Essentially everyone negotiates a one-year contract and so we're rolling into these materially higher costs.

It will hopefully slow from there. I can say looking historically at auto insurance costs, normally they lag inflation by about 16, 18 months. And so the extent to which inflation peaked, you know a year and a half, two years ago, we’re in the approximate range where we should be seeing this peak now in insurance costs and they should be starting to come down as well.

Sorry for saying all that with wages data in front of you. It’s a bit of a non-sequitur.

Another reason why we think inflation can become a little bit less high is here.

China is exporting deflationary pressures to the world: So here are prices in China and inflation rates. China's inflation has been negative recently. It's now a little bit positive again. But the bigger point is just China doesn't have a lot of inflation.

Chinese producer prices are flat-ish. Chinese export prices are flattish, if not actually falling right now. That speaks to some Chinese economic weakness. That's its own story.

But for the rest of the world, that's China exporting deflation. The things that China is making are getting to the rest of the world and are becoming cheaper.

It’s not that import of goods costs are the only thing that matters for inflation, but nevertheless, that is a downward pressure on inflation.

The world’s central banks are pivoting from hikes to cuts: That brings us to central banks. This is my favorite central bank chart. So the fraction of the world central banks that are raising rates versus cutting and of course a lot were raising.

And now importantly, a rising number are cutting. The blue bars at the bottom on the right show that more and more – still a select few – but more and more are cutting rates. A lot of them are emerging markets, which does matter because they are a pretty good leading indicator much of the time. And as I mentioned at the top, the Swiss National Bank has cut rates.

Reserve Bank of Australia is probably pretty close. Swedish central bank pretty close. Canada pretty close. June is in play for Canada’s first rate cut. I might bet on July as being a bit more likely, but June is certainly possible as well. So we're getting closer to those rate cuts. But they may happen a little more slowly than previously hoped, just because inflation is proving a little bit stickier as discussed.

2024 U.S. election creeps nearer: A quick nod to the U.S. presidential election. So as I'm recording this, it's just over six months away. That is very much getting close. And so let's pay attention to it. I won't go through all the policy items again. We've talked about that, before. But maybe in a nutshell, you would say Biden is the more status quo incumbent.

Trump, of course, is the more unconventional candidate. Maybe with big question marks, maybe Trump would be a positive for the stock market, just given some promises for corporate tax cuts and deregulation and so on. Maybe a slight negative for the economy, though, to the extent he's also talking less immigration and more tariffs, which are economically negative.

That might be the policy summary in a 30-second snapshot. What you see in front of you, though, are polls and betting markets and who may win.

I think the main takeaway is that it's pretty close. You see one where it's a dead heat and one where Biden appears to be in the lead and one where Trump appears to be in the lead.

So probably the most intelligent takeaway is we don't know the answer to who wins yet. But I will say this, versus a couple of months ago, Trump was more distinctly in the lead a few months ago.

And it looks closer now. Not that Biden's in the lead, per se. One poll would say he is, but it's back to being close. So that's interesting. And we'll see whether Biden enjoys continued momentum in the coming months.

Okay. I'm gonna finish with two charts on China, sort of semi-random, but interesting subjects that do matter.

Chinese housing demand to be significantly weaker in next decade: This is Chinese housing demand. So we talked last month about Chinese housing affordability, it’s poor. This month, Chinese housing demand, we stole this straight from the IMF (International Monetary Fund) I will admit. So if this looks like the wrong color scheme, that's why. The IMF doesn't mind when we borrow things, though. And this is so fascinating. I wanted to share it with you.

Maybe I'll start by saying this: China's population is shrinking. Simplistically, you might have guessed, therefore, that China needs no new homes. Its population is shrinking. That's the end of that.

It's not as simple as that. China does need new homes over the next decade. The middle and the white bar here are kind of a high and low estimate for the next decade of how many houses per year China needs.

They do need houses because first of all, houses decay. You need to replace them. That's the blue shaded area. They're budgeting for apartment sizes getting a tiny bit bigger. That's the tiny, tiny red area. They are assuming that household sizes shrink. So you have maybe fewer people, but not fewer households, as more senior citizens are living alone, that kind of thing. So they do need places to live, even if it's one person instead of two.

Lastly, urbanization. So urbanization is a pretty important force. Chinese people are moving from the countryside to the cities. You do still need more property to facilitate that.

The population decline, does that drag? It does drag. That's the dark green at the very bottom. It's pretty small, though. The other forces are all significantly more powerful. So the population decline is a pretty trivial contributor.

The main takeaway, despite all that – despite the fact that, yes, China does need more houses, despite a shrinking population – is that China needs far fewer houses over the next decade than they needed over the last decade.

So I've ignored the left bar. That was over the last decade. China needed about 1.7 million more houses per year. Going forward, China needs in the realm of 1.2 million to maybe 800,000 more per year. So it's about a 45% decline in how many houses per year China needs going forward versus the past. And so it just speaks to the challenges in China's housing market.

Builders are not going to rev back up to where they were. Fundamentally, there isn't that same level of demand and maybe there's even going to be less demand to the extent that some of the demand in the past was artificial. People were viewing it as an investment.

You should know China pays no personal property taxes outside of a few big cities, so it's actually a pretty attractive investment with not much of a carrying cost. But it's less attractive when home prices are softer, when affordability is poor. And so, bottom line, is China's housing is likely to remain a drag on the economy.

Going forward, we do think China can grow in general. We are seeing retail sales grow, cautiously.

We are seeing quite enthusiastic growth of the manufacturing and trade side. Some complaints from the rest of the world that China is undercutting other markets. They probably are to some extent. Nevertheless, we do think China can grow, but it's not going to get a lot of help from housing.

Chinese productivity growth is slowing, but still surprisingly good: I'll finish with this China item, which is just Chinese productivity growth.

Even this strikes a more balanced tone. There have been moments in the last few decades where Chinese productivity growth was rising by as much as 14% a year, which is unbelievable. I mean, that's really a proxy for how fast your prosperity goes up. And so just these unbelievable increases.

That's no longer the case.

Chinese productivity growth has slowed quite materially over time. It’s now running at about 5% a year. And so, first of all, that might be a surprise. Isn't the Chinese economy only growing at maybe 4% a year? It is, but the population is shrinking. And that's how you make the math work when you have productivity rising faster than the economy.

That makes sense. But I just say this 5% is still pretty good. You know, the developed world feels happy when they grow at 1.5% productivity growth. So this is pretty good.

Still, I was doing the math, and I'm forgetting the details, but I think the math is that essentially every 14 years, if you could keep the 5% growth – although it probably slows –

But if you can keep 5% growth every over 14 years, your prosperity is doubled. You know, your income essentially has doubled. And so that's not bad. That's, you know, that's almost a quadrupling of prosperity every generation.

So we can't say that China is stagnant in the sense that generations aren't getting richer. That's probably key to the continued viability and success of the Communist Party.

People feeling wealthier, feeling broadly happy at their financial prospects. And so, as we look at this, it has probably slowed somewhat from here. But just keep in mind, even as we talk about only 3 or 4% economic growth in China, it probably still allows for four point something percent productivity growth, which is which is not bad.

It's not the incredible numbers of the past, but it is still a China that is fundamentally doing pretty well in an economic context.

I'll finish with that. Hopefully you found some of that interesting. If you like this kind of thing, please do follow us online. You can do it on Twitter or X as it's called now, or LinkedIn, as you can see there, or just visit rbcgam.com.

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I'll just put this up and say again thanks so much for your time. I hope you found this interesting. And please tune in again next month.