Hello and welcome. My name is Eric Lascelles. I'm the chief economist for RBC Global Asset Management. I'm very pleased to share with you our latest monthly economic webcast. This is entitled Rate cuts support soft landing. And so indeed we are seeing central banks now cut interest rates with some enthusiasm, including perhaps particularly in North America. And those rate cuts, of course, take away a headwind to growth.

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In turn, they improve the odds that the economy does manage that much desired soft landing. Essentially, it gets to keep growing over the next year, instead of succumbing to recession. So more good news and bad news for sure. Let's step in and we'll start with that report card, as we always do.

Report card: Indeed, within that, why don't we talk about some positive things going on?

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I've already shared perhaps the big few, but I'll just go through those again and add some additional detail elsewhere. To begin with, the U.S. Federal Reserve has now joined the rate-cutting party. So there are quite a number of central banks, including the Bank of Canada, that have been cutting rates now for several months, but the U.S. had not yet joined.

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And that all changed on September 18th with a rate cut. And it wasn't just a run-of-the-mill, ordinary vanilla 25 basis point rate cut. It was a 50 basis point rate cut, so big. It's certainly the higher end of the expectations that had been out there. It suggests that the Fed (U.S. Federal Reserve) is willing to move fairly quickly.

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That's being viewed quite positively because it does again remove that economic headwind and further suggests that we can aspire to more normal conditions – not just in inflation but also in interest rates –before too, too long. So that's been very nice.

Soft landing odds, as I mentioned a moment ago, are rising. The U.S. economy over the next 12 months is our sort of bellwether or benchmark, but certainly applies to other countries and regions as well.

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But we think the odds of a soft landing of avoiding a recession have increased to 70%. So, we had been using a 60% number. It's now up to 70%. Do the inverse, and it's a 30% risk of recession, though we do believe any such recession would be short and mild. But we're feeling pretty good about that.

In terms of why we're feeling pretty good, part of it is those rates are coming down, and that's very useful.

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Part of it is that we have seen some decent economic data recently. So the U.S. data has actually held together, we think, quite nicely over the next month, with only a few exceptions. Some other countries have looked okay as well. And indeed, I suppose by extension, as we track economic surprises and the extent to which data is exceeding or undershooting expectations, there was a long trend of economic data disappointing.

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And it is, I guess all I can say for now, disappointing less. So we're seeing a line rise, which is helpful. It’s not quite at a point where every bit of economic data is impressing, but nevertheless, we're no longer getting the serial disappointments that we had before.

In terms of other good news, one certainly would be on the China front. Maybe the cart is before the horse here, because in the next negative section, I'm going to acknowledge some Chinese economic weakness, which is maybe the more important point.

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But in response to that economic weakness, China has now announced another round of economic stimulus. As I'm saying these words, which in very, very late September – by the way, this is still just sort of congealing and coming into form – and we can see a rate cut, and we can see some easier lending standards . . .

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and we can see perhaps some money being put towards buying stocks in the stock market. But it would appear there’s more to come, perhaps 2 trillion renminbi worth of money ultimately out the door. So, that's certainly very helpful. It helps, we think, to stabilize the Chinese economy, which has been a source of concern.

On the inflation side, it says something that you get down to the last bullet before we mentioned inflation.

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It's no longer the big, big problem that it had been. But I can just say as a general comment that inflation pressure continues to ease. It's still inching a little bit lower. I'm going to show you a couple specific charts on that in a moment. So overall a fair number of positives. I think the positives outweigh the negatives this go round.

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Still, we should acknowledge the negatives and some of the risks that still exist. So of course, even with rate cutting, rates are still fairly high. And so there's still a degree of pain associated with that. In the U.S. labour market – it's not specifically or uniquely the U.S. labour market – a number of labour markets are softening and unemployment rates are rising in a variety of jurisdictions right now.

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But the U.S. gets particular attention, in part because it's so big, in part because recently this particular threshold was breached with the unemployment rate that historically has signaled a high risk of recession. And so we're watching that closely. It's not going great. I think equally, though, it's not going quite as badly as some people, would imagine.

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When we look at yield curves, inverted yield curves have been the order of the day for a couple of years now, by some metrics, certainly over a year. And historically, that's been a recession predictor. We recently saw one of the yield curves we track un-invert. So the question is, does that mean the recession signal has gone away or does it enter a new phase?

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I'll elaborate on that in a moment. But I guess maybe I've already stolen my own thunder or given away the conclusion, which is still probably arguing for a recession. That's why it's in the Negative themes column. But I would just emphasize we have other signals that are arguing in other directions in terms of the recession risks. So we shouldn't hang our hat solely on that.

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We do see some Canadian economic challenges. It's still a pretty weak time for the Canadian economy, which we'll talk about a little bit later. I mentioned already the Chinese economy has been underwhelming, hence the stimulus that I have already mentioned. And then just on the geopolitical front, I think I copied and pasted this slide directly from the prior webcast – and unfortunately it’s still true.

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Which is not just that geopolitical risks are high, which has been true for a while. But they've arguably elevated further. We are seeing even more conflict and even more risk in a Middle East context; I would argue also in a Ukraine context as well. So that's relevant to oil prices and inflation and a few other things.

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And then just briefly, and this is a short list, but just on the interesting side of things, we'll talk about the U.S. election again. Gosh, as I'm recording this, it is less than six weeks away. And so we'll give you a little update on both the probabilities of who might win and also just a few general thoughts on the economic implications of either candidate.

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And then I'll speak as well to a Canadian wage mystery. I may be overstating this, but wage growth has been sort of weirdly fast in Canada. We couldn't quite square it. Maybe we've squared it out now, so I'll speak to that.

So that's our plan. Let's just jump right in. Why don't we start with those central banks that are enabling us to be more optimistic about the economy.

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The world’s central banks are now cutting rates: This slide gives you a sense for just what the world central banks are up to. The fraction of the world central banks that are cutting rates, on the far-right side in that light blue shaded area, it's rising. We're getting more and more central banks that are cutting rates. That is, of course, welcome to the extent that rates have been so high and presented such a challenge to economic activity.

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As mentioned, the U.S. Federal Reserve just joined the party.  As I said, they did a 50 basis point rate cut. That was not a complete shock, but the debate was would they do 25? Would they do 50? Should I admit, we thought 25 was more likely. So we certainly don't get them all precisely right here.

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But they did a 50. And you know, our concern, I think the concern of many had been that if they did a 50 basis point cut, it would smack of panic. They're worried the economy is crumbling and things like this. But, they communicated it very well and they described it as a good start. Kind of hinting it’s not foregone that they keep moving at this pace.

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They also said that they're doing it – I'm paraphrasing here – as sort of a celebration of how inflation has come down, as opposed to focusing on concerns about the economy having slowed as well. So they certainly painted it in a positive light. The market took it in a positive light as well.

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And so we got that first rate cut underway. It looks like there are more rate cuts to come.

The Fed cut by 50 bps, with markets now pricing in a lot more: So let me tell you what you're looking at here. The blue line is the bond markets prediction of where the fed funds rate will go in the future. So most of this line is looking forward, not backwards like most charts.

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I'll just tell you the difference between the gold and the blue line really speaks to the extent to which expectations have swung or gyrated pretty wildly. And so you look back to the spring, that's the gold line. Market expectations were in for a little bit of rate cutting, but not a whole lot. And that rates would ultimately settle.

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It's still a pretty high level. They maybe get down to 4.5% or 4.25%, but people didn't expect it to go a whole lot more. That struck us as too little at the time. That was too conservative. Now we're in a position where the market's pricing at a whole lot of rate cutting, and the market thinks maybe there's another 50 basis point cut in the next few meetings, and the market thinks that every single decision is going to yield a rate cut.

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I don't disagree too vehemently. I do believe the Federal Reserve can move fairly quickly here and can make a good amount of progress over the span of the next six months and over the span of the next year. But I would say, I do think if there's a risk to this view, the risk is that it's pricing in a bit too much as opposed to a bit too little.

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I'm not totally sold on another 50 basis point cut. But keep in mind, maybe that's my personal blind spot since we just got one that I didn't see coming. But nevertheless, my suspicion is it could be a little bit less. I don't disagree fundamentally that the fed funds rate can, under normal circumstances, work its way down to about 3% and the market's got it going a little bit further.

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And it doesn't take a huge leap of the imagination to think that if the U.S. economy opens up a bit of slack – and it's not far from doing that – you would want rates that are a little bit stimulative and a little bit stimulative probably is a number that ventures a little bit below 3%. So this is a completely viable scenario.

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But I would equally say there is a chance it moves a bit more slowly than that. I say that in large part to reflect our bond market view, which is it makes sense that bond yields have come down quite a bit, particularly term bond yields or longer-term bond yields. But maybe they've come down by enough. And we're not sure markets are going to be in a position to price even more cutting than they are right now, three months or six months from now.

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The risk here is that that bond yields are a little bit higher as opposed to a bit lower in the future, or at least not lower, simply because they are forward looking. They're already pricing in a lot of rate cutting. Again, I'll make the point that I've made already, which is keep in mind, the only reason we've been worrying about recessions is because high interest rates are so painful.

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And so as those rates come down, there are lags and so on. Nevertheless, you have to feel a little bit better about the outlook as that happens.

Inflation dangers fade: price-setting plans ebbing: Let's spend a couple moments now on inflation. Not the usual approach, which is to say country has a CPI (Consumer Price Index) of a certain number. Let's just look at a few underlying drivers and just how they've evolved.

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I would say broadly speaking it's been a constructive evolution.

This is the fraction of U.S. businesses planning on raising their prices. The point here would be that the recent trend has been a little bit more down than up. So you see that down arrow on the far right side. So you know, business pricing power, business pricing plans maybe still a hair higher than what was the norm before the pandemic.

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But it's come down mostly to normal levels. It certainly doesn't bear much resemblance to 2021 or 2022. And if anything, we think the trend is slightly improving. So businesses not planning on jamming through big price increases. That should help to keep inflation under control. Not shown here, but I can say wage growth ex-Canada – I’ll speak about that in a moment – but wage growth ex-Canada has similarly come down to some extent.

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That takes away the inflation threat a bit from the wage side or from the worker side.

Inflation dangers fade: inflation expectations down: So these are market-based inflation expectations. And for a long time, they just sort of trundled along sideways and I can say that recently they've been falling pretty nicely.

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But both the five-year outlook, and the five-year/five-year outlook, which is really the year six through ten outlook, I know that sounds like an awfully long distance away, but really what you're probing there is to say, once we sort through all the near-term distortions and issues and fears about geopolitics and oil and all those sorts of things, where do people think inflation might look like, you know, without little shocks that you can anticipate?

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And the answer is people are feeling better about the inflation outlook and it’s looking increasingly normal. And so, fears of inflation getting stuck at a particularly elevated level have been fading. And I think rightly so.

Shipping costs falling again: And then shipping costs. So shipping cost are not actually a central inflation driver. We learned that during the supply chain crisis of a few years ago, that the actual cost of shipping tends to be pretty low for most products. Nevertheless, not trivial and can be indicative of broader supply chain problems.

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We didn't love that that initial upward arrow trend was happening. So we were seeing a significant rise in shipping costs. It wasn't quite 20, 21, 22 style, but nevertheless, it was pretty big and related to the Houthi rebels in the Red sea and access to the Suez Canal, and also very low water levels that are constraining the Panama Canal and likely a few other forces I'm not thinking of.

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So, we had seen an increase there and it had us a little bit nervous about inflation. I can say since then we have seen a fairly nice-looking, if tentative, reversal. So now we are seeing some of those shipping costs begin to decline as conditions normalize. So that's quite useful.

As I say these words, there is the risk and probably even likelihood of an East Coast port strike in the U.S. across a number of ports. I have it on good authority that there's a fair chance that gets resolved fairly quickly on the basis of some pretty good-looking profit margins from the players involved. And so, unlikely to present an enduring challenge there.

Low oil prices may be overblown? And then I'll just throw in the price of oil also in an inflation context. The price of oil is actually pretty low, by recent standards, both by the standards of the last year and by the standards of the last few years.

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That's of course helpful from an inflation standpoint. I will flag, I guess, a couple of things really along the lines of maybe oil prices are low enough already. In my own head, when I think of a normal oil price, I think of maybe $70 to $90 a barrel West Texas. Right now, you're sitting at the very low end of that range.

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So I think there's some upside risk, particularly if we start to get economies reviving, towards the second half of this year and into next year, geopolitical risks that do tilt to the upside. In other words, the threat of a further intensification of the conflict in the Middle East or Ukraine versus Russia.

And then just structural factors as well, in the sense that if we had to guess a decade from now, we would think oil prices would be a little higher as opposed to a little lower, mostly on the basis of the idea that demand could well peak and come down, but supply might actually peak and come down a little bit faster.

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So you'd end up with higher prices, not lower prices as that took place. I'm getting a little ahead of myself here. The main point for the moment isn't to guess about the future, it is just to say lower oil for now is very helpful for inflation right now.

That brings us to the economy.

Soft landing odds are good and rising, though not guaranteed: I've shared variations on this slide before, and I'll just share the latest version with the latest numbers.

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Again, we think a soft landing is a 70% likelihood. That's up 10 percentage points from before. And I won't belabor all of the arguments supporting that. Of course the big one is just rate cuts are happening and we continue to observe stubborn economic growth despite some challenges that have existed. Some recession signals that had been saying yes are now saying no, including global trade reviving and lending standards easing and a few other of that ilk.

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So we feel pretty good about the soft landing. We do still flag a recession risk, we don't have complete confidence. You know, most of the time the risk of recession in an average year might be 15% or even 10 or 15%. So 30% is bigger than normal. And it reflects the fact that rates are still high and economic growth is slowing.

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We do see bits of debt distress and we do have some recession signals that are still saying ‘yes.’ But on the whole, we feel pretty good about the outlook and we are less concerned about the risk of a recession. If we got one, as mentioned earlier, it would be pretty short and shallow. And as investors, I can say we would likely view that very opportunistically as an opportunity to go buy some stocks on sale or buy some credit on sale or some variation of that.

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Yield curve recession signal gets more complicated: Let's talk about the recession signal that is still triggering, albeit with a twist, getting more complicated, as the chart title says. And so, this is the three different measures of the U.S. yield curve that we track. When the yield curve inverts historically, that's been a recession signal. You can see all three of those lines have been below zero recently.

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So that's the inversion we're talking about. I can say that one of the three, in fact, the one that gets watched the most closely, the 2-year/10-year spread, the blue line, the dark blue line, recently revived. It's actually now slightly above zero. So it's un-inverted. The question is how does that change the story?

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The short answer is actually not that much. I can say that although it's un-inverted, the other two haven't. Seen in one perspective, two of the three are still inverted, are still saying recession. But actually the more useful one is to say an inverted yield curve is a recession predictor from a distance of a year or two out.

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It's not a signal that says a recession's coming tomorrow. It says there's one coming in a year or two pretty reliably. And you can see this comparing to the prior recessions, which are the other gray-shaded areas. Pretty reliably, actually, the inverted yield curve un-inverts just before the recession. So the fact that we've un-inverted doesn't invalidate the recession signal.

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In fact, in some ways you could say it means maybe the recession risk has come a bit closer. So I wouldn't say it's invalidated. I can say that, historically, when the yield curve un-inverts before a recession, it's bull steepener. It means that the yields are falling. But it's the short-term yields that are falling even more than the long term. That is happening this time.

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Again, I can't refute this. I would just say, first of all, we have a lot of other recession signals we track. And quite a number of them are expressing a greater level of calm. So this is just one signal. It's not the only thing we should care about, but it's certainly part of that 30% recession risk story I just mentioned.

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The other maybe more important one is, normally when yield curves invert, it works something like this, which is yields are at a normal level. Market gets wind of economic trouble and buys long term bonds as sort of protection. Long-term yields fall and the curve inverts. The market's concerned, buys bonds, yields invert. Then the central bank gets wind of it a little later, acts a little later and starts cutting rates at the short end.

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And that pulls down yields everywhere but pulls down the short end and un-inverts the curve. So that's sort of the usual mechanism. The difference this time – and there's similarities, you know, central banks cutting rates and so on – but the difference this time is we're starting from an unambiguously restrictive level.

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Yields are unusually high. And so the yield curve is inverted, largely because the market was just betting that yields would go back to a more normal level someday. And so the long term would reflect that better. Not so much that there was an expectation of doom and gloom. And now we're seeing central banks deliver on that. They are cutting rates to a more normal level.

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They're not panicked. They're not doing it because there's a recession right now. And so the yield curve is bull steepening. And I guess the story here is one in which the journey of a soft landing looks a lot like the initial journey of a hard landing when it comes to the yield curve. And I would say what I'm seeing right now doesn't clearly in my eye differentiate between the two.

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It's a bit different because we're starting from a higher starting point. So we're normalizing down instead of moving from normal to unusually stimulative levels because there's a problem.

Hopefully that was clear.

Alternative Sahm Rule (that better captures hiring dynamics) has not issued recession signal: Another recession signal we've been tracking: this is the one that actually triggered recently, the fact that the U.S. unemployment rate has now risen by half a percentage point.

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So the dark blue line is up. That's the triggering of the rule. I'm afraid to say, all the other times this happened, we did get a recession. So how am I going to argue against this?

Well, again, part of the reason we think the recession risk is elevated, the thing that makes me most nervous, is the labour market and the risk that this slippery slope continues. So that's full disclosure.

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But I would say that one of the funny things about this particular episode of a rising unemployment rate is it's not the usual reason. Most of the time it goes up because of a big layoffs and people just losing their jobs in a large scale. That actually hasn't been why the unemployment rate has gone up. The unemployment has gone up, at least mostly, because more people are flooding into the labour market looking for work.

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And so that's a function, we think, in part of higher, immigration, in particular undocumented immigration in the U.S. And you can kind of tease out the differences by looking at the gold line. So the gold line is what's called the employment rate. It's inverted to make it sort of comparable. But the big point here is the gold line is up, but it's up a little bit. Indeed if you apply a recession rule to that, it hasn't hit its recession trigger.

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The point essentially is we haven't seen a big decline in employment, not the sort of decline you normally see when you get a recession. It's just you got more people looking for work. It's kind of a more benign reason. And when we step back and we look at the U.S. labour market again, undeniably, the unemployment rate is up.

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And undeniably the rate of hiring is slowed. It is still positive, I should emphasize. But high-frequency metrics like this can be very useful and I'm just not seeing that much distress here.

Jobless claims argue U.S. labour market isn’t in too much trouble: So this is weekly jobless claims. And so those were rising in the spring and summer, and we were getting a little bit nervous just directionally, it's still very low.

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Actually, for the last six plus weeks, we've been seeing jobless claims trending back down. And so not only are they improving, but they're pretty darn low. So it's hard to fathom anything too sinister happening in the U.S. labour market right now if people just aren't losing their jobs in a significant way. So we are ultimately feeling okay about the economic outlook while acknowledging a bit of risk, beneath the surface.

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Economic surprises have been improving: Economic surprises, I mentioned this off the top, I'll show it to you now. Maybe focus on the dark blue line, which is the U.S. It has seen kind of the biggest swing here, but it was undeniable actually globally and for the U.S. that across the bulk of 2024, economic surprises have been negative.

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So when economic data has come out, it's tended to be a bit disappointing. And of course, disappointing data can wear on markets and of course speaks to some risk in the economy. We're not back to positive numbers reliably yet. But you can see how that blue line is coming back up. At least it's getting closer to neutral surprises.

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Not to say that necessarily continues precisely, but there does tend to be a fair bit of momentum here. I would say at a minimum, we're no longer getting as much disappointing economic data. And that's part of the reason why we think the risk of recession is going down. The data is sort of stabilizing, at a reasonable level.

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That brings us to that election race that I promised you. And so let's start with the odds. I don't doubt this will change many, many times over the remaining six weeks of the election. But, of course, it's been unusually swingy over the last several months. And of course, the Democrat side has swapped candidates, which is virtually unprecedented this close to an election.

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And Donald Trump has had two assassination attempts now, and the first one in particular seemed to create a level of sympathy and support for him and boosted his popularity. These are betting markets, though. This is who the market thinks the likely winner will be. So not specifically what polls are saying. And, you know, at his most popular, Trump had as much as a two and three chance of winning, in July.

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So, at one point, it looked very likely indeed that he would win. Of course, then Biden, stepped down from the candidacy and Kamala Harris as vice president, stepped in, and she's enjoyed a honeymoon that's persisted. She also performed quite strongly in the second and final debate. And so, you can see where we are right now.

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U.S. presidential race has been repeatedly upended – Harris now has slight lead: The blue line is higher than the red line. That means markets think that the Democrats and Harris have a better chance of winning than the Republicans and Trump. The numbers on this chart right now are a 57% chance for Harris, 43% chance for Trump. I should warn there are some other betting markets out there that put it a little closer.

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You see numbers that maybe are closer to 53-47%. So it's by no means done. You know, 57% is higher than 43%. But 43% chances happen all the time. So this is still a close race, but it's one that's a little bit less close. If you have to make an assumption, Harris is the more likely to win right now.

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So that's where we stand. But just do appreciate how incredibly close this is. Every vote really isn't equal in the U.S. The whole state goes for one candidate. And so you're down to a handful of swing states, and it may well be a couple tens of thousands of votes in Pennsylvania or some other state that determines this outcome.

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It's difficult to nail that down with precision because that's getting awfully granular. So, still a close race. Harris slightly in front.

U.S. election macro and market thoughts: In terms of the implications, we've done this a few times. And of course, our thinking does continue to evolve. And, if you really want to get into the weeds here, feel free to press pause and read through all of this.

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But I'll just give you kind of the Greatest Hits tour, which is mostly the bolded items there. And so we've spent a lot of time looking at the platforms of both candidates. I've also spent a lot of time looking at what other analysts think about the economic implications of the two platforms. You will struggle to find any two people with even remotely similar views.

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I have seen strong arguments that Harris is the better economically, that Trump is the better economically, that both would be stimulative to varying degrees, that both would be restrictive. Literally every possibility in the two by two matrix, has been presented. It's tricky and it's tricky for a number of reasons.

Some of it is “Do you include anything the candidate has ever said they might do, even offhand, or do you to stick to the things they're talking a lot about?”

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A lot of things they are promising are not well defined. And so what assumptions do you make as to how they will implement these things? And do you take into account the fact that Congress is likely to be divided, and that will restrict their aspirations and constrain what they can accomplish? And of course, even beyond that, there are debates over what the economic implication of a particular policy would be and so on.

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So it's just a dog's breakfast of debates that exist. We've done our best. That's all we can do. We're trying to be as realistic as possible in terms of what realistically can get done by either candidate. Maybe we're being a little charitable in terms of thinking how much they can get done, given a likely divided Congress. But we're certainly not just taking their promises and running with them.

00:24:35:09 - 00:24:57:00

And here's what we tentatively arrive at. In the very short term, the Trump platform looks – I don't know if ‘stimulative ‘is the right word because we don't actually have either of them being that stimulative. But nevertheless, the Trump platform might be a little bit more economically supportive in the short run. The Harris platform a little bit less. Frankly, it's counterintuitive because, of course, the Trump stance on tariffs and immigration are both economically restrictive.

00:24:57:00 - 00:25:12:20

Harris is less so. So you're left with sort of the fiscal items, and it really comes down to Trump tax cuts and some deregulation, possibly out-muscling some spending increases that are then tempered on the Harris side by some tax hikes, which would constrain activity, but certainly you could debate this until you're blue in the face.

00:25:12:20 - 00:25:30:09

So that's where we land for now. Pretty mild difference. Do note a couple of things. One would just be over the medium run, arguably it starts to tilt in the other direction. And so, you start to see if Trump manages more economic support, that's largely with deficit-based financing, and someone's got to service that debt and pay for it.

00:25:30:09 - 00:25:49:15

So you lose that advantage over time. Similarly, less immigration, if persistent, does drag on growth every single year and so remains relevant. And there can be some second and third order tariff effects as well. So possibly that Trump advantage then goes away. It is clear. And this is a much narrower perspective looking just at what markets care about.

00:25:49:15 - 00:26:07:28

Keep in mind markets care about mostly what businesses care about. And businesses aren't the whole economy. But you know, the business attitude seems to be more pro-Trump. And the market attitude is still that the Trump trade is something along the lines of positive for the stock market, positive for bond yields and positive for the dollar, though, again, you could debate those things.

00:26:07:28 - 00:26:24:00

And it should be noted that even as Harris has become a more likely winner over the last few months, the stock market has felt perfectly content. And so just to emphasize that ultimately, as much as this election does matter, it's not likely to be the dominant force that sets the course for markets over the next year, let alone the next four years.

00:26:24:00 - 00:26:39:18

I will flag one other thing, which is right at the bottom of this slide. Just to say, potentially as important as who wins the election is whether Congress comes along for the ride. In other words, do the winner have a united Congress with their party behind them or not? The default assumption is not.

00:26:39:18 - 00:27:01:09

That's what the betting markets are saying, right now. In turn, the aspirations of both candidates are somewhat limited. If we were to see a united Congress behind whoever the president happens to be, that is where there is much more scope for them to deliver on their fiscal promises. And so the way I would think about it is not that it doesn't matter who wins, but if it's a divided Congress, there isn't a lot of money flooding into the economy.

00:27:01:12 - 00:27:19:08

In fact, there could be some that comes out, if it is a united Congress. Still, there's actually the scope for more money to flood it, maybe in very different ways via different channels. But there is scope for more money to come in there, and that might actually be more short-term economic stimulative. Keep in mind again, though, when we talk about short-term stimulus, we're talking about bigger deficits and debt.

00:27:19:08 - 00:27:37:22

So that's a problem that then needs to be dealt with at a later date.

Canadian economic growth has stabilized but at a modest growth rate; still shrinking substantially on a per capita basis: Okay, a couple Canadian thoughts here. So Canadian growth is this blue line here. So Canadian economic growth has slowed quite a bit. It wasn't going to persist at its post-pandemic recovery rate for long. But it is a little bit slow. We take some solace that the blue line has stabilized, it would seem.

00:27:37:22 - 00:27:56:02

So we are still enjoying some economic growth. It's just not a lot of economic growth. Of course, the dirty secret has been the gold line, which is GDP per capita, which is basically saying that the average person, despite that, is earning less money, is spending less, and basically it's all being papered over by the fact the population went up so much due to all that immigration.

00:27:56:02 - 00:28:14:10

And so as we look forward, we think the two lines should converge. That's really just a statement that immigration probably can start to slow as they continue to make some rule changes here. It's a leap of faith, though, for us to say that the gold line can converge toward the blue line, not that the blue line converges toward the gold line, because of course, that would be a recession call.

00:28:14:13 - 00:28:32:18

Certainly, Canada is more at risk than some countries, including the U.S., on that front. We are taking it as, again, a leap of faith that we can get productivity growth moving a little bit better. We think that there's been some indigestion recently, and that can't possibly be Canada's sustainable productivity decline rate, that would be the way you would have to describe it.

00:28:32:22 - 00:28:54:01

Keep in mind Canada's cutting rates more aggressively than most countries and Canada is more rate sensitive. So that is more of a positive impulse that Canada is managing. We'll see how the political environment changes. Obviously, some intrigue right now, but there's the possibility of more focus on businesses and productivity and growth and animal spirits going forward, though that's quite a speculative statement.

00:28:54:08 - 00:29:09:21

I would just say this: we think the Canadian economy can muscle out growth over the next few quarters and get through this difficult period and then start to grow a little bit better as we work into the second half of next year.

Markets expect more rate cuts ahead in Canada, 50 bps plausibly in play: In terms of what the market's thinking for the Bank of Canada? Well, we've already got three Bank of Canada cuts.

00:29:09:21 - 00:29:26:28

So this is the actual profile of hikes that we saw. It's the first three cuts that we have now seen. And so those are the dark blue little squares you're looking at. And then it's all market pricing beyond that. And so the market thinks those rate cuts continue. We certainly agree there's no reason not to with inflation now at 2.0%.

00:29:26:28 - 00:29:44:21

And with the economy a little soft, with the unemployment rate that's now up to 6.6% -- that's up by 1.8 percentage points from its low -- that does call for some further easing. I think the debate is could we get a 50 basis point rate cut? It was always a possibility. I think it's an even bigger possibility now that the Fed has done exactly that.

00:29:44:21 - 00:30:07:16

I would flag there's a real chance of that in October or December, but either way, there's likely to be some rate cutting at both of those meetings. And the Canadian policy rate should be in a position to work its way into something like the mid threes, potentially even by the end of this year, which is a fair amount of distance covered from the 5% peak that was registered as recently as June. We would think that the Bank of Canada can keep cutting across next year.

00:30:07:16 - 00:30:24:24

Unlike in the U.S., I don't have too many qualms with the idea. The Bank of Canada can likely work its way below 3% as well over the span of 2025. So Canada needs some support, and all those mortgages are rolling into higher rates and now is the time to move fairly quickly while respecting inflation and growth.

00:30:24:27 - 00:30:42:11

Underperforming Canadian productivity endorses CAD below PPP: Just a quick one here. This is the relative level of productivity in Canada versus the U.S. So really the story is that arrow, which has been a steady decay, for any number of reasons. We are working on a project to better explore and explain this, but for any number of reasons ranging from the U.S. is just a bigger market –

00:30:42:11 - 00:31:00:09

and so economies of scale apply in these sorts of things – to less favorable tax and regulatory regimes, to changing dynamics in the oil sector, to a housing market that got too big and is sort of eating up all the capital and not delivering the productivity gains. So lots of different explanations. But the bottom line is it's been a pretty rough go and Canada’s standard of living has slipped well below that of the U.S.

00:31:00:09 - 00:31:16:16

Certainly it's a call to action. Hopefully we get policies that start to improve that ,we think it can perhaps stabilize. So maybe that's a dangerous bet to make when it's a multi-decade trend in more or less one direction.

00:31:16:19 - 00:31:33:12

Maybe the thing I can see with greatest clarity is if you're ever trying to understand, why is it the Canadian dollar is cheaper than theoretical fair value. Theoretical fair value is maybe $0.85. Here it is sitting at $0.74 or thereabouts. Lots of potential answers to that. But, you know, one is this, which is Canada's less productive.

00:31:33:19 - 00:31:53:23

It needs a little competitive helping hand to remain viable. So the currency tends to be below fair value as opposed to above fair value, at least as per purchasing power parity (PPP) standards.

Canadian wage growth mystery resolved: And then here's the wage growth mystery ever so briefly. That dark gold line, the highest line on the far-right side, that's the standard measure of wage growth for Canada.

00:31:53:25 - 00:32:09:29

Labour force survey, hourly wages. It's running 5.0% year over year. It's pretty fast. So I should start by saying that's great for workers getting the wage increases, of course. But it's created a bit of concern just to the extent that fast wage growth does raise some questions as to whether inflation can stay settled and this sort of thing.

00:32:09:29 - 00:32:32:20

So there's been some mystery around it, because it's not like the Canadian labour market is any great shakes. It's seen a higher unemployment rate. The economy in Canada, certainly weaker than the U.S. and the U.S. wage growth is under 4%, in Canada sitting at 5%. And it's all been a bit strange. Some little bit of it can perhaps be explained by the fact that Canada has a higher level of unionization, and unions are negotiating their deals with a lag as their prior contracts came due.

00:32:32:21 - 00:32:50:03

And so it makes sense if wages stay higher, wage growth stays higher, longer in that kind of environment. But I want to say that when push comes to shove, there are a lot of different ways of measuring wages in Canada. And when we look through all the other measures, the other measures are all lower. So I don't have a great, clever answer for why one is high and the others are lower.

00:32:50:03 - 00:33:05:00

I would just say that the truth probably lies somewhere in the middle. And when we look at all these other metrics, including the Bank of Canada's own wage common metric, we find really most of the other wage measures are in the 3 to 4% range, which arguably makes more sense and reflects an economy that has softened to some extent.

00:33:05:02 - 00:33:22:02

It's still pretty fast, given that there's no productivity growth in Canada. You could argue really almost any kind of wage growth is pretty fast because the output being produced per hour is going down, not up. Nevertheless, it doesn't look quite as fast. It's not as much of a source of concern that inflation might remain too high.

00:33:22:05 - 00:33:51:18

Canadian housing affordability will benefit from lower rates, but starting from a very challenging position: A quick nod to Canadian housing affordability. This is our measure of affordability. A high number is bad. We have had, as you might have guessed, bad housing affordability for a while. And that was a function of well, it wasn't great to begin with, but it was a function of skyrocketing home prices during the pandemic.

And even as those have softened to some extent, then seeing mortgage rates, of course, skyrocket since. So home prices, you can say quite off-side looking a lot like the early 90s, which was the last housing bust, which ultimately was resolved via a number of years of soft home prices.

00:33:51:18 - 00:34:08:21

That's what we're assuming for the moment as well. You know, lower rates are going to help for sure. The fact that home prices are going roughly sideways helps. I don't know if we're going to get all the way back to normal affordability. I'm a bit dubious that we will, but nevertheless, we are continuing to budget for sideways home prices as this imbalance works its way out of the system.

00:34:08:21 - 00:34:29:11

Big city multi-unit housing markets are particularly weak: And I'll just throw this up. This is the last proper chart. Apologies if you care not a whit about Toronto, but it's just it's the big market with the biggest condo market in Canada. And so just to emphasize there's particular weakness in multi units. And so this is Toronto condo rental active listings and Toronto condo sale active listings – in other words, people trying to sell or rent out condos.

00:34:29:11 - 00:34:43:06

And, of course that wasn't looking good for a moment during the pandemic. But other than that, it's generally been fairly low. You can see these lines are rising quite a bit. So that suggests that, in other words, people are trying to get out of the condo market.

00:34:43:10 - 00:34:58:18

A lot of people are trying to sell, less have buying interest. And you're seeing builders pull back on their plans or delay their plans as well. And just in general, the multi-unit market is the weaker of the two, and it's not totally intuitive to the extent that, of course, there's been such a population boom, you'd think people would be pushing into that kind of space.

00:34:58:18 - 00:35:14:28

But of course, some of these properties have become quite expensive. And a lot of people were speculating with them and counting on rising prices as a motivation for buying them. And of course, without that, that segment of the potential buyer pool goes away. So that's a particularly weak area of the housing market.

00:35:15:23 - 00:35:32:10

All right. On that grim note, thanks so much for your time. If you found this interesting, as always, you can follow our work on Twitter – now called X – on LinkedIn, or maybe best of all via our website, rbcgam.com. See the Insights tab. Please do follow along and I'll just say thanks. As always.

00:35:32:10 - 00:35:37:25

Thanks for your time. I wish you very well with your investing. And please consider tuning in again next month.