Major economies are on track for a soft landing.
Financial market participants are superstitious about October, as nine of the 20 largest single-day declines in the Dow Jones Industrial Average have occurred during the month. This year, however, investors have had less cause for fear.
The optimism is supported by steady economic gains. Growth is progressing, even strengthening in places. Inflation is under control, helped by stable commodity prices and cooling labor market conditions. This has allowed western central banks to normalize monetary conditions. Looking ahead, we expect trend-like growth for the main developed markets, with a sub-par performance from other parts of the world.
The unpredictable nature of the ongoing regional conflicts, along with the outcome of the U.S. election, could lead markets into the cold November rain.
Following are our thoughts on how major economies are faring.
United States
- The U.S. economy continues to chug along. Consumers are still spending, reflected in the solid gains in retail sales. Job growth picked up in September, bucking the trend of slower hiring that had caused concern over the summer. The unemployment rate edged down to 4.1%. Average hourly earnings, a leading indicator of services inflation, stepped up to 4.0% year over year.
- A string of upbeat economic data has put expectations of aggressive rate cuts by the Fed on ice. Federal Open Market Committee (FOMC) members have been noncommittal about the path of easing ahead. We continue to expect a cadence of 25 basis point cuts at each meeting until a rate of 3.0% is reached in the middle of next year. With inflation still above target and employment tapering, risks to the outlook for monetary policy are balanced.
Canada
- Growth slowed in the third quarter, well short of the Bank of Canada’s (BoC) forecast. The underlying trend in consumer goods spending remains frail as mortgage renewals at higher rates and soft hiring are curbing household budgets. A tepid economy has been slow to absorb an influx of immigrants. Falling rates should contribute to improvement in business investment and consumer spending, but the government’s focus on reducing immigration will likely weigh on growth.
- The BoC has been one of the world’s more dovish central banks in the current cycle. The central bank accelerated the pace of easing by lowering its policy rate by a half-point to 3.75% in October as inflation dropped below the 2% target for the first time in three years. The BoC also continues to press ahead with its balance sheet normalization plan. Given the focus on underpinning growth, we expect the central bank to implement another 50bp rate reduction in December.
