Hello and welcome to our latest video Macro Memo. We have a whole lot to cover this go round.

• We'll talk a bit about the wobbling Canadian economy and what that means.
• We'll talk about the mixed signals from the U.S. economy. Some really good things happening there, some really bad things as well.
• We'll take a look at U.S. consumer distress in the context of some credit card delinquency rates that are rising.
• We'll talk about Germany's recession. They are pretty explicitly in one right now.
• We'll take a peek at central banks and what they've been up to.
• We'll look at stocks versus bonds and the relative valuation of the two. It's not the usual arrangement right now.
• We will acknowledge that North American housing is perhaps starting to weaken again.
• Conversely, the Chinese housing might be starting to rebound as part of a broader Chinese economic stabilization after a period of difficulty.

So that's the plan. Let's jump right in.

Canada’s economy: We'll start with those Canadian economic wobbles. By that, I really mean two things. One is on the gross domestic product (GDP) front, where the Canadian economy shrank in the second quarter of this year. It's actually the second time in the last three quarters that GDP was down and so that's not great.

Let the record show the middle quarter was up, of course. It was up substantially, in fact. So I don't think anyone can say that the Canadian economy is in a recession right now, but it is wobbling to some extent. It's not growing at its normal clip. And I would say something very similar about the Canadian labor market right now.

We just got a report for August that showed 40,000 new jobs. So on the surface, nothing to see here. But none of the jobs were private sector jobs, which means that we're not really getting a strong signal from the economy itself. And maybe more importantly, two of the last four months of job numbers have been negative.

It's quite rare to get a negative print. It's even rarer to get two in a few months. And so, again, not that there's net laying off going on because the hiring actually outpaced the firing in terms of the two that were up versus the two that were down. But it's still the case that we're seeing a bit of a wobbling labor market as well.

And so some evidence the Canadian economy is sputtering. We're still forecast in a recession ahead. We don't think it's one right now, but we're still forecasting one ahead based on the lagged impact of the rate hikes that have taken place so far.

U.S. economy: Let's move from there to the U.S. It’s really a mixed U.S. economy, some really good things and not so good things.

On the positive side, I can say that the closely watched ISM (Institute for Supply Management) Manufacturing Index rose a little bit, though it's still weak. The ISM Services Index rose substantially and is actually looking pretty good. The cherry on top, though, was third quarter GDP for the U.S., which hasn't been released yet, but it's being tracked and people are now casting it.

It's tracking 5.6% annualized growth, which would be a huge number, almost triple normal.

Just a fascinating little aside: about 0.5 percentage points of that – so some not all, but some of it – is thought to have been due to some pop culture phenomena recently. And so the Taylor Swift concerts, the Beyoncé concerts, the Barbie and Oppenheimer movies are actually adding palpably to the economy. But again, that's not the whole story.

It looks like Q3 will ultimately be quite strong. So that's the good stuff.

The okay part is that U.S. job creation is continuing to slow. August payrolls were 187,000 jobs, but there were 110,000 negative revisions to earlier months, which was not great. We now have three consecutive months in the U.S. of fewer than 200,000 jobs created.

There's nothing wrong with less than 200,000 jobs created, but it's a deceleration. There were 29 consecutive months of more than 200,000 jobs created and now we've had three in a row on the opposite side. And so there's some deceleration here.

At the same time, U.S. unemployment is rising. It's up to 3.8%. It had been 3.4% at one point.

And then looking beyond payrolls into the outright bad, one thing we've been watching is that U.S. railcar loadings are in decline – and not just in decline, but they're now the weakest they've been since 2010 and I would say getting pretty close to undershooting the 2010 low.

You can think of railcar loadings as a proxy for the goods that are flowing across the country. And so something really is slowing on that front.

We also have taken some heed of the latest U.S. Beige Book, which is an anecdotal survey of what's going on across the business sector conducted by the U.S. Federal Reserve. Just to highlight a few things from it, it looks very late cycle. It seems as though it's an economy that's running out of steam.

• There were comments from businesses that the pent up demand for tourism is about to evaporate.
• There were comments that consumers are exhausting their savings.
• In some districts, the demand for manufactured goods was described as having waned.
• The contacts were expecting softer wage growth ahead.
• Price growth was described as having slowed and profit margins were falling in several districts.

Again, not to say it's a recession right now, but a lot of those things do sound like economies that are slowing and could find their way in that general direction before too long.

Consumer distress: A word on U.S. consumer distress. It’s by no means universal, and let's not forget that unemployment is still pretty low. That's usually the first and most important guide to how households and consumers are feeling.

But consumer spending has been awfully strong for quite a long period of time. It was notable that in the last year consumers have been leaning heavily on credit cards to continue their spending spree. Credit card borrowing has risen by as much as 20% a year. This is U.S. data, but we're now starting to see some evidence of credit card delinquency rates rising.

So it's a little bit confusing because the 90-day delinquency rates still look fine, but the 30-day delinquency rates are rising quite a bit.

Indeed, if you look at smaller American banks, the increase is to the extent of being to the highest level of delinquency as a percentage of total assets in more than 30 years. That's a significant jump to an unusual level.

For larger banks. It's not nearly as high, it's not as extreme. But still, the credit card delinquency rate in the U.S. for 30 days is now the highest it's been in more than 10 years, and so still actively rising. So some level of distress is there.

Again, it makes sense. Consumers have been leaning on credit cards. Their balances have been going up. It also makes sense because credit cards are effectively a variable rate product. When interest rates rise, the credit card borrowing cost goes up quite quickly. So whereas Americans are quite insulated on the housing side because of the 30-year mortgage rate that is so popular, on the credit card side they aren't.

And so we are seeing a bit of pain accumulate there.

Germany’s economy: I think what you could describe here is probably a German recession. Germany recorded roughly a flat second quarter GDP rate. It was up the tiniest bit, but it was really functionally flat after two quarters of decline. That's three quarters without growth and with a fair bit of contraction sprinkled in. Leading indicators still show extremely weak manufacturing in the months ahead.

So we may not see a whole lot better in the third quarter when that comes out.

The labor market numbers are not as bad as you would often see in a recession. Unemployment is just a little bit higher. But if you don't achieve any growth really for three quarters, I think you have to call that a recession.

And so Germany has already suffered a recession. It has been described as the weak man of Europe for a while now.

• It is more exposed to China, which has struggled. And so that's been a problem.
• It's a very manufacturing-oriented economy and global demand for goods has been waning.
• Russian sanctions, of course, hurt and higher natural gas prices hurt as they do all of Europe.
• There's a bit of a subtle Brexit drag.
• ECB (European Central Bank) rate hikes, of course, hurt all of Europe,

Also, the German government is being criticized for being inefficient and for really under-investing in infrastructure in particular. So it's adding up to a German economic underperformance right now.

Central banks/interest rates: The story here is one in which central banks have raised rates an awful lot. They're getting close to the finish line, but the precise details vary depending on the country.

The Bank of Canada recently delivered its latest decision and it left rates unchanged. So Canada's overnight rate is still 5.0%. But it was a hawkish pause. That's kind of a classic strategy. You don't do anything but you say, don't test me here. We're not cutting in the near term. If we needed to, we could hike rates more. We don't want the bond market rallying and undoing your hard work.

So that was the Bank of Canada's strategy. We're assuming there's no more rate hiking, but equally it doesn't look like they were in a hurry to cut rates.

For the U.S. Federal Reserve, there could still be a hike out there somewhere. It doesn't seem likely to be in September, maybe in early November. Probably a hawkish pause there as well at their next decision in just over a week from when I record this.

The European Central Bank makes a decision very soon as I record this. Markets aren't sure, but a 40% likelihood of a rate hike is a sign. No is more likely than yes, but I would take the latter on that. There may be a higher likelihood than the market is currently thinking.

But in all cases, central banks are getting closer to the end of that tightening process. We've been watching emerging market central banks closely because they've been actually a good leading indicator. They were the first to raise rates, they were the first to pause, and a few of them have been the first to cut, including Chile.

Another central bank joined them recently: Poland. Poland did a big 75 basis point rate cut, that caught people a bit off guard. I'm hesitant, though, to lump them in with the others in saying this is the beginning of the reversal that perhaps will say something for developed central banks a little later.

I say this because it seems to have been really politically motivated. Poland still has problematic inflation. It's more than 10%, still one of the worst figures out there. Yet they are cutting rates because, at least in part, there's an election coming up. This is the thinking.

So maybe we shouldn't include that one in the mix. But nevertheless, it’s notable that some central banks are starting to cut rates.

Stocks versus bonds: A quick word on stocks versus bonds. That's kind of a classic asset allocation decision at the simplest level.

I just want to flag something which is the stock market risk premium. This is using the U.S. S&P 500 versus investment grade bonds, but reasonable stocks and reasonable bonds to look at. The risk premium has inverted. That is to say normally you would expect to earn an extra percentage point or two in the stock market based on the earnings yield that exceeds the bond yield. But that's actually inverted.

We're now in a position in which investment grade yields are a little higher than the earnings yield in the stock market. And that's in part because the stock market has gone up. It's in part because bond prices have gone down, which is how bond yields rise. It doesn't guarantee that bonds beat stocks in the future.

But you have a lower conviction that stocks beat bonds with this configuration. So this is partially informing our stance, which is that we are holding fewer equities than we generally have over the last decade or so. We're generally holding more fixed income.

All sorts of thinking goes into that, including the possibility of recession as an opportunity to reload perhaps into equities. But also just on a valuation basis, the risk premium is much less compelling for stocks than it once was. And that's a roundabout way of saying as well that you can get a pretty decent yield on your bond portfolio.

North American housing markets: We had really a bust in 2022. We've had a tentative rebound in early 2023. The question is, where do we go from here?

We've been arguing for a while that housing should soften up again. We think we're maybe starting to see that.

• The U.S. homebuilder sentiment indexes are now falling again.
• Construction employment seems to be in slight decline.
• Existing home sales is back to a falling trend as well.
• In Canada, existing home sales starting to fall again.
• Home prices, at least in the bigger markets, are starting to fall as well.

We're not looking for a repeat of 2022. It's more of a malaise kind of forecast where we think we could just see weaker levels, home prices maybe trending sideways or even down a little bit, but not by a lot –motivated by higher rates, motivated by poor affordability, admittedly in the Canadian context, contrasted against very strong immigration.

But again, we think maybe we're starting to see a bit of housing weakness, which makes sense in a rising rate environment.

China’s economy: China has had a rough go from an economic standpoint recently. We've been saying the stimulus that has been announced in recent months is maybe a little bigger than a lot of people are giving credit for. We think it's been underestimated. We’ve said we think people are a bit too pessimistic on China.

To be clear, China is struggling. We're not looking for a magical rebound. We do think some stabilization is possible. And maybe now there are little bits of evidence of that happening, at least in one sector. And so Chinese housing, at least in some markets, may be stabilizing.

For instance, in Beijing and Shanghai, home sales were reported to have doubled at least for a few days recently. With the Baidu search engine (like Google), when you look for the searches for ‘mortgages,’ those searches are up about 60% in recent days in China.

So we think maybe housing is stabilizing, which has been a particular source of weakness. Why is it stabilizing?

Well, China did deliver some policy changes. In particular, they lowered the minimum downpayment on housing. And so maybe that stabilizes.

Again, still not a great economic picture, but a modest recovery we think is achievable. And perhaps there's a bit of a pivot there with China.

Okay, I'll stop there. Thanks so much, as always, for your time. I wish you well with your investing and please tune in again next time.