At the close of business on Friday, global equities rose as improved US inflation data reinforced the notion that the US Federal Reserve’s tightening cycle has ended. The yield on the US 10-year Treasury note declined 13 basis points from last Friday to 4.46% while the price of a barrel of West Texas Intermediate crude oil fell $1.50 to $75.25. Volatility, as measured by the Cboe Volatility Index (VIX), fell to 13.8 from 15 a week ago.
CANADIAN ECONOMIC NEWS
Our central bank’s decision to keep its benchmark interest rate steady at five per cent as it continues to fight inflation was welcome news for many. But the effects of both higher interest rates and inflation on the tax system will be felt in the new year in at least a couple of ways based on recent economic data.
CRA’s prescribed interest rate will increase as of Jan. 1, 2024. The prescribed rate is set quarterly and is tied directly to the yield on Government of Canada three-month Treasury bills, but with a lag. We get six per cent for the new prescribed rate for the first quarter of 2024.
If you owe the CRA money, or if you’re late or deficient in one of your quarterly tax instalments, then the rate the CRA charges is a full four percentage points higher than the base rate. This puts the interest rate on tax debts, penalties, insufficient instalments, unpaid income tax, Canada Pension Plan contributions and employment insurance premiums at a whopping 10 percent come Jan. 1. Keep in mind that this interest is compounded daily and is not tax deductible.
The most recent CPI data showed a 3.8 percent increase over the past 12 months. We can then use this data to finalize the 2024 indexation factor, which should come in at 4.7 percent. By comparison, the 2023 indexation factor was 6.3 percent.
The silver lining in the latest inflationary number is that the TFSA limit for 2024 should go up to $7,000, an increase from the current 2023 limit of $6,500. For someone who has never contributed to a TFSA and has been a resident of Canada and at least 18 years of age since 2009, the total contribution room available in 2024 will rise to $95,000 from $88,000 in 2023.
US ECONOMIC NEWS
With just under 95% of the constituents of the S&P 500 Index having reported for Q3 2023, blended earnings per share show that earnings rose 4.3% compared to the same quarter a year ago. Sales growth is up 2.2% year over year.
Consumer prices were unchanged from the month before and rose 3.2% year over year, down from 3.7% in October. The core rate, which excludes food and energy, rose 4% from a year ago, the lowest level since September 2021. Markets reacted jubilantly to the data with US 10-year Treasury yields falling around 20 basis points on the news and equities extending recent gains to more than 9% above the late-October lows as the odds of the US economy experiencing a soft landing increased. Investors abandoned bets that the Fed will hike one last time while pricing in early rate cuts. The chance of a rate cut in May jumped from 22% before the data to near 90% today. Contributing to the risk on market tone has been a significant loosening in financial conditions. In addition to higher stock prices and lower bond yields, the dollar weakened and credit spreads tightened.
The US Congress passed a continuing resolution on Wednesday funding parts of the government through mid-January and other departments through early February. The bill contained no spending cuts, nor did it include supplemental aid for Israel and Ukraine. Republican members of the House of Representatives allowed the bill to pass despite sizable opposition from within the GOP caucus rather than derailing newly elected Speaker Mike Johnson’s first major piece of legislation. Late last Friday, Moody’s cut its outlook on US government debt to negative from stable, citing deficits and political polarization.
EUROPEAN ECONOMIC NEWS
Industrial production in the euro zone posted its seventh straight monthly decline in September, falling 1.1%.
British Prime Minister Rishi Sunak reshuffled his cabinet this week, bringing former PM David Cameron back into the government as foreign secretary.
In October, the inflation rate in the UK fell to a two-year low of 4.6% year over year from 6.7% in September.
China’s home price decline deepened in October, with residential property prices slumping 0.38% in October, the most in eight years.
CHINA, EMERGING MARKETS and JAPAN ECONOMIC NEWS
Chinese President Xi Jinping and US President Joe Biden met on the sidelines of the APEC summit in San Francisco on Wednesday, their first face-to-face meeting in a year. The leaders agreed to resume military contracts, restart cooperation on choking off key ingredients for making fentanyl and open a dialogue on the risks posed by artificial intelligence. Xi told a group of American executives that he wants friendly relations with the US and has no interest in fighting either a cold or hot war. Attendees said they were surprised that Xi steered clear of discussing trade and investment.
China is considering providing at least ¥1 trillion in new low-cost loans to shore up the struggling property market. The People’s Bank of China would inject funds through policy banks in phases, with the money ultimately trickling down to households for home purchases, according to the report.
The Bank of Japan continues to lay the groundwork to exit its negative interest rate policy in early 2024 after a series of hawkish comments by Governor Kazuo Ueda.