📉 Escaping the September Slump, Jumbo Rate Cuts, and a Bullseye on Inflation
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September is the cruelest month. Sure, maybe not for the poets, but for the finance professionals and investors and money-makers that track market performance, particularly the S&P 500, the “September Effect”—or the “September Slump”—has become a persistent mythical phenomenon. A historical anomaly based on data dating all the way back to 1928, September just happens to be the only month whose average return is negative. Whether it’s caused by traders returning from the beach, quarter-end window-dressing, tax-loss harvesting, or something else entirely, it’s seemingly perpetuated by one simple fact: we expect it to happen.
Fortunately, September also has a way of bringing signs of optimism, signalling a new beginning. And this September was a little different.
The Bank of Canada kicked off September by cutting interest rates for the third consecutive time, setting its policy rate at 4.25 percent and signalling that more rate cuts are to come. Outside the pandemic, it’s the first time the central bank has cut rates three times in a row since the height of the global financial crisis back in 2009.
Economists called the move “cautious” and “less dovish,” with industry expert David Rosenberg arguing that the Canadian economy is already on shaky ground and that the bank has a long way to go, particularly considering the economy would be contracting -2.4 percent annually without the country’s recent population boom. So, where are we headed? There seems to be some consensus: Economists see the overnight rate at 2.5 percent by next year.
The biggest sign of optimism was rooted in the country’s inflation reading.
With inflation rate slowing to 2 percent in August—the slowest increase in the consumer price index since February 2021—there’s a good chance we may reach 2.5 percent a little faster than we think. It’s been a long journey, but the Bank of Canada has finally managed to get inflation back to target. With mounting danger that the Bank of Canada is now behind the curve, the recent reading increases the likelihood of a 50-point basis cut at the central bank’s next policy meeting on October 23.
So, just how likely is a jumbo rate cut? Well, it’s even more likely now.
That’s because the Fed just paved the way! With US inflation cooling to 2.5 percent in August, a three-year low, the Federal Reserve cut interest rates by a half-percentage point this past month, marking its first interest rate cut since 2020. According to some economists, the jumbo rate cut blows the door wide open for larger rate cuts by Canada’s central bank. Some even argue that it could even be the difference between a soft landing and a recession.
But with the risks to growth now outweighing the risk to inflation, economists as well as experts at CIBC believe that jumbo rate cuts were already on the table and the Fed has nothing to do with it.
Finally, while September seemingly brought us signs of a new beginning, it wasn’t all good news. After all, it’s important to remind ourselves that the productivity crisis isn’t going anywhere, not anytime soon—not without dramatic change in policy, not without real innovation.
So, we should forget about the September Slump. What we really need to worry about is the productivity slump.
After all, Canada is getting poorer.
Optimism will only get us so far.
(Photo Credit: Columbia Pictures)
ICYMI | Hand-Picked Fintech & Finance News from September 2024
FINANCIAL POST
The Bank of Canada cut its policy interest rate for the third consecutive time on Wednesday and signalled that more cuts were ahead as concern about a weakening economic picture takes on greater importance in the bank’s risk assessment process.
THE LOGIC
The productivity problem didn’t go away over the summer. In case you missed it, inflation-adjusted gross domestic product increased 0.5 per cent in the second quarter, but on the back of a larger increase in hours worked, Statistics Canada reported this week.
FINANCIAL POST
The Bank of Canada cut interest rates for a third consecutive time by 25 basis points on Wednesday, leaving its benchmark lending rate at 4.25 per cent. Here’s what economists are saying about the move, and how much more they expect the bank to cut.
CBC
Canada is among the richest countries in the world — but when compared to peer countries like Australia, New Zealand and the United Kingdom, it isn't as rich as it once was.
FINANCIAL POST
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Inflation slowed to two per cent in August, hitting the Bank of Canada’s target and adding to the case for more aggressive interest rate cuts.
THE LOGIC
Bank of Canada governor Tiff Macklem made it relatively easy to predict when he would start cutting interest rates. He stated his criteria and followed through when all the boxes had been checked. If you got lost, it was mostly your fault.
FINANCIAL POST
The United States Federal Reserve made a big splash this week with its 50-basis-point interest rate cut, prompting some Bay Street economists to believe the Bank of Canada could match the move when policymakers meet at the end of October.
WALL STREET JOURNAL
Inflation eased in August to a new three-year low, teeing up the Federal Reserve to begin gradually reducing interest rates at a meeting next week. The consumer-price index climbed 2.5% from a year earlier, according to the Labor Department, decreasing from 2.9% in July and extending its cooling streak to five months.
WALL STREET JOURNAL
The Federal Reserve voted to lower interest rates by a half-percentage point, opting for a bolder start in making its first reduction since 2020. The long-anticipated pivot followed an all-out fight against inflation that the central bank launched two years ago.
FINANCIAL POST
The Bank of Canada likely can’t afford to continue its current pace of interest rate cuts and will have to pick up the pace at some point as soft economic data continues to come in, according to analysts at CIBC Capital Markets.
CBC
Bank of Canada governor Tiff Macklem says he is pleased that inflation has fallen to two per cent, but the central bank now has to "stick the landing" and keep price growth centred around the target.
CBC
The Office of the Superintendent of Financial Institutions says it will end the policy for lenders to apply the minimum qualifying rate to straight switches when uninsured mortgages are renewed at a different institution under the borrower's current amortization schedule and loan amount.
ICYMI Notable Quotables
“Statistics Canada said that if gasoline had been excluded from the index, the increase from a year earlier would have been 2.2 per cent. And if mortgage interest costs had been excluded from the calculation, inflation would have been a mere 1.2 per cent. There’s little evidence of an inflationary threat in those numbers.”
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