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Hello and welcome to our latest video #MacroMemo. As always, there's quite a bit to cover off. We'll talk a little bit about the latest economic data and broadly supporting that soft landing thesis that we've been talking about now for several months. We'll take a look at inflation. And inflation has been coming down a little bit, but ultimately, I think less enthusiastically than most of us would like and still not entirely normal.

We'll spend a moment on central banks, where fascinatingly we had a prominent central bank raise rates for the first time in 17 years. We had another fairly prominent central bank cut rates. And so we'll talk through that and what it means for all the other central banks somewhere in the middle. And then we'll jump into some miscellaneous, some smaller thematic topics.

And those include the latest averted U.S. government shutdown and some CapEx data we're looking at and some other things as well. So that's the plan.

Economic data: Let's jump into that economic data to start. I can begin by saying that the soft-landing thesis we've been talking about over the span of the last several months, that's our new base case scenario – with a 60% likelihood versus 40% for a hard landing.

This story is still holding together fairly well. You can say that looking at really any number of pieces of data, but ones that we find particularly evocative include the latest Beige Book. This is a qualitative survey, but we've actually quantified it in the sense of tallying up regions of the country that are saying things are good versus bad versus pretty good versus pretty bad and trying to put numbers to those things.

And when we do all of that, what we find is that we had seen some genuine Beige Book weakness at the end of 2023 and actually into early 2024, the sort of weakness that was suggesting a hard landing. And it was making us nervous. But the latest quarterly Beige Book release has now rebounded pretty notably. So it is now consistent with economic growth and I guess consistent, you could say, with that soft landing thesis.

We look at the New York Fed's weekly economic activity index that's still rising. So that's still suggesting an economy that's doing fine. Jobless claims in the U.S. are also still low and broadly going sideways. So no sudden pivot or sign of deterioration there. Maybe a little bit further afield, we look at the U.S. oilfield production that is rising quite nicely.

In fact, it's in the realm of its highest reading ever, I believe. And so we're seeing strength in that sector at a time when oil prices are $80 a barrel, which is fairly profitable for that sector.

Then we look at daily news sentiment. And so this is from the San Francisco Fed. I'll admit it's a little bit wishy washy in the sense of not being hard data. Nevertheless, daily new sentiment in the U.S. isn't just up, it's up a lot and it's now quite optimistic.

And at some point you get a little bit nervous about the circularity of a happy stock market, making people feel happy and the news is good and round and round it goes. And that can be helpful or it can become a vicious circle at a different time. But you know what? Whether it is the input or whether it is the output, I can say that news sentiment is actually quite favorable right now.

So again, not consistent with economic doom happening in the near term.

We did get purchasing manager indices in the U.S. that were a little bit weaker, it should be noted. And so the ISM (Institute for Supply Management) manufacturing, the ISM services, they both fell somewhat in the latest month, but you know what? They fell a little bit, but they jumped a lot the month before.

I think you can still say that, in particular, manufacturing in the U.S. went through a long period of weakness. It is now at a minimum bottoming and maybe rebounding a little bit on a trend basis. So not strong, but not signaling some new downward path, that's for sure.

And on the last U.S. point, GDP (gross domestic product), as we track the Atlanta Fed's GDP nowcast, they're looking for about 2% annualized growth in the first quarter of this year.

That's not that impressive compared to the growth rates achieved in the third and fourth quarters of last year, 5% and 3%. These were big, big honking numbers, while 2% is much more sedate. But 2% is fine, 2% is decent growth. After big gains like that, you almost have to expect somewhat less. I wouldn't say this is suggesting particular trouble.

So the U.S. economy is still growing, still moving fairly well. I won't belabor the Canadian one. We've talked before about how Canada's underperforming the U.S. and has some unique challenges, including a greater rate sensitivity and greater exposure to housing weakness and that sort of thing. But I can say that when we look at Canada's real time business conditions index,

it's been rising nicely again, and in general we are seeing more evidence that the economy is growing than that it's declining. And last year there was a fair bit of decline alongside that growth. So if anything, the economy is looking a little bit better in Canada as well.

Okay. Let me pivot from there to inflation.

Inflation: So inflation is broadly a 3% exercise at this point in time.

We'd like it to be 2%. Of course, it was eight, nine, 10% at one point. And so there's been a lot of progress. The progress has been a lot slower lately. The February inflation data was broadly boosted by higher gas prices. That might be a complication for March data as well. When the March data eventually comes out, we're seeing a little bit of improvement beneath the surface, but it it's pretty slow going.

And really, as we've been saying, if you get a soft landing, which looks more likely these days, it is going to be harder to get inflation back to 2%. It's probably going to take somewhat longer.

It's nice that some of the supply chain problems with regard to the Red Sea have become a bit less intense. So we can see the cost of shipping containers is falling again after a pretty abrupt increase a few months ago.

But it's likely to be a slow journey downward for inflation. And you can really get a sense for this just looking at inflation expectations.

Again, using the U.S. as our bellwether, inflation expectations in the U.S. are running half a percentage point to a full percentage point higher than normal. So that is to say that it's realistic to think that maybe 3% inflation could become 2.8% or 2.5% inflation.

It's not at all certain we can get all the way down to 2%, at least at this juncture. Markets aren't convinced, households and businesses aren't convinced either. And so we probably are going to operate in a higher-than-normal environment, if not a horribly problematic environment, for a while longer. We'll still say we think we can see some improvement. But again, it's going to be slow. That then informs central banks and that's our next topic.

Central banks: So we'll talk in a moment about the Fed (Federal Reserve) in the U.S. and some other central banks that are on hold and grappling with inflation that’s still higher than they would like, and I guess celebrating that economies are holding together better than almost anyone would have imagined as of maybe a year or two ago.

But let me first start elsewhere, which is just that there were some other notable central banks doing interesting things, doing, in fact, rather different things than one another.

And so you had the Bank of Japan in Japan, of course, hiking interest rates for the first time in 17 years. That's momentous, if anything ever was. They've gone from a slightly negative rate to a very slightly positive rate of 0.1%. So baby steps, I suppose, probably only baby steps from here as well. It's unlikely they're able to move a whole lot more, but nevertheless symbolic and reflecting the fact that in Japan wage growth has really picked up. This is the wage-setting season and we're seeing that wage growth for a second straight year is fairly fast.

And the Bank of Japan is expressing some confidence in private sector demand. So it feels like the economy is okay as well. That's indeed a time when you'd want to be raising rates a little bit and they abandoned their so-called yield curve controls as well. They no longer have an explicit target for the 10-year yield, or I guess explicit cap for the 10-year yield that they defend if it's challenged.

And so there's room for Japanese yields to rise a little bit and there may be room for them to rise a little bit further. Japan, though, is very much a lagging indicator. It is dealing with issues that the rest of the world dealt with a couple of years ago in terms of higher inflation and that sort of thing.

I don't think that's a guide to where other central banks are likely to go in the future. The question is, what about the Swiss National Bank? The Swiss National Bank just cut rates. It did that surprisingly, actually.

In other words, it hadn't given a clear signal to that effect. It likes to do that historically. And so the question is, okay, is this the first of the major or the quasi-major central banks that are cutting rates?

I would say it’s probably not a perfect predictor in the sense that Switzerland has some special things going on. One would be its inflation rate is only 1% right now. So most countries are dealing with too much inflation. Switzerland is dealing with not quite enough inflation. Switzerland's also, relatedly, worried about a too-strong exchange rate. And most countries aren't in that position.

And so the Swiss National Bank has cut rates. They're likely to cut rates again. They're already, by the way, into the ones, whereas other central banks are in the fours and fives and so it is a bit of a different story there. Although, I guess all else equal, you could say that it does reflect the fact that we are probably entering a cautious rate-cutting environment, if not quite as immediately or obviously so as in Switzerland.

In terms of the Fed, in terms of the Bank of Canada, their latest decisions yielded no rate changes.

Still, expectations of a rate cut emerging, pretty transparently in the U.S., a little bit more obliquely in Canada. The Bank of Canada is not talking in that direction, but its economy is probably more receptive to rate cuts than in the United States. We are continuing to think June or July is the most likely timing for rate cuts, but I will say that as much as June is entirely possible, maybe the market's a little ahead of itself in terms of strongly pricing in June. It could well be that July is that starting point, instead.

It’s probably going to have to be fairly slow going in terms of rate cuts from there just because economies are holding on with soft landing scenarios, so you can't cut rates that much. And if inflation is at 3% or even at 2.7 or 2.8% in a few months’ time, that's probably not quite low enough to justify enthusiastic rate cutting.

So we think it will be a fairly cautious affair on the rate side. That brings us to some miscellany here. And so let me just zip through. Some of these are no more than a sentence or two.

More updates – United States: So one would just be that we've seen the latest threat, the U.S. government shutdown, averted. That is the third or maybe fourth time that this has been avoided over the span of the last six or seven months.

So as we've said a few times now, we're not that nervous about these things. It seems to us they do manage to figure them out, if at the last possible moment. And particularly in an election year, it would be foolish to allow a shutdown to occur. And so shutdown averted again. We're not expecting another shutdown, even though they do continue just to punt the ball down the road . . .

and they will have to grapple with this again before too long.

Let's switch from U.S. policy to U.S. politics. And so this is a little bit old, but I haven't said it in this video. And so with presidential candidate Donald Trump winning Super Tuesday some time ago, he is now the only candidate left in the running. He will be the Republican nominee.

We've said before that legal experts say that his legal woes will not likely impede his ability to contest the presidential election. So it's very much looking like it will be a Biden versus Trump affair. Very much like 2020, it should be a close race. Trump might actually be slightly favored.

More updates – Canada: Switching from the U.S. to Canada, Canada's next federal budget will be April 16th.

We are presuming it will have some enthusiastic spending and part of that is because there have been promises made in the pharmacare space. There have also been promises made with regard to NATO's obligations and military spending. Some of it is just mathematical because of debt servicing costs that are, of course rising. Some arguably is just because the incumbent government is not very popular, and would like to buy some popularity, especially with a 2025 election on its way.

And so with all that in mind, it's pretty likely the Canadian deficit will be twice as big this year as last year and maybe even somewhat larger. Not that big in a grand scheme, not worrying in a share of GDP context, but nevertheless somewhat bigger is more likely than not.

Another Canadian policy item is Canadian immigration changes. We've talked before about, first of all, incredible population growth in Canada in 2023 and in recent years.

Then there was a change made theoretically to reduce the number of international students by about 35% over the next few years. Now, there's a broader goal by the government to reduce temporary residents. That's where most of the growth has been. Temporary residents will drop from 6.2% of the population to 5%.

I guess in a nutshell you could say that whereas Canadian population growth might otherwise have been on track to grow at about 1.2% over the next three or four years, it might grow by more like 0.9 percent per year.

So certainly the rate of population growth looks like it's going to be slowing versus the 3% plus rate that was recorded in 2023.

I'll mention just one more Canadian item: Canadian productivity growth (or nonexistent productivity growth). I suppose we've talked before about the fact that Canada's productivity levels, or at least GDP per capita (which is a decent proxy) are the same levels they were six years ago.

And so that was pretty underwhelming. The latest data shows Canada's GDP per capita is now no better than it was eight years ago. That's with the latest quarterly data. So this is pretty rotten. Some of it is temporary indigestion related to rapid immigration and maybe a bit of post-pandemic effects. Some is more structural and relates to not enough R&D and not enough CapEx and other perhaps government policy errors along the way.

Those are going to take longer to fix. Certainly we don't think productivity keeps falling from here, but we think it could still be pretty anemic until some important fixes take place.

U.S. CapEx: I’ve got to finish with one thing back to the U.S. CapEx. We've talked before about how we think this could be a time of faster-than-normal technological growth . . .

related to generative AI and some other exciting technologies. In theory, you get faster productivity gains over time, but it takes time. It takes usually a couple of years at least before you see those benefits show up in the productivity numbers. In the meantime, you normally get something of a boost to research and development and to capital expenditures, and you see some economic gain recorded there.

We've been watching that. We're watching it in the U.S. as a bellwether economy. I have to say we haven't seen that much of it yet. It's a little bit perplexing. Nvidia and others have recorded record profits. Everyone is talking about these things and seemingly investing in them.

But when we look at research and development, it's up nicely over the last decade.

It's up nicely over the last three or four years. It’s actually down, though, over the last year when the AI boom has got really interesting. Very much similar with CapEx into computers and peripherals. It's actually down over the last year. And so it's a little bit baffling. We'll stubbornly say we still think we're going to see a boost to R&D and CapEx.

It just hasn't come quite yet. The productivity gain comes a bit later.

Okay. That's it for me. Hopefully you found that interesting. Thanks so much for your time and please tune in again next time.