balanced fund quarterly report

December 31, 2023

Economic Commentary

After peaking in June 2022, North American inflation has declined dramatically. Although there was a modest back-up during the summer months of this year, the downward trend has been re-established. Both Canadian and U.S. annual inflation now sit at 3.1%, after peaking at 8.1% and 9.1%, respectively, last year. Although the core inflation readings have declined as well, the data continues to remain higher than the headline rate. Core inflation is 3.5% in Canada and 4.0% in the U.S. This consistent downward trend has allowed central banks to refrain from increasing interest rates any further. Inflation declines in Europe have been even more impressive than in North America. U.K. inflation has declined from a peak of 11.1% to a current rate of 3.9%, while inflation in the Eurozone has declined from 10.6% to 2.4%. Despite these declines, however, inflation continues to be the main driver of financial markets as we begin 2024 as levels remain higher than the 2% target of most major central banks.

Major global central banks remained on hold during the fourth quarter, following earlier increases during the year. Despite the fourth quarter pause in rate hikes, the Bank of Canada raised interest rates by 75 bp during the year while the U.S. Federal Reserve increased its overnight rate by 100 bp. Central banks have now pivoted from an environment of consistent interest rate increases to one where they are now contemplating the prospect of lowering rates. Both the BOC and the Fed had called for interest rates to remain higher for longer, however, at its most recent meeting, Fed governors began forecasting lower rates in 2024, with projections indicating interest rates could decline by 75 bp next year. Financial markets, on the other hand, have begun discounting more aggressive declines in interest rates than what the central banks are implying. Current expectations are calling for interest rates to decline by over 150 bp, both in Canada and the U.S. There is an obvious disconnect between central banks and the markets in terms of the expected path of interest rates in 2024 as financial markets may be overestimating the extent of potential interest rate declines. Future moves will continue to be data dependent, with inflation, the state of the labour market as well as underlying economic conditions dictating the future path of interest rates.

Balanced Fund Quarterly Report Archive