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Bank of Canada makes a big cut, U.S. inflation is up, Oracle ends a great year on a low note, Broadcom notches big AI win and a reminder that the stock market is not the economy—especially in the States.
Kyle Prevost, creator of 4 Steps to a Worry-Free Retirement, Canada’s DIY retirement planning course, shares financial headlines and offers context for Canadian investors.
The Bank of Canada (BoC) cut its key interest rate by 0.50% on Wednesday. It’s now 3.25%.
This second consecutive jumbo cut (as opposed to the standard 0.25%) was widely anticipated after November’s soft labour market report and Canada’s continued anemic gross domestic product (GDP) growth. What’s more noteworthy was the fact BoC Governor Tiff Macklem said a more gradual approach to cuts would be taken going forward.
As a result of this long-term warning, Canada’s five-year and 10-year bond rates actually went up slightly from the day before the rate announcement. Options markets are now pricing in a 67% chance that the BoC will cut rates by 0.25% on January 29, 2025. The same markets believe there will only be two 0.25% cuts in 2025.
Macklem also highlighted possible U.S. tariffs as “a major new uncertainty.” He said, “If tariffs were imposed at the levels that have been suggested, it would be very disruptive to the Canadian economy.” These taxes could bump inflation back up in Canada and America and prevent the BoC from cutting rates as aggressively as it had intended.
Immediately following the announcement, large banks (RBC, TD, BMO and CIBC) lowered their prime rates from 5.95% to 5.45%. Folks with variable rate mortgages and other variable rate loans will no doubt be thankful for the relief.
That said, there was very little immediate change on five-year fixed mortgage rates from banks. For the Canadians with fixed five-year mortgages coming up for renewal soon, the hopes of getting back to sub-3% rates are fading quickly. If you want to know what fixed mortgage rates will likely do, look to the five-year and 10-year bond rates. Those are more correlated with fixed rates than the BoC key interest rate is.
Interest-rate sensitive areas of the Canadian stock market—such as utilities, pipelines, telecoms and real estate investment trusts (REITs)—should continue to do well. Interest costs are key expenses for those sectors.
The TSX Composite Index was up 0.60% on Wednesday.
Read more about how the December rate cut will affect investors, fixed mortgages, variable mortgages and savings.
Check out the rates below to see the current status of mortgage rates in Canada. To check variable rates, simply change the “rate type” drop down menu.
As anticipated, the Bureau of Labor Statistics reported that the consumer price index update revealed an annualized inflation rate of 2.7% in November. Core CPI increased to 3.3%.
Here are some of my takeaways from the December 11 report:
As a result of this new inflation data, CME FedWatch tool now predicts a 99% probability of a small 0.25% interest rate cut from the U.S. Federal Reserve next week. That would move the target range from 4.50% down to 4.25%.
Interestingly, there doesn’t appear to be much consensus on where the target range will be a year from now. Right now, the tool shows a 60% probability the target will stay above 3.75%-to-4% range. That’s probability the main reason why the U.S. dollar remains so strong, versus other currencies around the world. It also means there isn’t much relief coming for new mortgage-seekers in the U.S.
Incoming president Donald J. Trump’s vow for tariffs would almost certainly ratchet up this inflation rate and discourage further rate cuts.
In related news, most market experts appeared relieved when Trump said he would not seek to remove U.S. Federal Reserve Chair Jay Powell before his term ends in May 2026. That stability takes some worst-case scenarios off the table for market watchers, who were worried about elected officials directly interfering in monetary policy decisions.
We had two old-school tech companies reporting earnings this week, as well as one of the year’s hottest retail stocks.
Here’s what came out from earning resorts this week. All figures below are in U.S. currency.
While Tuesday wasn’t a great earnings day for Oracle (the stock finished down 6.67%), it was more of a case of cooling the red-hot momentum than a real fear about the company’s business model. Oracle massively benefitted from the AI race, as cloud infrastructure is at a premium right now. Consequently, the company’s share price is up more than 70% year to date.
It was a similar story for both Costco and Broadcom on Thursday. Both companies beat earnings expectations, but saw their share prices dip slightly. That said, investors have to be happy with the fact Costco is up about 52% year to date, and Broadcom was up about 66% at Thursday’s close (with an after-hours gain of 10% at press time).
Costco highlighted gold (yes, Costco sells gold bars), home furnishings, sporting goods and hardware as key areas of growth. E-commerce sales were up 13% year over year.
Broadcom was focused on its custom AI chip development. That’s probably a good place to zero in on, seeing as how AI revenue is up 220% year over year! Broadcom CEO Hock Tan said, “We see an opportunity over the next three years in AI. Massive specific hyperscalers have begun their respective journeys to develop their own custom AI accelerators.”
To compare U.S. tech companies (like Oracle) to Canadian counterparts, check out my article on the best tech stocks in Canada at MillionDollarJourney.com.
It’s logical, at first glance, to think a country’s worth of its largest companies (measured by the market capitalization of its stock markets) might be directly tied to its economic performance (measured by GDP).
But remember, the stock market is not the economy! The U.S. has a massive economy, but it has a substantially larger share of the world’s investment dollars.
A country’s largest companies can sell products and services outside their nation’s borders. At the moment, investors are willing to pay way more for the same profits from an American corporation than corporations in most other places in the world. That’s due to many factors. But foremost among them is the view that American companies are an excellent long-term bet for increasing profits relative to companies headquartered elsewhere.
It’s interesting that investors appear to be quite confident in America’s ability to keep making money, despite widespread concern about America’s decline and speculation that the U.S. dollar is going to be in trouble any day now.
For investors to move away from the proven profitability of the U.S. free market and the stability to the U.S. dollar, they’d have to put their money somewhere else. Where else a stability-conscious investor would prefer to put their money remains by far the strongest argument for continued American dominance.
We agree with former U.S. Treasury Secretary Lawrence Summers when he said, “Europe is a museum, Japan is a nursing home, China is a jail, and bitcoin is an experiment.” To continue the analogy, we could add for laughs that Canada is a skating rink—in the age of global warming.
Today, American stock markets account for more than 65% of the world’s investable equity wealth. That’s up from 30% in the 1980s (the last time America was “great,” according to some). Not since the ’50s and ’60s has there been such American dominance. And that American-led economic dominance was due to the rest of the world’s superpowers bombing each other or sacrificing their stock markets to communism. The U.S. stock market is even more dominant when it comes to private investments, where it garnered more than 70% of the USD$13 trillion market.
Of course, as with all investments, investors have to ask if the current valuations of U.S. companies are an accurate estimate of long-term value. It’s clear that the U.S. is a great place to build and scale a company. But is it that much better than other countries? Right now, investors are willing to pay a lot more for companies that are headquartered in the U.S.A. Time will tell if those investors have put too much emphasis on American exceptionalism, or if the U.S. has created a system that is just that much better at building wealth.
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