Key Takeaways:
- Resilient U.S. Economy: Strong GDP growth, supported by robust consumer spending and household balance sheets, highlights continued economic momentum.
- Inflationary Pressures Resurface: Rising commodity prices, persistent wage growth, and increased service sector costs signal renewed inflation risks.
- Trump 2.0 Adds Policy Uncertainty: Tariffs, tax cuts, and deregulation present a mix of inflationary and disinflationary potential, keeping markets on edge.
- Canadian Dollar Weakness: Economic underperformance, interest rate differentials, and reduced energy export prospects weigh on the Canadian dollar.
- Interest Rate Divergence: The widening U.S.-Canada yield spread reinforces U.S. dollar strength, with the Canadian dollar facing further downside risks.
Strong U.S. Economy
In Q3 2024, U.S. Gross Domestic Product (GDP) grew at an annualized rate of 3.1%, driven by robust consumer spending, particularly in the ‘control group’ of retail sales, which excludes volatile categories such as food and energy. This segment directly impacts GDP through personal consumption calculations and underscores strong household spending.
U.S. household balance sheets remain exceptionally healthy, with the household debt-to-asset ratio at a 50-year low, supported by strong income growth. The GDP report highlighted significant growth in the services sector, while the primary detractors were:
The Atlanta Fed’s GDPNow forecast estimates Q4 GDP growth at 3.0%, above trend and potential levels, which could sustain inflationary pressures.
U.S. Retail Sales
Advance in Solid End to Holiday Season
Control group sales
climbed the most
in three months.
Source: Commerce Department, Bloomberg. December 2024.
Inflation Trends and Rising Risks
Disinflation in early 2024 was largely driven by lower commodity prices. However, since September 2024, the CRB Index (a measure of commodity prices) has been rising, with inflationary effects likely to flow through to consumer prices.
Wages remain a key inflationary force. In December, U.S. average hourly earnings grew 0.3%, moderating slightly from November’s 0.4%. However, purchasing manager surveys point to higher wage growth expectations. Additionally, the ‘prices paid’ components in service sectors have surged to recent highs, indicating renewed upward pressure on inflation.
Commodity Research Bureau (CRB) Index
February 2024 to January 2025
Source: Trading Economics, CRB (The Commodity Research Bureau). January 2025.
Policy Uncertainty Under Trump’s Second Administration
The start of President Trump’s second term brings a mix of inflationary and disinflationary risks. Potential policies such as tariffs and tax cuts could add to inflation, while deregulation and efficiency improvements might offset price pressures. Market participants remain cautious, awaiting concrete legislation before making significant moves. Uncertainty is high, and the policy runway is long.
The Canadian Dollar’s Decline
The Canadian dollar (CAD) continues to weaken against the U.S. dollar, falling below 69 U.S. cents. Several factors underpin this decline:
Source: Thomson Reuters, January 2025.
The commentaries contained herein are provided as a general source of information based on information available as of January 31, 2025 and should not be considered as investment advice or an offer or solicitations to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication however, accuracy cannot be guaranteed. Market conditions may change and Caldwell Investment Management Ltd. accepts no responsibility for individual investment decisions arising from the use or reliance on the information contained herein. Investors are expected to obtain professional investment advice.
Published on January 31, 2025