Mick Jagger monetary policy

by Avery Shenfeld

The Rolling Stone’s lead singer, who was also a dropout from the London School of Economics, had some important advice for those pondering monetary policy ahead: you can’t always get what you want, but… you get what you need. For different reasons in the US and Canada, recent data should be telling bond market bulls that, right now, they can’t get what they want, which is a quick dose of central bank rate cuts. But other indicators still suggest that, in terms of avoiding a severely negative economic outcome for equities, we’ll still get what we need.

Today’s US jobs data were uniformly bad news for the bond market. The 0.3% decline in total hours worked, on the heels of a small drop in December, seems to have been largely due to weather. The drop in household survey jobs was actually a gain of over 200K after allowing for the distortion from the new population estimate.

The January payrolls surge only adds to the evidence from a GDP boom in the latter half of 2023, that in terms of getting what it needs, the US economy is hardly desperate for quick interest rate relief. The upward adjustments to Q4 hiring mean that incomes were stronger and savings rates less depleted. The Fed will worry that if productivity gains were a one-time rebound from supply-chain disruptions, labour costs will be running too hot to keep inflation at 2%, even if that’s where core PCE inflation has been in the last six months.

We still expect a US economic deceleration to be in evidence as we move deeper into the year, tied to weak loan growth and a rising savings rate. But in terms of getting what it needs, America’s resilience in the face of rates above 5% suggests that the Fed will have the luxury of taking its time. Hence our call for only 100 bps of Fed cuts in 2024.

In Canada, November/December GDP data looked a bit brighter than expected, but haven’t countered a picture of an economy that really does need interest rate relief as soon as it can get it. Given the weakness we’ve seen in employment, some of that output bounce was an overdue productivity recovery, and domestic demand indicators are still languishing. If that productivity turn has any legs, it could feed into another slow month for hiring in next week’s Canadian employment figures. The Bank of Canada seems much more focused these days on labour market slack indicators than GDP performance, with productivity swings making it more difficult to track non-inflationary potential output.

Relief from high interest rates in Canada will, however, await further evidence that inflation is more confined to rents and mortgage interest. Growing economic slack should fill in that missing piece in time for the economy to get the rate relief it needs before too much further damage is done. We’ll be watching for a deceleration in wages in the months ahead as a signpost of that, as well as in the non-shelter components of the CPI. The Governor appears to be counting on other government policy changes to cool rents, and its rate cuts will address inflation in mortgage interest costs.

When rate cuts do come, sometime near mid-year, giving the Canadian economy what it needs would appear to mean being a bit more aggressive than what the US will require. We’re not talking about getting back to pre-2020 levels, and lingering inflation will likely mean that this will be a two-year transition towards neutral rates.

Our call for 150 bps in cuts this year is admittedly a bit aggressive, and is no doubt more than the BoC is now contemplating. But if sluggish domestic demand continues into 2024, rate cuts that exceed what the Fed delivers could end up being Canada’s version of Mick Jagger monetary policy, giving the economy what it needs to stay clear of a deep downturn.