U.S. election countdown

The U.S. election is now just a week away. We have already written about the economic and market implications that might extend from either presidential candidate gaining office, most recently here and here.

It is still a close race, though a gap may have recently opened up between the two candidates. After a lengthy Harris honeymoon, former President Trump appears to have recently reclaimed the lead. Betting markets agree about this reversal but disagree over the magnitude of his advantage. The PredictIt betting market assigns a 57% chance of a Trump victory (see next chart), while Polymarket assigns a bigger 65% chance (see subsequent chart).

Trump now leads

As of 10/25/2024. Based on prediction markets data and RBC GAM calculations. Sources: PredictIt, Macrobond, RBC GAM

Polymarket says Trump has sizeable lead

As of 10/25/2024. Sources: Polymarket, Macrobond, RBC GAM

There has been considerable debate as to which of the betting markets is more trustworthy. The main positive for Polymarket is that it allows unlimited bet sizes. This is arguably quite important for a properly functioning market. However, it is a foreign exchange that precludes easy participation by the very Americans who are closest to the election, and it requires the use of cryptocurrency to transact in the market.

Furthermore, there has been some criticism that the bulk of the recent upswing in Trump’s victory odds has come from a small number of giant bets. If these people are simply savvy investors, then more power to them and perhaps the updated odds are entirely accurate. But if they are trying to influence the media narrative by making it look as though Trump has momentum, or if they are hedging some negative exposure elsewhere in their affairs to a Trump win and accidentally moving the market in so doing given relatively thin trading, then Polymarket could have considerably less informational value.

PredictIt is almost the opposite in every regard. It is based in the U.S., betting is available only to Americans, and bet sizes are limited to no more than US$850 per person. As such, movements in this market require a significant shift in the breadth of opinion, rather than one confident bettor. However, the small bet sizes mean that people do not have a strong incentive to think hard about the outcome, investors with superior information are incented to go elsewhere, and an existing participant already at their limit cannot upsize their bet as new information arrives.

If forced to choose, we have a slight preference for PredictIt. But even better is to take the composite of the betting market opinions, with the conclusion that Trump has around a 60% chance of winning, versus 40% for Harris. This simultaneously means that he is about 1.5 times more likely to win, but also that neither outcome should be viewed as a big surprise.

Ultimately, this race will come down to a handful of states, and possibly no more than a few tens of thousands of votes in those swing states – likely just 0.1% or so of the entire American population.

Why isn’t there more certainty about the outcome when there are so many polls and political models swirling about?

Polls have become less trustworthy due to ever-declining response rates that are now thought to be well under 10%, leading to all sorts of biases that pollsters have to attempt to correct for by inserting their own assumptions into the numbers. National polls have particularly limited value in the presidential race given that the Electoral College allows for a significant deviation between the popular vote and the election outcome (Democrats normally need to capture substantially more than the popular vote to win, so the fact that they are leading slightly according to this metric does not assure anything).

Political models tend to be overfitted due to insufficient historical data and the many uncaptured exogenous variables, which means they usually aren’t as helpful as they look.

Ultimately, this race will come down to a handful of states, and possibly no more than a few tens of thousands of votes in those swing states – likely just 0.1% or so of the entire American population.

There is the very real chance that the Republicans win the White House, Senate and House of Representatives. On the flip side, a Harris presidential win would probably pick up the House, but not the Senate.

Based on the sequence of events after the 2020 presidential election, it is far from certain that a victor will be definitely known on November 5. There is a real chance it will takes days or even weeks to count and recount the ballots, and to give courts a chance to weigh in on disputed outcomes.

A key secondary source of election uncertainty revolves around how Congressional elections go. The Senate looks increasingly likely to flip toward the Republicans, while the House is expected to go to the Democrats. But the House expectation is looking somewhat flimsier, much as Harris’ odds have diminished in recent weeks. Recognizing the positive correlation between the three main contests, there is the very real chance that the Republicans win the White House, Senate and House of Representatives. On the flip side, a Harris presidential win would probably pick up the House, but not the Senate. This means that a President Trump would be in a better position to deliver on his policy agenda than a President Harris.

While the U.S. economy has held together quite nicely in recent months, it is undeniable that a considerable amount of policy uncertainty will exist until the election is settled – and even for some time thereafter until the new president takes office and converts rhetoric into action. Small businesses appear to be especially attuned to this uncertainty, as demonstrated by the National Federation of Independent Business’ uncertainty index, which has set a record high (see next chart).

Small Business Uncertainty Index hit record high ahead of U.S. elections

As of September 2024. Shaded area represents recession. Sources: National Federation of Independent Business, Macrobond, RBC GAM

In our view, while this is a consequential election, the present level of small business concern is nevertheless somewhat overblown and not obviously greater than during the early phase of the pandemic or the 2020 election race. Seemingly sharing this opinion, U.S. households show a generally rising level of confidence (and outright optimism according to real-time metrics – see next chart).

Twitter Economic Sentiment suggests more optimistic sentiment in the U.S.

Twitter Economic Sentiment Index as of 10/15/2024, University of Michigan Consumer Sentiment as of October 2024. Sources: Goldman Sachs Global Investment Research, University of Michigan, Macrobond, RBC GAM

U.S. activity holds up

The U.S. economy continues to hold up. After what we believe was a hurricane-induced spike, jobless claims are back to their earlier low level (see next chart).

U.S. jobless claims look fine, excluding hurricane distortion

As of the week ending 10/19/2024. Sources: U.S. Department of Labor, Macrobond, RBC GAM

While the U.S. labour market isn’t as strong as it was two years ago, this has largely been a journey back to a normal state as opposed to one toward problematic weakness. Not only is the unemployment rate of 4.1% within the sustainable range (roughly, 4.0% to 4.5%), but the softening of other labour metrics such as job openings and the quits rate has also taken them back to approximately pre-pandemic levels (see next chart).

Job openings and quits in U.S. have returned to normal

As of August 2024. Estimates for all private non-farm establishments. Shaded area represents recession. Sources: U.S. Bureau of Labor Statistics (BLS), Macrobond, RBC GAM

The next big step will be for the labour market to enduringly stabilize at this level. That’s far from a certainty, as historically it can be a very slippery slope after the unemployment rate has started rising. But the initial signs are pretty good. Not only is the unemployment rate actually down a few tenths from its recent high, but hiring has seemingly steadied and the job openings rate has also tentatively stabilized.

The next big test will be the soon-to-be-released October payrolls report, which is likely to be somewhat weaker than prior months due to the hurricane effect. Historical hurricanes have subtracted an average of about 50,000 jobs from the affected month. In line with that, the consensus outlook is for 110,000 new jobs in October. That’s compared to a +150,000-job consensus in September (though realized job creation was actually +254,000 in September). We flag the downside risk for the next month, in part because the September number was probably unsustainably fast and so demands some reversal, but mainly because the U.S. was struck by two strong hurricanes within the same sample period. This points to the potential for an outcome that misses the trend by a larger-than-normal amount.

Elsewhere in the U.S. economy, the latest Beige Book indicator staged a small rebound, and remains in a familiar if uninspired range (see next chart). Businesses that responded to the survey cited reasons for pessimism including elevated uncertainty, weak manufacturing, downgrading consumers and hurricane damage. Conversely, reasons for optimism included falling interest rates, stabilizing housing activity, and the end of the dock workers’ strike.

Beige Book Sentiment Indicator staged a small rebound

As of October 2024. The indicator quantifies the sentiment of local contacts by assigning different weights to a spectrum of positive and negative words used to describe overall economic conditions in the Fed Beige Book. Sources: U.S. Federal Reserve, RBC GAM

Meanwhile, economic sentiment in the news has lately become quite positive, consistent with some of the positive economic surprises recently recorded (see next chart). Overall, there appears to be no reason for great concern about the economy right now.

Daily news sentiment in the U.S. has become positive

As of 10/20/2024. Sources: Federal Reserve Bank of San Francisco, Macrobond, RBC GAM

The economy and higher bond yields

At a time of central bank rate cuts – an economically stimulative act – it should be noted that, in recent weeks, term bond yields have actually been increasing as markets partially scale back their rate-cut expectations. We believe this has happened in part because the economy has stabilized after experiencing weakness, and in part as the election outlook tilts toward a more probable Trump victory (see next chart).

Bond yields rebound on resilient U.S. economy and concerns on fiscal outlook

As of 10/23/2024. Shaded area represents recession. Sources: U.S. Department of Treasury, Macrobond, RBC GAM

The U.S. 10-year yield was as low as 3.62% in mid-September, whereas it is now a considerably more elevated 4.28%. Informing this, the market has now removed two 25-basis-point rate cuts by the end of 2025, though quite a number of anticipated cuts still remain. While this removes some measure of economic tailwind, it should be noted that yields are still lower than they were in the spring and last fall, and the 100-day moving average is still at its lowest level in over a year.

More importantly, the broader financial backdrop remains a friendly one, with a higher stock market and narrower credit spreads contributing to financial conditions that remain unusually friendly by the standard of the past few years (see next chart).

Financial conditions have eased, but slight uptick lately

As of 10/24/2024. Sources: Goldman Sachs, Bloomberg, RBC GAM

Furthermore, to the extent the yield backup is partially on the basis of an improved economic picture, any sign of weakness from higher rates would then justify the reduction of those higher rates.

The bottom line is that this increase in rates should be manageable, and just as we thought yields were too low in September, they may now be too high. In particular, it is hard to justify the degree to which markets continue to swing back and forth in their expectations for U.S. monetary policy. It is entirely understandable that participants debate 25bps versus 50bps rate cuts and wonder when pauses might start to intersperse the cuts. It’s harder to justify the substantial variation in where markets think the fed funds rate will eventually bottom.

There have been times over the past year when the market thought the cycle-bottom for the fed funds rate would be around 4.25%, and other times when the low was expected to be 2.8%. There are active debates as to what constitutes a neutral interest rate, but they don’t gyrate this wildly. The most likely outcome likely lies in the middle, which happens to be in the range of what markets currently price (see next chart).

U.S. Federal Reserve jump-starts the easing cycle

As of 10/25/2024. Sources: Bloomberg, RBC GAM

High savings rates

With the exception of the U.S., developed-world household savings rates are currently higher than their pre-pandemic norms (see next chart).

Household savings rates are higher than pre-pandemic norms (% of disposable income)

As of August 2024 for U.S., Q2 2024 for all other countries. Prepandemic defined as average of 2017 to 2019. Sources: Macrobond, RBC GAM

There is good reason for this. Uncertainty is high. Households are still traumatized by the recent inflation shock. Many have pivoted from spending to paying down their debt now that interest rates are much higher than before. It is likely no coincidence that the savings rate has jumped particularly in Canada and the U.K., where housing affordability has been particularly challenging and where mortgage terms are particularly short.

As such, we shouldn’t expect a consumer spending miracle any time soon. But it is nevertheless good news that, as central banks pare rates and the economy continues to grow, there is theoretical room for consumer spending to rise at a faster rate than incomes over the next few years. One shouldn’t necessarily expect a full return to normal household savings rates as the wealth creation that came from rising home prices may not resume with the same enthusiasm, requiring households to save somewhat more than before. But there is some upside.

The U.S. consumer outlook doesn’t enjoy this same latent upside potential from a high savings rate. However, we think it is ultimately fine given the benefit that should come from falling rates, decent hiring, robust wage growth and incrementally rising consumer confidence.

One might also reach the conclusion that a fair swath of the economic underperformance in places like the U.K., Canada and Germany reflects insufficient demand rather than insufficient supply. That means demand-side stimulus would be the appropriate remedy, and indeed that is exactly what rate cuts are.

The U.S. consumer outlook doesn’t enjoy this same latent upside potential from a high savings rate. However, we think it is ultimately fine given the benefit that should come from falling rates, decent hiring, robust wage growth and incrementally rising consumer confidence.

But why is the U.S. the outlier? The U.S. household savings rate before the pandemic happened to be unusually high relative to the country’s longer-term norm, so there may be a partial calibration issue here. But, more fundamentally, U.S. households didn’t have as much debt going into the rate shock as some of the other countries, and their interest rates haven’t reset higher at the same clip due to the structure of the mortgage market. This means that there hasn’t been the need for additional household savings to pay down problematic debt loads.

Deteriorating demographics

The population of the world and of nations matters. It influences the quality of life of the existing inhabitants, the pace of climate change, the rate of economic growth, the level of inflation and the market size of companies, among many other influences.

The United Nations (UN) is the primary forecaster of long-term demographic trends. The organization updates its population outlook through the year 2100 every two years. The latest update is now available, and the population outlook continues to decline. The UN now forecasts the world population will peak at 10.29 billion people in 2084 rather than the prior forecast of 10.43 billion in 2086 (see next chart). That’s 140 million fewer people. The more significant downgrade was actually between 2020 and 2022, as before 2022 the world’s population had been expected to continue growing right through the end of the forecast horizon (see subsequent chart).

World population is expected to peak at 10.3 billion as growth slows

Sources: UN World Population Prospects 2022 & 2024, Macrobond, RBC GAM

The UN has lowered its peak global population forecast since 2019

Sources: UN World Population Prospects 2019, 2022 & 2024, Macrobond, RBC GAM

Alongside this, the global population is expected to continue aging, to the point that by the late 2070s the number of people aged 65 or older should exceed the number of children under 18.

Here is how it breaks down at the individual country level:

• The biggest downgrade relative to the 2022 forecast is in China. Here the expected population in the year 2050 has been cut by a remarkable 52 million people (see next chart).

• Nigeria and the Philippines are next, down by 23 million and 22 million people, respectively.

• Bangladesh leads the way in terms of upgraded forecasts, with an extra 13 million people expected by mid-century relative to the 2022 forecast.

China is the top contributor to downward revision in world population growth

Change in population growth based on forecasts from 2022 and 2024 revisions. Sources: UN World Population Prospects, Macrobond, RBC GAM

For our part, we continue to think the UN overestimates the demographic outlook. Fertility rates have absolutely collapsed since the pandemic, not just in the developed world but also among developing nations. There was already a downward trend in place prior to this.

• India’s fertility rate was approximately 4 children per woman in the year 1990. It is now just 2 – putting it at the replacement rate – and still falling.

• Nigeria’s fertility rate was approximately 6 in the year 2010 and is now around 4.5 and still falling.

As such, we believe the world’s population will never quite reach 10 billion people, and that it will peak somewhat sooner than 2084.

China’s fertility rate has continued to fall despite the removal of the country’s one-child policy, to just 1.0 children per woman. The UN actually assumes China’s fertility rate will rebound from here, for which there is little modern precedent. Even still, the official forecast calls for China’s population to plummet from around 1.4 billion people today to just 633 million by the year 2100 (see next chart). We think this is an overestimate and favour a number closer to (if higher than) the country’s low-fertility scenario of just 406 million people.

China’s population to shrink faster in latest UN projections

World Population Prospects 2022 & 2024, United Nations, Macrobond, RBC GAM

Meanwhile, in this multipolar era, the medium-fertility scenario for the U.S. population anticipates 421 million people by the year 2100. It isn’t fair to compare the Chinese low-fertility scenario to the U.S. medium-fertility scenario, so we aren’t saying that the U.S. population will be larger than China’s by the end of the century. But the gap should shrink substantially. Under a like-for-like comparison using the medium-fertility scenarios for each, China’s population goes from being a whopping 4.2 times larger than the U.S. to just 1.5 times larger by century’s end (see next chart). Just two years ago, the Chinese population was expected to end the century fully twice as large as the U.S.

China’s population advantage has been shrinking

World Populations Prospects 2022 & 2024, United Nations, Macrobond, RBC GAM

Turning to other prominent nations, India, Canada and Mexico are still forecast to experience particularly fast population growth through to the year 2050 (see next chart). The U.S. and U.K. are also expected to experience significant population growth. For the developed nations in the chart below, particularly caution is needed as their population forecasts are significantly predicated on their immigration policy. This in turn is a function of the politicians who cycle through every four years or so. There are a lot of election cycles between now and the middle of the century, and sharply changing attitudes toward immigration.

Canada’s population growth to outpace other countries

Numbers shown in chart are from 2024 revision. Sources: UN World Population Prospects 2022 & 2024, Macrobond, RBC AM

Countries like Japan and China merit careful tracking in the decades ahead as they will reveal how gracefully (or awkwardly) countries and economies handle shrinking populations.

Does automation replace retiring workers, boost productivity and keep economies moving forward? Or is there real pain because there are fewer young risk-takers and entrepreneurs to drive innovation and productivity?

Do economies shift into perpetual decline, and if so, does it not feel too bad because each individual is fine on a per capita basis? Does crumbling infrastructure become problematic, or does it not matter because there is a smaller population requiring infrastructure? Do big cities shrink, or do they instead stay the same size and leach from smaller cities and rural areas?

Presumably, fiscal finances will at a minimum become more challenging as the dependency ratio rises.

The demographic outlook can be projected with unusual confidence given that today’s babies will reliably become 2054’s thirty-year-olds. Fertility rates look likely to remain low and to continue falling. Longevity seems likely to continue inching higher (it recently reclaimed the pandemic decline).

But major surprises are not impossible. As populations shrink, could lower home prices and a rising overall quality of life persuade young families to have more children, reversing the trend? New technologies could aid in the matching of compatible couples, make pregnancy and childbirth less unpleasant and dangerous, and make childcare easier. More prosaically, governments could make having children more attractive via longer parental leave, subsidized or free childcare and other financial incentives. The demographic outlook is not written in stone.

Canadian immigration reversal

Canadian immigration surged to unprecedented heights over the past three years, driven disproportionately by a rise in temporary residents (see next chart).

Canadian net immigration has surged

As of Q2 2024. Sources: Statistics Canada, Macrobond, RBC GAM

Over the past year, the federal government has awoken to the considerable indigestion associated with this population explosion, which ranges from a worsening housing shortage to higher youth unemployment and lower productivity.

In turn, the government has begun to do something about this, tightening quite a variety of immigration rules.

While significant, Canada’s immigration spike was never centrally about permanent residents so much as an influx of temporary residents. This came mainly in the form of international students and temporary foreign workers.

The most recent change – announced in late October – is to reduce the number of permanent immigrants admitted in Canada by 20-25% per year relative to recent years. In practice, that means a reduction from 485,000 new permanent residents in 2024 to 395,000 in 2025 and 380,000 in 2026.

While significant, Canada’s immigration spike was never centrally about permanent residents so much as an influx of temporary residents. This came mainly in the form of international students and temporary foreign workers. These two groups will also be reduced in the future, with a target of lowering the fraction of temporary residents in the population from 7.3% in mid-2024 to 5% by the end of 2026.

To achieve this, the government aims for a cumulative 45% reduction in the annual admission of international students over the next two years. Anecdotes suggest the initial decline is already on or ahead of schedule for this.

We don’t expect population growth to slow by quite as much as the government forecasts. While quite a number of rules have already changed over the past year, the rate of quarterly immigration remains quite robust.

Changes to temporary foreign worker programs are primarily focused on reversing the rule changes that broadened the programs during the pandemic.  This includes reducing the share of a company’s workforce that can be temporary workers and banning their usage altogether  for certain sectors – when the unemployment rate in the local region is over 6%. For context, the national unemployment rate is presently over 6%, so this will cut back on many such programs.

The federal government projects that that these changes should result in an outright decline of 446,000 temporary workers in each of 2025 and 2026. In turn, Canada’s overall population is projected by the government to shrink by 0.2% in each of 2025 and 2026, before returning to a moderate 0.8% growth rate in 2027. For context, the population grew by a startling 3.2% in 2023.

However, we don’t expect population growth to slow by quite as much as the government forecasts. While quite a number of rules have already changed over the past year, the rate of quarterly immigration remains quite robust (see next chart).

The rate of Canadian immigration is high but slowing

As of Q2 2024. Sources: Statistics Canada, Macrobond, RBC GAM

Specifically, the arrival of new temporary residents may slow more gradually than projected, and a non-trivial fraction of those on expiring visas may seek refugee status (which buys another three years in the country as the application and appeals play out) or remain as undocumented residents. This results in a population that continues to grow, albeit much less quickly than before (see next chart). We forecast population growth bottoms out at 0.4-0.5% per year in 2025 and 2026, rather than turning outright negative.

Canadian population growth to slow with reduced immigration targets

As of 10/28/2024. Government plan estimated based on federal government 2025-2027 Immigration Level Plans released on 10/24/2024. Sources: Statistics Canada, Macrobond, RBC GAM

For what it is worth, the Bank of Canada forecasts population growth for 2025 and 2026 of +1.7% each year, far faster than we do. This is slightly stale as it predates the latest government announcement, though that specific announcement only reduces population growth by about 0.3 percentage points.  We flag this not to argue that population growth should be outright fast, but to support our view that it won’t be as weak as the government projects.

But perhaps this is splitting hairs as our own forecast anticipates an eightfold reduction in the rate of population growth from 2023 to 2025. That is certainly significant, and has far-ranging implications:

• The housing shortage should diminish, or at least cease to worsen.

• Housing affordability should improve.

• The rate of workforce growth should slow, reducing its contribution to GDP (gross domestic product) growth.

• Productivity growth may pick up as the indigestion from the immigration surge ends and as unskilled labour exits the labour force.

• Labour costs should rise for companies that relied on the temporary foreign worker programs.

• Post-secondary institutions that were especially reliant on foreign students will experience a deterioration in their finances.

A big question mark is whether the Canadian economy can grow through this challenging period. Mechanically, without population growth, GDP would presently be shrinking by about 3% year-over-year (see next chart). If population growth slows sharply, productivity growth will have to pick up by an equivalent amount to avoid economic contraction.

Canadian growth has slowed markedly

As of Q2 2024. Sources: Statistics Canada, Macrobond, RBC GAM

This only seems plausible because it is incredibly unusual for productivity to fall for any sustained period of time, let alone to fall by this much. A large fraction of the productivity shortfall is seemingly related to the abruptness of the recent immigration inflow, and so it can theoretically revive as immigration reverses. But it does take a certain leap of faith to imagine that the timing will align perfectly of one reversing precisely as the other picks up, and by equivalent magnitudes. This leaves the risk of a few messy quarters in 2025.

Quick hits

Gold medal for gold

We wrote about gold last June, highlighting its remarkable strength and assessing the various factors supporting it. The conclusion was that gold is higher mainly because central banks are buying lots of it after losing some confidence in sovereign debt both due to challenging fiscal finances and the weaponization of the dollar against Russia.

Conversely, gold cannot be said to be higher due to inflation concerns because those have declined nicely.

The price of gold is now an additional 16% higher since June, blasting through record after record on its way to an approximately US$2,745 valuation per troy ounce today (see next chart).

Gold prices have soared

As of 10/23/2024. Sources: Macrobond Financial AB, Macrobond, RBC GAM

Further theoretical support for gold comes from the central bank rate cuts underway that reduce the relative pain of holding non-yielding assets like gold, plus the existence of heightened uncertainty – both relating to the U.S. election and geopolitical risks more generally. (Though it is curious that oil prices are seemingly unperturbed by geopolitical risks despite their far more direct exposure).

High and rallying gold prices are particularly favourable to the Canadian stock market given that gold mining and exploration companies make up quite a significant fraction of the index – by some estimates over 10%.

Chinese stimulus

The Chinese economy remains fundamentally challenged, with policymakers scrambling to stabilize the situation. The latest action was a cut to China’s prime lending rate, coming on the heels of significant stimulus delivered in late September, and quite a suite of initiatives that have now accumulated over the past few years (see next graphic).

China stimulus: expect significant further actions, with skew toward demand-side stimulus

Note: Policies implemented/announced as at 10/24/2024. Source: RBC GAM

We still expect further support spanning many of the categories listed in the graphic. After all, local governments are still in a precarious position, banks may need further aid, the property market is still weak and so on.

But, unusually for China, additional actions could include notable demand-side stimulus, potentially including an expansion of the country’s social safety net. Chinese households aren’t spending, and something needs to be done to bolster their confidence, or at least to reduce their compulsion to save. In our view, China has no shortage of problems but the level of pessimism about the country, its economy and its markets is probably too great – even in the context of a highly relevant U.S. election. Reassuringly, just 2% of Chinese GDP is generated by U.S. demand.

Japanese election

The initial results from Japan’s October 27 election showed voters rebuking the long-ruling Liberal Democratic Party (LDP) after a series of scandals, with the party losing its Lower House majority.

But this result is unlikely to remove the party from office altogether. A minority government or coalition is the most probable scenario under Prime Minister Ishiba, who only rose to the position on October 1. But there is a chance Ishiba resigns due to the poor election results. Regardless, two smaller parties are plausible coalition partners for the LDP, and there is also the possibility that the LDP will accept a number of independent representatives back into the fold after expelling them from the party following a recent financial scandal.

In terms of economically relevant implications, there may be greater political instability in Japan in the immediate future as the government is forced to seek support from other parties to pursue its agenda. The election result should be fiscally stimulative as opposition parties demand that their own spending priorities be met as a condition for supporting the government. The election result is incrementally yen negative and risks delaying Bank of Japan monetary tightening until the dust has cleared. We do not think Japanese corporate governance reforms will be significantly slowed, nor that the renewed corporate focus on profit maximization will be shed.

U.K. budget approaching

The new British Labour government is shortly set to unveil an austere budget that raises taxes and otherwise limits fiscal largesse in an effort to get the country’s fiscal trajectory back on track despite the challenge of large debt-servicing costs. Anxiety is high given the bond market’s severe rebuke of the country’s proposed 2022 budget.

Bank of Canada goes big

The Bank of Canada delivered a large 50 basis point rate cut on October 23 (see next chart). That comes on the heels of three prior 25 basis point rate cuts. The Bank has been emboldened by a particularly soft inflation print and a significant amount of economic slack. Headline Consumer Price Index or CPI is now just +1.6% year-over-year – below the 2.0% target. With a total of 125 basis points of easing, the Bank of Canada now leads the rate cutting parade among large, developed nations.

North American monetary policy now firmly in rate-cutting mode

As of 10/18/2024. Sources: Haver Analytics, RBC GAM

The Bank of Canada’s next decision is on December 11, and the market is currently nearly equally divided between a 25bps or 50bps cut. Both remain entirely plausible. The economic data between now and then will likely inform it.

But in the context of recent revelations about the country’s just-reduced immigration targets, the Bank’s population forecast is likely too high, and the resultant decline in economic growth and housing pressures could tilt the balance slightly toward another 50-basis-point cut in our view. Another supportive development was the clear message in the communiqué that more rate cuts are coming – this had been merely implicit in the prior statement.

Finally, it is relevant that CPI excluding mortgage interest costs is now rising by just 1.0% year-over-year (see next chart). While mortgage interest costs are an entirely real component of the average household’s spending and remain hot due to the lag associated with resetting mortgages, it should not prevent the Bank of Canada from cutting rates. Unusually, rate cuts actually help to bring this one CPI component down. Thus, the Bank of Canada should focus on CPI excluding mortgage interest costs as it conducts monetary policy, meaning that substantial rate-cutting is appropriate.

Canadian inflation excluding mortgage interest is well below target

As of September 2024. Sources: Statistics Canada, Macrobond, RBC GAM

Interesting tidbits from the Bank of Canada’s Monetary Policy Report included:

• The Bank expects Canadian home prices to start rising (we remain less convinced).

• The output gap is now a sizeable -1.25% of GDP.

• Spending per person is expected to resume rising after a period of decline.

-With contributions from Vivien Lee and Aaron Ma