Why the U.S. Economy Does It Better
December 2024
- Previously, we’ve pondered whether the ‘soft landing’ narrative was still viable. After a few months of data, we can more resolutely state that it is–depending upon which economy we’re talking about.
- The U.S. economy still appears to be humming despite concerns with a slowing labour market. The Q3 data implies a growth rate of around 3% annualized, which is still above trend. The fact that this is happening at the same time that price pressures are decelerating suggests there is enough capacity in the economy to accommodate this degree of growth without stoking fresh inflationary fears. After a years-long battle with above-target inflation, this is a central banker’s dream scenario.
- Of course, the U.S. Federal Reserve (Fed) is now much more attuned to the other side of its mandate – maintaining maximum sustainable employment. After all, the rationale behind the 50-basis point (bps) cut in September was that both sides of its mandate had come into better balance. By keeping policy settings at restrictive levels, the Fed was risking a more disorderly adjustment to the labour market. In hindsight, we still think that was the right call even if the September non-farm payrolls print was much stronger than expected. That’s primarily because we still see signs in other areas of the labour market that imply a backdrop that is slowing to a more normal pace–including job openings.
- From here, the cadence of rate cuts from the U.S. Federal Reserve (Fed) will come down to the speed of normalization in the jobs market. The potential base case scenario at this point is for 25-bps cuts until the Fed reaches its implied terminal of around 3.0%.
- We estimate that the U.S. labour market would need to add around 140,000-150,000 jobs per month to keep the unemployment rate steady. That’s not impossible to achieve in this environment, but it still portends to a degree a slowdown that doesn’t at all represent a hard landing scenario.
- The combination of a strong economy alongside looming rate cuts should be a powerful driver for U.S. equities. Our preference is for high-quality U.S. indices alongside small caps as we expect to see greater participation from that market segment during equity rallies compared to earlier this year.
- In contrast, we’re a bit more circumspect when it comes to the Canadian economy. While we’re not yet at a point where we can definitively say that a ‘hard landing’ is the base case scenario, we do think the risks are sharper north of the border.
- True, the Q3 data implies that the Canadian economy recovered on the quarter. Having said that, we’re nowhere close to the Bank of Canada’s (BoC) own estimate of a 2.8% annualized rate of expansion. That suggests that despite the bounce in growth, the degree of economic slack should increase, which brings downside risk to the BoC’s inflation target into sharper relief.
- In both October and December, the BoC expediated its move back to the neutral rate via outsized 50-bps cuts. Additionally, we feel there’s also a decent chance that the central bank will have to take policy into stimulative territory and cut by more than the market is currently pricing in.
- Given the above, we continue to prefer fixed income exposure in Canada. The income generated closer to home may complement a slightly more aggressive tilt to the U.S. in a portfolio’s equity sleeve.
- In terms of themes, we continue to expect a migration out of cash/money markets and into duration.1 That dovetails nicely with our expectation that dividend-focused strategies should outperform in the near-term. Additionally, we see upside in Canadian Investment Grade credit from spreads narrowing further to still attractive coupons.
Fund Focus
Mutual Fund Performance (%)
| Fund | 1 Month | 3 Month | 6 Month | YTD | 1 Year | 3 Year | 5 Year | 10 Year | Since Inception | Inception Date |
|---|---|---|---|---|---|---|---|---|---|---|
| BMO U.S. Equity ETF Fund - F | 5.8% | 6.8% | 14.2% | 26.5% | 31.8% | 9.5% | 13.7% | - | 12.8% | May 5, 2017 |
| BMO Low Volatility U.S. Equity ETF Fund - F | 3.7% | 7.0% | 16.3% | 25.6% | 25.2% | 12.1% | - | - | 11.4% | Aug. 17, 2020 |
| BMO U.S. Small Cap Fund - F | 12.1% | 16.1% | 20.5% | 37.4% | 46.2% | 15.2% | 16.2% | - | 13.2% | May 14, 2018 |
| BMO Aggregate Bond ETF Fund - F | 1.6% | 2.4% | 6.3% | 4.5% | 8.1% | - | - | - | 4.4% | March 29, 2023 |
| BMO Corporate Bond ETF Fund - F | 1.6% | 3.2% | 6.7% | 6.7% | 10.1% | - | - | - | 7.2% | March 29, 2023 |
BMO Global Asset Management, as of November 30, 2024.
ETF Performance (%)
| Fund | 1 Month | 3 Month | 6 Month | YTD | 1 Year | 3 Year | 5 year | 10 Year | Since Inception | Inception Date |
|---|---|---|---|---|---|---|---|---|---|---|
| BMO S&P 500 Hedged to CAD Index ETF (Ticker: ZUE) | 5.77% | 6.82% | 14.28% | 26.71% | 32.17% | 9.79% | 13.97% | 11.77% | 13.56% | May 29, 2009 |
| BMO Low Volatility US Equity ETF (Ticker: ZLU) | 3.72% | 7.00% | 16.46% | 25.77% | 25.43% | 12.31% | 10.16% | 11.81% | 14.24% | May 19, 2013 |
| BMO Low Volatility US Equity Hedged to CAD ETF (Ticker: ZLH) | 3.10% | 2.91% | 12.92% | 18.43% | 20.66% | 8.21% | 8.16% | - | 9.37% | Feb. 4, 2016 |
| BMO S&P US Small Cap Index ETF (Hedged Units) (Ticker: ZSML.F) | 10.87% | 8.48% | 15.54% | 16.69% | 31.10% | 4.65% | - | - | 8.41% | Feb. 5, 2020 |
| BMO S&P US Mid Cap Index ETF (Hedged Units) (Ticker: ZMID.F) | 8.74% | 8.88% | 13.01% | 21.25% | 31.37% | 7.64% | - | - | 10.18% | Feb. 5, 2020 |
| BMO Aggregate Bond Index ETF (Ticker: ZAG) | 1.67% | 2.54% | 6.50% | 4.90% | 8.50% | 0.12% | 0.60% | 1.97% | 2.91% | Jan. 19, 2010 |
| BMO Corporate Bond Index ETF (Ticker: ZCB) | 1.64% | 3.24% | 6.72% | 6.77% | 10.21% | 1.79% | 1.92% | - | 2.78% | Mar. 2, 2018 |
| BMO Discount Bond Index ETF (Ticker: ZDB) | 1.61% | 2.47% | 6.46% | 4.81% | 8.43% | -0.01% | 0.68% | 1.97% | 2.35% | Feb. 10, 2014 |
| BMO Mid Corporate Bond Index ETF (Ticker: ZCM) | 1.68% | 3.11% | 7.59% | 7.71% | 12.04% | 1.86% | 2.41% | 3.10% | 4.14% | Jan. 19, 2010 |
| BMO Long Federal Bond Index ETF (Ticker: ZFL) | 3.05% | 3.15% | 8.70% | 1.47% | 8.40% | -4.85% | -3.51% | 0.41% | 2.57% | May 19, 2010 |
BMO Global Asset Management, as of November 30, 2024.
Please contact your BMO Global Asset Management wholesaler for any additional support and guidance.
1 Duration: A measure of the sensitivity of the price of a fixed income investment to a change in interest rates. Duration is expressed as number of years. The price of a bond with a longer duration would be expected to rise (fall) more than the price of a bond with lower duration when interest rates fall (rise).
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This article was published on December 18, 2024.
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