(en anglais seulement)

Hello and welcome to our video #MacroMemo. This go-round we’ll talk about inflation – some of the improvement we've seen, but also maybe some backward steps in Canada. We'll speak about the economic data and some continued softness in the U.S. which merits a bit more attention, I think.

We'll spend a moment on politics, lots of political things going on right around the world.

We'll also talk about the Canadian economy, and we'll finish with an economically motivated discussion about weight loss drugs and what those might mean for the economy and productivity and health, and those sorts of things.

Inflation: Let's start with inflation. Inflation fears certainly have eased in recent months, I think I can say. They fell quite abruptly in the U.S. as the American May inflation data came out not too long ago.

That's because the figures were substantially below consensus. And they were actually pretty soft in and of themselves, at least for the month of May versus April. Overall prices were roughly flat. Core inflation, which is maybe the more important one right now, was up, but up just 0.16%. These had been 0.3 and 0.4% increases not long ago.

And so all of this handily beat expectations. Of course, by definition, beneath the surface, plenty of things were moving in the right direction.

• We saw gas prices down.
• Food prices were up just a little bit. They were nearly flat.
• New car prices fell.
• Apparel prices fell.
• Even insurance prices fell.

We've been talking about insurance inflation for a while. It was incredibly white hot over the last year. And we were saying we think it should turn. It did tentatively start to turn in the May data, which is wonderful news.

• Medical costs still rising but decelerated.
• Shelter really is the big remaining force for inflation. And it moves so slowly, you can't expect miracles from one month to the next.

It was still rising at a pretty robust 0.4% per month by itself. But we can say the lagged effects that we know about suggest we can expect some deceleration there.

So it was a good news report. Plausibly, we are on track for inflation to fall somewhat further. Some of the nowcasting we do suggests that June could look pretty good, as well.

And so this does open the door for (U.S.) fed policy rate cuts. Still plenty of debates as to exactly when that might be. And it doesn't look like this summer is very likely. The debate at this point is September versus November as the first rate cut.

I'd say I still favor September by a little bit, but maybe the more important point for anyone who isn't trading day-to-day bonds is just to say that it looks like the fed can start to cut rates.

It looks like they can probably deliver something like two rate cuts in 2024. And that would have them joining other countries.

Keep in mind the European Central Bank, the Bank of Canada, both prominently began their easing cycles not too long ago. Similarly, we saw Switzerland and Sweden cut rates as well. Bank of England perhaps joining the fray in late summer.

So, we are seeing that pivot toward rate cuts that lower inflation enables.

 Now, that said, in a Canadian context, the Canadian inflation numbers for May have just come out literally an hour before I'm recording this. And so I won't give you a great deal of detail, but I'll just say they actually disappointed a little bit. They were somewhat hotter in May than before.

I think Canadian inflation numbers deserve a bit of a grace period in the sense that they had shown some pretty good downward momentum previously. I don't think we can conclude that there is some new pernicious trend afoot. But let's acknowledge that Canadian inflation didn't cooperate quite as much as before.

My first blush interpretation of that would be the market was debating whether the Bank of Canada could cut rates not just in early June, as it did, but maybe also in late July in consecutive meetings, which was on almost no one's radar screen a month ago.

I wonder whether that might argue that perhaps they take a pause in July, and the next rate cut comes a bit later, such as in September. But we'll see what other data says over the intervening weeks.

Economy: Let's shift over to the economy. So the theme here really has been one of economic deceleration. We view it as being mostly benign at this point, to the extent that in particular the U.S. economy was too hot.

It needs to cool somewhat. This is a constructive thing to achieve a sustainable trajectory for the economy and to help inflation continue to come down.

Nevertheless, we are getting softer data, and that does sometimes create some concern because you can't say with precision or definitively that the economy won't continue to weaken into a worse position. As it stands right now, economic surprises remain negative in the U.S.

So the data is coming in a bit weaker than economists and forecasters had expected. The jobless claims – a weekly index that’s worth watching because it's so fresh. It’s still inching higher though low.

Retail sales were softer in the latest month. I don't think that's a permanent trend. But I do think you should expect consumers to be a bit more cautious, though.

It’s interesting to see what S&P 500 companies are saying about the consumer right now. Lots of focus on and talk about low-income consumers, presumably because they are somewhat more stretched on average than the rest by virtue of higher interest rates and by virtue of the track record of higher inflation in recent years.

A lot of talk as well about trading down.

There had been a great deal of talk about that in 2022. It faded a bit. We're seeing a little bit more again, and so consumers are not spending enthusiastically, they are being careful with their money. Of course, that has consequences for businesses.

But still, despite evidence of a slower economy, let me emphasize, we are still tracking about 3% annualized GDP growth for the U.S. in the second quarter.

So that's a perfectly fine, if not a good report. We are still seeing U.S. air travel rising nicely. It's actually now well above pre-pandemic levels for the first time since before the pandemic.

Copper prices, yes, they're a little bit lower. And sometimes that does say something about the broader economy. It seems to be mostly a statement about China, though, and weaker Chinese housing, and very elevated Chinese copper inventories in that country. We don't think that copper necessarily needs to fall much further, nor that it's telling us anything too ominous about the economy.

In fact, in the rest of world copper inventories are actually quite low, and so that would suggest that demand is perhaps still outstripping supply at the global level.

Political developments: Let's turn to politics. So it's been a busy time. Famously, 2024 is the greatest year in history in terms of the fraction of the world’s population voting in a national election.

And we've seen a number of those already. Not too long ago, we had the trifecta of South Africa and India and Mexico with their elections. The incumbent party won all three. The market was displeased, though, with all three, in the sense that in India, the majority party had a weaker outcome. So some questions about the ability of India to continue with its economic reforms.

In South Africa, the party that has won every election dating back 30 plus years still won but had a smaller win and needed to seek out coalition partners. Those two concerns have largely faded. It looks as though South Africa will have some business-friendly, some moderate parties in the coalition in a way that suggests the economy should be okay.

In India, concerns have faded. It looks like those economic reforms can continue.

In Mexico, the concern was the incumbent party won too large a majority, and maybe that wouldn't be great from an economic standpoint. Those concerns do still exist for now. Those haven't been fully resolved.

Looking forward, we have a U.S. presidential election not much more than four months away right now.

The first debate is on June 27th, which is after this video update. It’s one of just two scheduled debates and, we can say that, given maybe age-related concerns, the focus here for many is on how these candidates sound as much as what sort of policies specifically they propose.

Although I should emphasize, academics find that debates rarely change the views of many people. So symbolic, perhaps. Probably not a game changer in terms of the election.

We also have a French election on June 30th, which is just under a week away as I record these words. The polling is suggesting that maybe a far-right party versus a left-leaning coalition makes it to the two party-runoff, leaving President Macron’s centrist party out in the cold.

And so there are some concerns about that. Those two groups do have aspirations of spending a fair amount of money. The far-right party is somewhat eurosceptical as well.

And so, French bond yields have increased and there are concerns about the size of the French deficit, which is already quite large. Our expectation is if we do end up seeing a more extreme party take power in France that there will be some moderation of views.

This is actually what's happened in Italy and in Ireland in recent months. And so it's probably okay. But it is a tricky time for the European Union again.

I'll just flag in a Canadian context, we don't know when the next national election will be. It might be 2025. It could technically be 2026, which is still some distance away.

But there was a by-election in Toronto recently and it did, rather surprisingly, result in the election of a Conservative candidate as opposed to the Liberal candidate that has held that riding for 30 plus years. And so just to say that consistent with the polls that we've been seeing for some time, there is a higher-than-normal chance, in fact, a pretty high chance, that there could be a change of government with the next election in Canada.

Speaking of Canada, let's talk the economy for a moment.

Canadian economy: I mentioned some economic weakness elsewhere. Canada is not immune to that. But for the most part, the economy is holding up fairly well. So we're nowcasting about a 2.6% increase for Canada's second quarter GDP print. That's a pretty solid report if achieved.

Canada had a nice retail sales report not that long ago. Canada's economic surprises have remained positive even as they've turned negative in the U.S. and Europe and in Japan as well. So Canada’s holding together for the moment.

Weight-loss drugs: Let me finish with some thoughts on technologies, specifically weight loss drugs, which maybe you don't think of as being technologies. But I'll just start with the backdrop here, which is that we are, as we've said repeatedly, pretty excited about the new technologies that are here and that are coming.

A lot of that focus, rightly, is on artificial intelligence and whether these are the next general-purpose technologies and those sorts of thoughts. But it should be said that there are some pretty interesting things happening elsewhere.

In the medical space, we see mRNA technologies being deployed and CRISPR gene editing entering its prime time and perhaps protein folding approaching in a way that could revolutionize the creation of medicines.

Also already here, though still iterating, we see a series of weight loss drugs that appear to really work in the GLP-1 family. The best of these drugs averages a 21% weight loss, which is quite significant, certainly exceeds anything that was previously achievable. There are new drugs in the pipeline with hopes that they might even exceed that sort of number.

Accessibility is still pretty limited for now. It's expensive. A lot of insurance companies don't cover it. You need to inject it every day as opposed to a pill. There are things that need to be done to democratize this more, but there's reason to think it will be democratized over time. And there are or there is rather the potential for some potentially major societal and economic implications.

These drugs work by reducing food cravings. And so to the extent people who are overweight and seek to lose weight do lose weight, that's of course good for them and good for their individual health. It's also, by the way, consequential for food companies who might find demand for food or certain snacks goes down. So relevant in that sense.

These drugs are linked to fewer weight adjacent illnesses like diabetes and heart disease. So as people lose weight, they sometimes lose their diabetes or they don't encounter heart disease. And so that's a pretty big deal from a human health perspective.

It's also consequential for the pharmaceutical companies making those sorts of products. To the extent that better health extends longevity, that's of course wonderful in and of itself.

Maybe the main point here is these drugs are not mainly economically relevant drugs. They're drugs that affect humans. But they also have some economic consequences. So it's great if longevity increases. That might mean that governments and indeed health care costs then pivot toward other age-associated disorders, which people who live longer are more likely to encounter.

It could be costly for governments if people are living a lot longer as well. So some potential fiscal implications.

There are also some other, maybe more speculative value or uses to these drugs. It would appear tentatively that they may improve cognitive function. Now, to be clear, only, it would seem, in people whose cognitive function had been diminished by their health problems.

And so sort of unwinding those problems. But that's good. That could be good for productivity. It looks as though the way these drugs work in terms of dealing with the reward system, and discouraging cravings, it appears, at least in animals, that it also works in reducing cravings for, for illegal drugs and nicotine and alcohol and these sorts of things.

So it could reduce drug addiction and other afflictions in the population. The idea here is that a healthier population is plausible, even at the societal level, coming out of this. That's a good thing in and of itself.

But maybe from an economic standpoint, we could also end up with more people participating in the work force, maybe people a little bit more productive when working than otherwise.

And so there is perhaps a boost to the economy that exists in there as well. And it's a potential tailwind that we think could help to offset some of the longer-term headwinds that exist out there.

Certainly exciting times. I guess let's see what happens. These drugs are literally just a few years old and still being rolled out.

All right. I'll stop there. Hopefully that was interesting. Thanks for sticking with me. And please tune in again next time.