At the close of business last Friday, global equities were marginally higher on the week as investors raised their forecasts for how high policy rates will rise in the United States and the eurozone. The yield on the US 10-year Treasury note rose to 3.88% from 3.72% a week ago while the price of a barrel of West Texas Intermediate crude oil fell $3 to $75.50. Volatility, as measured by the Cboe Volatility Index (VIX), declined to 21.15 from 21.5 last Friday..

CANADIAN ECONOMIC NEWS

Should I use a TFSA, RRSP, or both?

Low income

A TFSA can be an ideal savings vehicle if you’re in a low-income tax bracket. RRSPs may not be well suited to low-income Canadians. The RRSP tax savings are insignificant, and you may be in a higher tax bracket when you make withdrawals. You may also want to consider that TFSA withdrawals don’t impact income-tested benefits and credits, such as child tax benefits and credits, Old Age Security, or Guaranteed Income Supplement.

If you now find yourself in a lower tax bracket, such as when on maternity leave, and made RRSP contributions in the past, you might consider withdrawing from your RRSP to make a TFSA contribution. However, remember that funds withdrawn from your RRSP can’t be re-contributed later.

Middle income

One strategy would be to contribute to your TFSA now and accumulate RRSP room to be used later when in a higher tax bracket to optimize the tax benefits.

High income

This is a situation where you may want to maximize both your RRSP and TFSA contributions. In fact, the tax savings or refund received from the RRSP contribution could be used to fund the TFSA.

Which option is better with the HBP and LLP?

If you’re saving for a down payment on a house, a TFSA might be a better option than saving in an RRSP and withdrawing under the Home Buyers Plan (HBP) for several reasons. You have the flexibility to re-contribute the TFSA withdrawal without time limits. There’s no restriction on how much you can withdraw from your TFSA, while the HBP restricts you to $35,000 from each of your RRSP and your spouse’s RRSP. Alternatively, you could each contribute $5,000 a year for seven years to a TFSA and then withdraw $35,000 plus any investment earnings tax free. There are no conditions on TFSA withdrawals, whereas the HBP requires you to be a first-time home buyer.

Similar logic could be applied to the Lifelong Learning Plan (LLP). By using a TFSA to save and fund continuing education, contributors can gain increased withdrawal flexibility while eliminating any enrollment requirements or repayment conditions.

Whether to save in a TFSA, RRSP, or both depends on your savings needs, your eligibility for income-tested benefits, and your current and expected future financial situation and income level.

 

US ECONOMIC NEWS

With about 82% of the constituents of the S&P 500 Index having reported for Q4 2022, blended earnings per share shows that earnings declined 4.8% while sales rose about 5.2% compared with the same quarter a year ago, Consumer and producer prices in the US moderated less than expected in January. While price growth continued to slow, the pace of improvement decelerated and this is a concern. Having said this, past rate hikes are still working through the system and we expect a steady decline in inflation as the year progresses. After months of debate over whether the US will face a hard or soft landing, the debate has recently turned to whether the economy will land at all. A string of stronger-than-expected data points signal that the US economy remains surprisingly resilient despite having absorbed 450 basis points of rate hikes in under a year. The US Federal Reserve will receive one more inflation report before their next expected rate hike on March 22^nd.

The US Congressional Budget Office says that if Congress does not extend the nation’s debt limit, the US could default sometime between July and September. The CBO forecasts a fiscal year 2023 budget deficit of $1.4 trillion and expects the government to amass an additional $19 trillion in debt in the coming ten years if there is no shift in spending patterns. Senate GOP leader Mitch McConnell said this week that the US debt ceiling will be dealt with and the government won’t default.

 

EUROPEAN ECONOMIC NEWS

Wages in the United Kingdom grew more than expected in the final quarter of 2022, rising 6.7% year over year, complicating the Bank of England’s task of reining in inflation. UK inflation slowed in January to 10.1% year over year, the third straight monthly decline and down from October’s 11.1% peak.

Eurozone GDP grew 1.9% in 2022 but just 0.1% quarter over quarter.

 

JAPAN, CHINA and EMERGING MARKETS ECONOMIC NEWS

Former Bank of Japan board member Kazuo Ueda was nominated this week to succeed Haruhiko Kuroda as governor of the central bank.

Bloomberg reported this past week that Chinese consumers are using cut-rate loans offered by banks under pressure from Beijing to reflate consumer demand to pay down mortgages and purchase stocks rather than on consumption as intended. In January, new home prices in China increased for the first time in a year.