(en anglais seulement)

Hello and welcome to our video #MacroMemo. There's quite a bit to cover off this week.

• We'll talk about inflation, the idea that it's actually starting to fall again after a difficult period earlier in the year.
• We'll talk about central banks potentially in motion very soon after I record this. And so it's exciting to think about more central banks entering that rate cutting phase.
• We'll talk a bit about economic convergence. So the U.S. was an exceptional economy and now it's becoming a bit less exceptional as other countries catch up in a growth context. We'll nevertheless talk about how the U.S. is probably okay though, so we're not too, too worried about its recent deceleration.
• We'll talk about the consumer, specifically the U.S. consumer, and that's really a story of people nervous about a consumer that could lose steam. But we think actually the U.S. consumer’s probably okay.
• We'll finish with a couple of China topics. One is Chinese housing, which got some new stimulus really targeted in a different direction and more of the unsold inventory of homes as opposed to builders directly or to home prices or mortgage access. And we'll talk about China growth and whether we can believe the numbers and what we should believe.

That's a lot. So let's jump in here.

U.S. inflation: We'll start with easing inflation. And so I can say that the main macro theme for the first part of 2024 was not easing inflation. It was intensifying inflation or misbehaving inflation. We had inflation that had been performing and declining nicely from mid-2022 to the end of 2023. And then it started to revive and that wasn't good. That complicated everyone's lives.

And so the April data has since come out and it's looking better. That's really important. Not low, but going in the right direction For the U.S., service inflation is still too hot, but a little bit less so. We think within that, shelter cost inflation can keep coming down from here. We think insurance inflation can turn lower before too long.

We know that we lost some seasonal distortions in the first quarter that made inflation look hotter than it otherwise would have been. And looking forward, we are hopeful that we continue to see some decline in inflation.

• One reason for optimism is the price of oil. The price of gas is actually falling in May and hopefully into early June.
• The labor market continues to ease a little bit in a way that might cool wages, might cool inflation.
• We've seen retailers announcing some price cuts, prominently Walmart, Target and McDonald's all announcing price cuts. That's not something you would have heard a lot about a few years ago.

It does sound like a time where inflation should be coming down as consumers become more price sensitive. Maybe where push comes to shove, we can see some of the real-time inflation metrics out there continuing to improve in a pretty important way into the month of May. And so we think we can get inflation continuing to improve in May. We're banking on a further declining trend over the remainder of the year.

Unlikely to be smooth. Unlikely to be fast. I'm sure we'll have a few hiccups along the way. But we are constructive on where inflation is going.

Other developed world countries: Just briefly, in terms of other countries, not the U.S., on the inflation front: they never got quite as high in recent months. I never saw quite the same backup in early 2024. But still, the April numbers that have come out have been mostly pretty constructive here.

• Canadian CPI (Consumer Price Index) fell from 2.9 to 2.7%.
• UK CPI fell a long way from 3.2 to 2.3%.
• Eurozone CPI was steady, but it was steady at 2.4%, which isn't that much above the 2% number that a lot of central banks are trying to target.

And so I would say, again, the inflation story was bad. It's becoming a little bit better.

Let's pivot from there. Let's talk central banks.

Central banks: It's a natural segue because, of course, central banks are responding primarily to where inflation is. So they must be feeling at least a bit better. We've already seen rate cutting cycles begun in a fair swath of the world. So a certain fraction of emerging market central banks have been easing for months, if not quarters.

Switzerland, Sweden, developed world central banks have now started to cut rates, though they are the only two of note so far. We may get a pretty big player cutting rates rather soon. I am recording this in very, very late May. On June 6, the European Central Bank (ECB) is scheduled to render its next decision and expectations are in the realm of an 90% likelihood that the ECB cuts rates for the first time. So that's looking quite likely.

Indeed, European inflation is down into the low twos. The European economy is looking okay. They don't need rates to be this restrictive.

The Bank of England at one point was thought likely to cut rates in June. It's not impossible, but it's looking less likely now. And that's for two reasons.

1. One was even though UK inflation fell a lot in the month of April, it actually didn't quite fall as much as everybody had hoped for. That technically counted as a slight inflation miss and so that might slow the Bank of England down.
2. The other reason is the UK now has an election scheduled for July 4th. And so there's a general thought that maybe the UK just waits until after that election to deliver its first rate cut. So maybe the Bank of England now goes in August, as opposed to what had once looked like a June possibility.

That brings us to the Bank of Canada, which is actually scheduled to be first of all possibly with its June 5th decision date. The market is pricing a 60% or so chance of a cut, most of a cut or more than half, I should say. The cut is priced in. It's entirely possible the Bank of Canada cuts rates in June.

We're slightly more sympathetic to the July date. So there's also a July decision date. I might say that one, in my mind, is a hair more likely than June, but it's pretty close to a 50/50 proposition.

So I think Canada could be cutting rates very soon indeed. To me, in fact, it's probably less of an issue exactly whether it's June or July, it's more of a story of if they go in June, they won't in July.

If they go in July, they won't have in June. Either way, it's pretty likely that the Bank of Canada reduces its policy rate from 5% to four and three quarters by late summer.

One of the reasons we prefer August is just that it then reduces the gap to the U.S. easing, which might happen in the fall. There's sometimes concern if the Bank of Canada moves significantly differently than the U.S.

But again, June is entirely possible. The next time we talk it could be in the context of the Bank of Canada already easing rates.

We think from there for all of these central banks, it's likely to be a pretty gradual stop and go affair. Not every meeting, not large rate cuts. But all the same, we do believe that a neutral rate is a couple of percentage points below where we are right now.

So there should be room for a fairly concerted easing over the span of a year or two, at least.

At the Fed (U.S. Federal Reserve), by the way, is likely to start cutting rates later. And so right now, September looks like a possibility, though there certainly are some who think the Fed might not get around to it until early 2025. So that's a possibility. But we would say the fall of 2024 is more likely at this point.

Let's pivot from there. Let's talk convergence.

Economic convergence: This is more of a pure economic theme. And so the U.S. was an exceptional economy in 2023. It outgrew everyone by a significant margin. Now the U.S. economy is slowing to some extent. Just a couple examples of that would be first quarter GDP (gross domestic product) was down to sub-2% growth after some quarters of 3, 4, or 5.

The ISM (Institute for Supply Management) manufacturing and services indices both slipped recently actually below 50, which technically would signal contraction. Retail sales were flat in the latest month. Payrolls were up just fine, but they were up not as quickly as they had been in prior months. So the U.S. economy is slowing down.

Simultaneously, we are getting signs of strength in other countries, other developed countries.

• UK and Eurozone GDP were positive for the first quarter. That's actually an impressive accomplishment. Those countries hadn't been reliably growing toward the end of 2023.
• Germany's big business confidence index is up nicely. We're also seeing purchasing manager indices rise.
• Japan's important Tankan survey is rising.
• Canadian employment was quite strong in the latest month of April.

So it would appear the rest of the world is maybe even accelerating.

I think the way to think about this is really just that it is actually convergence. The U.S. economy was strong and now it's slowing to a more moderate pace. The rest of the world was pretty weak and now it's reviving to a more a more moderate pace.

I think it is interesting, though, to think of it from an investment standpoint because the U.S. stock market has been easily the champion and now there's the opportunity for some of these other markets that are cheaper, and in some cases also have undervalued exchange rates, there is some opportunity perhaps for them to perform. Not that it's all about GDP growth when it comes to the stock market, of course.

So as the U.S. economy slows, is the U.S. economy okay? I think the answer is probably yes. Admittedly, there is a question mark here because a happy soft landing which involves a deceleration to a reasonable rate of growth is initially indistinguishable from a less happy hard landing.

The latter also involves an initial deceleration, but one, of course, that continues. So we do need to watch closely to make sure the U.S. is doing the former (soft landing) and not the latter (hard landing).

I'll talk about the consumer in a moment, but I can say we still feel pretty confident the U.S. economy is on track to grow at a reasonable rate.

• We're tracking second quarter GDP growth that's in the realm of 3%. So that's actually a bit better than the first quarter.
• Weekly jobless claims had reasons for worry a couple of weeks ago, but for a funny, temporary, distorted reason to do with the timing of Easter and the context of New York State teachers, believe it or not. And so that slipped back down, jobless claims are still low and trending sideways, which is good.
• We've seen capital goods orders pick up.
• We've seen the demand for U.S. freight actually picking up after a period of weakness.
• We are seeing corporate reporting talk very, very little about recession fears or layoff plans. So that's promising as well.

And so we do think that this is most likely a U.S. soft landing story, not the beginning of something worse for the U.S.

Consumer outlook: Now as I say that, we do need to talk about the U.S. consumer for a moment because there are consumer worries right now and it's not unreasonable to be at least a little bit concerned. Higher rates, of course, bite everywhere, not just in the U.S.

• We have seen U.S. credit card usage growth slowing and so that is less of a support for spending.
• We've seen pandemic era savings mostly used up. Indeed, the personal savings rate in the U.S. is pretty low, which suggests a limited scope for spending growth to continue outpacing income growth in any event.
• We do see some downgrading going on, you see that people are shifting their spending from luxury stores to discount stores in a way that does suggest people are at least becoming more prudent or maybe even experiencing some stress.

And so I think it's right to think that the consumer outlook is for more modest or at best, moderate spending growth from here. I would push back against the idea that there's serious trouble with the U.S. consumer, though. And one of the reasons is just that the most important thing when we talk about the consumer is what's the job market up to?

And it's slowed, but it's slowed to a very healthy level. And when you have hiring continuing at a healthy rate, that's the big determinant of spending. And so spending can continue to be mostly fine.

Maybe the next most important thing is what’s happening with wages. And wage growth is slowing, but it's still pretty robust. So this is still supportive of spending.

Yes, higher rates hurt, but the majority of American households are handling higher rates fine. In fact, if we look at the share of income going to service debt, it's actually completely normal in the U.S. right now. It was really low there for a moment post-pandemic, but it's just returned to pre-pandemic levels at this point. So there isn't a huge chunk of savings at this point of income going to spending on interest and on the principal for debt.

That's actually not maybe the issue for now that it had had once been expected to be. And we still see wealth accumulating. So people are saving less and maybe that's a limiter, but keep in mind, the stock market's going up. People are getting richer. Home prices have gone up a lot over the last five years. That's a lot of wealth that people could choose to deploy if they needed to.

And so at the end of the day, we think that the consumer is in okay shape. There have been some anecdotal accounts of maybe vacation, holiday spending, weakening. We're not seeing it. We have real-time metrics for hotel usage and for airlines in the U.S., and both are actually flat to rising and look quite normal by seasonal standards.

So the takeaway for us is the U.S. consumer is not going to be the hero of the economy going forward, but I don't think it's going to be an outright millstone either. I think it's going to be a time of modest to moderate growth.

China housing: Now let's talk about China, in two ways. First, Chinese housing. The housing market has been very weak, and you have insolvent builders and falling home prices and falling activity and all sorts of issues. We've detailed those in the past.

I do want to flag one important and promising new policy. So China's already done some things. They've already cut rates and they've cut mortgage rates and they've reduced down payments required. They've done things to try to stabilize housing.

They're trying something new now, a new approach. And so the new approach is a major fund. It's 500 billion renminbi, which is almost 100 billion USD. And they're using that to help digest a completed but unsold housing unit.

So builders have built units they weren't able to sell This is a problem for the builders. It's kind of a waste and inefficiency for the economy. And so they're giving money to local governments, so local governments will buy these units and use them as affordable housing. And so it seems like a pretty promising strategy. It's being viewed quite favorably.

I'm not sure I'd expect Chinese housing to zoom higher from here. The amount of money being put to work isn't enough to absorb the entirety of the excess inventory, or anything close to that. But nevertheless, it does suggest to us that Chinese housing can stabilize over time. We think it's a multi-year journey before we can talk about any kind of strength, because it will take time for affordability and construction levels and builder health and indeed inventories to fully normalize.

China’s economy: I'll finish just really quickly. China's economy, we think, is tracking about 5% growth. When I tell people that, they say, okay, but do you believe the numbers? Because there is some history of local governments fabricating numbers and there is some history of China's growth being weirdly smooth compared to everybody else in a way that suggests maybe there is something going on beneath the surface.

This isn't the definitive final account on this subject. It's obviously an important subject. But we do look at some alternative measures that are less easy to fabricate. Some, like international trade, just can't be because you can cross-check with the countries trading with China. So that's one that you could have a high level of confidence in.

But we can look at things like electricity usage and rail shipping statistics and other things that don't go as processed through the statistical agency. In fact, we look at three aggregates that look at different slices of those sorts of things. And believe it or not, two of the three argue that Chinese growth, if anything, is a little quicker than the GDP numbers say right now. The other, of course, by definition would say that it's a little bit slower.

Just to show how imprecise these are, though, one says the Chinese economy's accelerating, one says it's flattening, one says it's decelerating. So some contradictions there.

But on the aggregate, you're seeing some lines that are pretty close to what Chinese GDP is up to. And so I would say I think Chinese economic estimates right now are not far from the truth. China's growing at about a 5% rate. We think it will slow to a 3-4% rate over time. I don't think there's a great secret there.

Okay. So maybe on that anticlimactic ending, I'll just say thanks very much for your time. I hope you found this interesting and useful and please tune in again.