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When the Bank of Canada made its first quarter-point rate cut in June, to 4.75%, it appeared to be just a trickle. The policy statement released at the time made no promise of further cuts, noting that “risks to the inflation outlook remain. Governing Council is closely watching the evolution of core inflation and remains particularly focused on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour.”
Nothing there to suggest it was the start of a new wave of cuts.
In late July, the BoC cut another quarter point, to 4.50%, but the governors were still cautious, saying: “…price pressures in some important parts of the economy – notably shelter and some other services – are holding inflation up. Governing Council is carefully assessing these opposing forces on inflation. Monetary policy decisions will be guided by incoming information and our assessment of their implications for the inflation outlook.”
On Sept. 4, the central bank cut the target rate again, to 4.25%. The wording in the policy statement commented that economic activity had slowed in June and July, while inflation continued to fall.
Three meetings, three rate cuts. And Governor Tiff Macklem indicated there could be more before year-end.
Meanwhile, the U.S. Federal Reserve Board was doing nothing. The stand-pat position shifted dramatically last month when the Fed announced a 50-basis-point drop in its key rate, stating it “has gained greater confidence that inflation is moving sustainably toward 2%, and judges that the risks to achieving its employment and inflation goals are roughly in balance”.
The trickle had become a flood.
No one is saying it publicly, but the main priority now is to avoid a recession. The job market is tight, youth unemployment is uncomfortably high, and the economy is sputtering. The primary goal now is the rarely achieved “soft landing” – pushing the inflation genie back into the bottle while maintaining positive GDP growth and reducing unemployment.
The Bank of Canada will make two more rate announcements this year, on Oct. 23 and Dec. 11. It would surprise no one to see two more quarter-point cuts at those meetings, bringing Canada’s target rate to 3.75% at year-end.
The Fed will also have two meetings this fall, and more cuts are expected from those as well.
Recently, we did an informal poll of my social media followers to find out what they expect. This was not a scientific poll by any stretch, but past results have been surprisingly accurate at predicting what’s coming. We asked where people expected the Bank of Canada rate to be at year-end and offered four choices. Here are the results:
Almost all the respondents expect the BoC to keep cutting right through the fall, with the rate at 3.75% or lower by year-end.
In short, people are expecting the inversion of the tightening cycle of 2022-23, when every Fed and BoC meeting produced another round of rate hikes. That led to the rapid increase in everything from the cost of variable-rate mortgages to carrying costs on government and corporate debt.
Commercial rates won’t fall at the same rate they went up and are unlikely to return to their pandemic-period lows. But we are still going to see a transformation in the investing landscape, and if you haven’t already taken action, now is the time.
Some of the securities that were badly battered during the past two years are about to become winners again. Others are about to hit the skids, if they haven’t already. Here’s what I expect to happen.
Cash. For several months you didn’t have to do anything with your money but find a good savings account and watch the interest accumulate. There are still a few good deals around, but they are drying up fast. According to ratehub.ca, EQ Bank offers an on-line account that pays 4.25%, but you must give 30 days’ notice before making a withdrawal. Think of it as a one-month GIC. Duca Credit Union offers an impressive 5.25% on its promotion account, but if you read the fine print, you’ll find that it drops to 4% in November.
GICs. The 5% five-year GIC rates that people were snapping up last winter are long gone. If you really scout around and are willing to invest with small institutions that you perhaps have never heard of, you can earn 4.25%. If you prefer to stick to the big banks, you’ll earn 3.5% or less on a five-year term.
Bonds. Bond prices always rise when yields drop, and we’re seeing that play out again. The FTSE Canada Universe Bond Index is up 1.90% this month (to Sept. 30) and 4.27% year-to-date. Even more significant, the Long Term Bond Index is ahead 2.69% for September after being in the red for most of the first eight months of the year due to the inverted yield curve.
Interest-sensitive stocks. If you’re still holding those beaten-down losers in your portfolio, cheer up. The interest-sensitive stocks that were so badly battered in 2022-23 are coming back.
Communications stocks, which were the worst performers on the TSX last year and the Communications sub-index is still in negative territory year-to-date, but has gained 12.63% in the third quarter (Sept. 30). The Utilities sub-index, which also ended 2023 in the red, is ahead 15.54% year to date, and ahead 16.58% in the third quarter.
The Financials sub-index is up 22.01% for the year to date, with most of the gain (16.97%) coming in the third quarter. REITs have been the biggest Q3 winners, with the REITs sub-index surging 17.31%. Year-to-date, it’s up 7.09%.
Gold. The precious metal has been on the rise all year for reasons that go well beyond interest rates. But a decline in rates can only help boost gold’s attraction as it reduces the opportunity cost of investing in a zero-yield asset.
Bottom line: We’re experiencing a fundamental change in the investing climate. If needed, adjust your portfolio accordingly.
Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website.
Follow Gordon Pape on X at X.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney.
Notes and Disclaimer
Content © 2024 by Gordon Pape Enterprises. All rights reserved. Reprinted with permission. The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.
Image: iStock.com/peterschreiber.media
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