(en anglais seulement)

Hello and welcome to our latest video #Macro Memo. Plenty to cover this go round.

• We'll talk about recession risks. Indeed, we believe those are starting to recede, which is wonderful news.
• We will discuss the latest U.S. Federal Reserve decision, a big 50 basis point rate cut. Why they did that, what that means . . .
• We'll talk certainly about the yield curve. The U.S. 2-10 yield curve is un-inverted. Does that mean the recession signal has gone away? I'll give you a preview. The answer is no, but we'll talk through that.
• We will speak to the U.S. election, As I'm recording this it is now, I believe, exactly six weeks away. So that is getting very close. And there are some implications that we think through.
• We'll spend a brief moment on oil prices, which are fairly low.
• And we will conclude just with a talk about Canadian wages, which have been sort of mysteriously high. And we try to dig to the bottom of that mystery.

So there's the plan. Let's start with recession risks.

For context, we usually talk in the context of a U.S. recession over the next 12 months. So a 12-month rolling window. And for a while now, we've been saying we think that risk was around 40%. So not the most likely outcome. We still believe and have believed that a soft landing is more likely.

But we were giving a 40% number. We raised it actually in early August, after some fairly rough-looking economic data had come out. We're now downgrading that. We are pulling that 40% risk down to a 30% risk. So that's still significant. Indeed, the reason the risk of recession is still significant is that interest rates are still pretty high.

And as we'll talk about the moment, yield curves are still sending an ominous signal and so on. So the risk is not trivial. It's higher than normal. But it is still down, and it's down for several reasons.

The most obvious reason is that the Fed just cut rates by 50 basis points. That was more than had been expected. I'll get into that as well in a moment.

But broadly from a recession risk perspective, I would say that it signals two important things. The first one is that rates are falling faster than previously expected, so that removes an economic headwind faster than previously imagined. So that's good for the economy, of course.

The second element is just that the bigger move and the surprise involved in that move signals the Fed's flexibility, its willingness to do big things.

So if the economy were to begin to falter in a serious way, it could be counted on to do a bigger rate cut and to perhaps prevent the economy from actually tumbling to recession.

So we do think the risk of recession has certainly fallen. The other reason, one motivation, the main one being, again, the big fake Fed rate cut, the other motivation to reduce the recession risk is just that we're getting decent economic data.

And so the ISM (Institute for Supply Management) services index in the U.S. remains above 50, signaling growth. The unemployment rate, which had been trending higher and could yet trend higher, actually fell in the latest month. So that was nice.

Jobless claims, which comes every week, a very high-frequency, fresh indicator, so jobless claims have been nicely falling.

Retail sales rose.

Maybe when push comes to shove, you, you smoosh that all together and you can say Q3 GDP for the U.S. is tracking 2.9% annualized. That's a big annualized quarterly gain. This does not suggest any measure of struggle. And Q3 includes that July/August period when there were a lot of concerns about the economy. So the takeaway is the economy seems to be fine. Rate cuts should help it even more.

And so the risk of recession has gone down and elsewhere these are much more minor considerations. But we can say the credit markets are not showing much stress. And of course inflation is also continuing to cooperate. And that's mostly what has helped the Fed be in a position to cut rates.

And so incredibly U.S. CPI (Consumer Price Index) ex shelter is now sub 2%. It's running at 1.8%. So the work is done there. It's the shelter side that still has some work to do. And that can probably ease somewhat as well, based on what we're seeing in rents and home prices and the lags that are involved.

Then when we step away from the most recent trend and just think about inflation in general, it is looking better.

We can say wage growth has slowed, which takes away the threat of inflation from that avenue. Business pricing plans are falling again, which does the same. On the corporate side, inflation expectations have really settled in a big way in recent months.

And so, certainly markets believe the inflation threat is fading. Importantly, oil prices have fallen, which I'll get to in a moment.

Shipping costs are coming back down after having increased. And so the inflation story does look better. It just gives, confidence to the Fed. And in turn, it means the economy has a better chance of surviving for next year, which is great.

Let's move from there to the U.S. Federal Reserve. I've stolen my thunder several times here.

But the big news, of course, is that the Fed cut by 50 basis points. That's half a percentage point. The expectation. Well, there was a debate whether it would be a 50 or 25 point cut. We had looked for a 25, if I'm being perfectly honest. Like much of the economic community had, the debate was whether it would be 25 or 50 – and there was a risk with a 50 basis point rate cut, which is that it could have been interpreted by markets as smacking a panic and a feeling they'd made a mistake in not cutting earlier and reflecting concern about a softer economy and so on.

But the Fed communicated in a very constructive way, and they managed to convey that bigger rate cut as getting off to a good start, and as a sign of their confidence that inflation is coming down rather than their concern that the economy is weakening. So in that context, the market celebrated, felt pretty good.

It does look based on the dot plots at a company. That latest decision, that more rate cuts are in the offing. There is a debate there, I should acknowledge. The market is pricing in about 75 basis points of easing across the two meetings that remain, through year end. The dot plots, the Fed's own forecasts, suggest maybe 50 basis points of easing.

I think that is the debate, 50 versus 75 and total spread over two meetings. I would slightly favor a total of 50 basis points of easing over those two meetings right now. But it's going to come down to the economic data. And so we'll ultimately just have to see. But a fair bit of further easing is possible.

And the market, when we look into 2025, it is pretty eager. It is pricing in quite a lot of rate cutting at a policy rate that descends below 3% by the end of the year. That's completely feasible and possible. But I would just say that maybe the risk is the market is pricing in a bit too much cutting as it stands right now.

Let's pivot from there to something else that is certainly related to rates. Indeed it is precisely rates. It's the yield curve. And so the U.S. two-year ten-year spread has un-inverted. The two-year yield was higher than the ten-year yield. That's unusual. Now it's no longer higher. The question is does that invalidate the recession signal?

So when the curve is inverted that's historically a recession signal. It just un-inverted therefore is a recession signal gone? The answer is actually no, for two reasons. The first reason is simply that the other two yield curve components we look at, it's a three-month, ten-year spread and also a near term I think it's a two-quarter, six-quarter spread.

Those are still inverted. So we haven't lost the inversion for two of the three metrics we care about. And then even for the two-year tenure spread, that inversion is actually still the next logical sequence in a theoretical recession. So the signal is still signaling recession.

What usually happens is the yield curve inverts and you get a signal from that that there's a recession maybe in a year or two. And then just before the recession, you tend to get the un-inversion. And so we can't say that the un-inversion recently has negated the recession signal. What I can say is that based on the earlier conversation about the risk of recession being 30%, not 100%, we are dubious that a recession actually happens.

In terms of why this yield curve signal might not be telling us the truth here, I think there are a couple of answers to this. One of the answers would just be that because the term premium is sort of structurally smaller than it was decades past, it's easier to get an inversion. It doesn't mean as much as it once did. So that would be one angle.

But I think more importantly, the more relevant angle is just that we're moving from a level of unusually high rates down to a level of roughly normal interest rates. That's not normally what's happening when yield curves invert. Normally the inversion is when rates are normal.

As a starting point, the market gets concerned about a recession, the long-end rallies. That inverts the curve. And then when the Fed or central bank start cutting, as they see that recession manifesting, it un-inverts. And so that's where the recession is. And that isn't the story right now.

The story right now is rates are unusually high. The market said we don't think rates will be this high forever. That's what inverted the curve, not a full-on recession prediction. And now we're getting those rate cuts which do naturally invert the curve. But the rate cuts are really just designed to return rates to a more normal level. They are not in response to the feeling that a recession is happening right now.

So I would argue ultimately, it is likely to mislead us. But for the moment, we can nevertheless acknowledge that we do see some curves that are still inverted. And for that matter, there are some others, the 2-10 that have gone inverted and are still technically following a traditional recession path.

Let's move from that confusing story to the U.S. election.

So it is six weeks away as I record these words, and in terms of the likely outcome, it's still close. That's the most useful thing I can say. But it does continue to show it being, prediction markets and betting markets do continue to show, that Kamala Harris on the Democrat side is slightly favored, and her odds of winning have been rising a little bit.

In fact, you can find markets that give her as high as a 57% chance of winning. Some others are more like 53%. But either way, they do have her a little bit ahead of Trump. So there is a slight lead. This is, I should emphasize, very sensitive to a small number of votes in a small number of swing states like Pennsylvania, such that there's no certainty whatsoever at this point.

But she is slightly in the lead, for what it's worth.

And then in terms of what that would mean, we've talked before about the tariff implications. Trump would do more tariffs, Harris might not. And so that's a more negative for the economy on the Trump side. Trump would curtail immigration more. Harris would too, but by less. That is more a negative, mathematically, for Trump, on the immigration side.

But that does leave the biggest part, which is fiscal policy. And there's a lot of disagreement here among analysts. And it's really tough to nail down just who would send the economy up and who would send it down, if either would. And so really the debate is do you include everything they've ever mentioned or do you just focus on the policies they've spoken to at length?

A lot of the details aren't fleshed out for these policy ideas. You've got to fill in the blanks and make some guesses. There are political, legal, practical constraints to doing some of the things the campaigns are proposing. And so it requires a lot of judgment. And people land in very different places.

And so you will find analysts arguing that a Trump win is better for the economy in the short run. You will find those arguing that a Harris win is better. Those two opposite perspectives are being expressed. Right now, you will find analysts who say that the candidates are both net stimulative for the economy and others who say they are net restrictive for the economy.

So there isn't a lot of agreement here. It is really hard to say. I don't want to pretend I have all the answers, though. We have read a whole lot on the subject. The closest I can get, and I think this is a plausible answer, is that Trump might be the slightly more stimulative economic in the short run.

That's a statement about tax cuts, which appear to outmuscle the tax hikes plus spending proposed by Harris. Animal spirits might prefer that outcome. Deregulation might help the animal spirits. Certainly business surveys suggest that there is a preference for the Republican outcome, but I can say I don't think the difference is all that great, particularly when you factor in the immigration drag and the tariff drag on the Trump side.

You can certainly debate this because ultimately politicians are constrained by Congress, and Congress is likely to be divided. And that means that both candidates will be limited in terms of what they could accomplish and unable to deliver a significant chunk of what they're hoping to do and unable, ultimately, to deliver all that much net stimulus. And if a Trump win does prove to be more economically supportive in the short run, I think it's quite plausible it could be less economically supportive in the medium run, as you're basically dealing with bigger deficits that need to be financed and the slower immigration that keeps biting every year.

And tariffs, it could have some second round effects. And so maybe Trump a little better in the short run, maybe a little worse in the medium run. It is clear that from an investment standpoint, the Trump trade does remain in place, which is markets feel a bit more excited about the possibility of a Trump win in terms of the stock market going up.

But equally as the Harris odds have increased in recent weeks, the stock market has felt just fine. And so we shouldn't overstate that effect. Okay, let's go from there. Let's quickly touch two things. One is oil prices. And so oil prices are fairly soft by recent standards $72 a barrel. West Texas Intermediate. That is pretty low in the context of the last year and the last couple of years.

It is mainly a statement about demand. So concern to some extent about US demand maybe more acutely about Chinese demand. Both economies have been a bit softer over the last couple of months. Secondarily, we're not seeing OPEC do the kind of cuts it might once have done in response to softer demand. So that's really where the story is.

We looked in the inventory data. Nothing too notable. Their inventory levels look pretty normal. We would flag upside risks to the price of oil on two fronts. And the first is just economic in the sense that we think the US economy is okay. We think the Chinese economy isn't so great, but is likely to stabilize, particularly as policymakers continue to swoop in with sequential rounds of stimulus.

The second reason there's some upside, all risk, and this is less likely to manifest, but it's still a risk is geopolitical, which is just that idea. We are in a world of, of geopolitical, challenges, including in the Middle East and in Ukraine, Russia, both, with oil prices potentially affected. And so there are scenarios in which an intensification of either conflict could send oil prices higher, barring a big shock, I would say 70 to $90 a barrel is reasonable.

But we are towards the lower end of that range right now. I will finish also briefly, just Canadian wages. And so for those who track these sorts of things, the Labor Force Survey in Canada says that hourly wages are rising at 5% year over year. That's a bit weird in the sense that the unemployment rate has risen by 1.8 percentage points, and yet it's still moving at a fast 5% year over year.

The US economy is is objectively stronger than the Canadian one. And yet the US wage growth is 3.8%. So why is this Canadian numbers so strong? I'm afraid to say I don't have a great practical answer, but I can just say there are other surveys of wages and they mostly disagree. They mostly say Canadian wage growth is actually not quite that fast.

And so we can look at the survey and the productivity data and the national accounts and, and indeed survey and even the Bank of Canada makes its own wage common metric. And the common theme there is those are all in the 3 to 4% range, not 5%. And so I don't really know why the difference is there. But we can say, realistically, Canadian wage growth probably is more in line with places like the US.

It isn't the outlier that it first appears. It is therefore maybe less of an inflation threat, though. You have to be careful in reaching that conclusion, because with falling productivity in Canada, any kind of wage growth is actually an inflation threat. And so Canada really needs to get that productivity growth going. All right. On on that less cheery note, I'll finish and say thanks so much for your time.

I hope you found this interesting and useful. And please tune in again next time.