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Where are the returns?

February brought increased volatility for the markets as investors dealt with the prospect of central banks keeping rates higher for longer. Market data showed that the U.S. economy grew in January and inflation came in higher than expected. The preferred gauge of inflation used by the U.S. Federal Reserve Board (Fed), the personal consumption expenditures (PCE) price index, increased 0.6% for the month, up 4.7% from a year ago.

The overall economic landscape for Canadians is mixed. Growth for the fourth quarter of 2022 was flat, following five consecutive quarterly increases. The reading missed analysts’ median forecast of 1.5% growth. But preliminary data suggests a rebound of 0.3% occurred in January, Statistics Canada said. The good news – an uptick in jobs, manufacturing activity, and retail sales – complicates the Bank of Canada’s efforts to determine if it’s stemmed inflation without pushing the economy off the rails.

Central banks held meetings early in the month, announcing continued interest rate increases to start the year. The Fed raised its federal fund's rate by 25 basis points (bps). It suggested more hikes are coming, but at a slower pace than last year. The European Central Bank and Bank of England both raised their key rates more aggressively by 50 bps

Canada’s economic growth stalls in the fourth quarter

Canada’s economy was largely unchanged in the fourth quarter of 2022, posting no growth (0.0%). It was the first time the Canadian economy didn’t expand since the second quarter of 2021. It was also a significant slowdown from the 2.3% annualized pace of growth seen in the third quarter. While the slowdown was expected amid ultra-tight financial conditions, the fact that economic growth came to a standstill surprised market participants. The main detractors to Canada’s economic growth over the quarter were declines in business and housing investments.

Conversely, net trade and household spending were key contributors to economic growth. The rise in household spending was particularly notable, suggesting Canadian households remain relatively resilient despite elevated goods and services prices and rising interest rates. Household consumption rose 0.5% over the quarter, reversing the 0.1% decline in the third quarter. Spending was boosted by higher savings accumulated over the pandemic and the continued strength of Canada’s labor market. Over 2022, retail spending increased 8.2% compared to the previous year. A strong Canadian consumer could help the Canadian economy stabilize in the coming months.

I do have concerns about the housing market in Canada. The last time we had inflation and interest rate hikes was in the early 1990s. Many found that the slowed economy and high-interest rates were too much for young families and lost their homes. Caution is recommended and reducing debt if you are able. Reviewing your financial plan regularly is prudent.

The Aggregate Composite MLS® HPI now sits 15% below its peak level, reached in February 2022. Looking across the country, prices are down from peak levels by more than they are nationally in many parts of Ontario and some parts of B.C., and down by less elsewhere. While prices have softened to some degree almost everywhere, Calgary, Regina, Saskatoon, and St. John’s stand out as markets where home prices are barely off their peaks at all. An interesting development in recent months has been an increasing number of East Coast markets where prices appear to have bottomed out on a month-to-month basis and are now trending back up. The non-seasonally adjusted Aggregate Composite MLS® HPI came in 12.6% below its January 2022 reading. Year-over-year declines will likely hit their highest levels over the next two months as we move past the highest price levels on record in February and March of last year. (Chart)

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