Central banks get on the cutting edge

SEI’s Domestic View

It was an eventful third quarter, and the fourth quarter of 2024 promises to be at least as interesting. Central banks in most advanced economies have now joined the Bank of Canada (BOC) in cutting policy interest rates. The Canadian economy continued to avoid recession, while the U.S. economy continued to exhibit surprising strength. China finally pulled out the “policy bazooka” in an attempt to reinvigorate its economy and stock market. Finally, ongoing conflict in the Middle East intensified, creating a further push-pull in energy commodities. Against that eventful backdrop, elections are looming in both Canada and the U.S. We’ll explore the potential outcomes and also briefly revisit the Canadian housing market.

After leading the way with initial rate cuts this year, the BOC has now been joined by several other key central banks as inflation has continued to recede from the elevated levels of recent years. The BOC was able to continue lowering its interest rate target in the third quarter thanks to further progress on inflation (as well as lingering concerns about Canadian households and consumers), cutting the rate in 25-basis point (a basis point equates to 0.01%) increments three times from July to September. Meanwhile, markets expect the BOC to continue on this dovish path into late 2025.

While Canada has made the most impressive progress against inflation among advanced economies, we continue to think the so-called “last mile” to many other central banks’ desired inflation-rate destinations could prove challenging, especially in the U.S. and perhaps in the U.K. as well. As expressed in the latest SEI Forward, ¹ we believe markets are pricing in an overly aggressive number of rate cuts by the Federal Reserve (Fed) given the still-strong economic backdrop in the U.S. Should SEI be proven correct, that could pose a challenge to the BOC, as Canadian and U.S. interest rates have tended to track fairly closely in recent history. The spread between the BOC and Fed policy rates has become fairly wide compared to the last 10 years. That will remain the case if recent market expectations prove roughly correct. However, if the Fed disappoints by keeping rates higher than expected, that would stretch the current rate differential even further. While by no means assured—the market’s current outlook for BOC cuts might also be overly aggressive as well—a further widening of the rate differential could create interesting challenges, both for policymakers at the BOC and the loonie.

In addition to monetary measures, looming elections in the U.S. and Canada promise to create interesting dynamics for fiscal, trade and regulatory policies in North America in 2025. While SEI does not recommend trading around election forecasts, it can still be worthwhile to think about how electoral decisions and resulting policy shifts could impact economies, financial markets, and portfolios in order to prepare oneself emotionally for the potential risks that lie ahead.

¹ https://www.seic.com/en-ca/insights/third-quarter-sei-forward

Important information 

SEI Investments Canada Company, a wholly owned subsidiary of SEI Investments Company, is the Manager of the SEI Funds in Canada.

The information contained herein is for general and educational information purposes only and is not intended to constitute legal, tax, accounting, securities, research or investment advice regarding the Funds or any security in particular, nor an opinion regarding the appropriateness of any investment. This information should not be construed as a recommendation to purchase or sell a security, derivative or futures contract. You should not act or rely on the information contained herein without obtaining specific legal, tax, accounting and investment advice from an investment professional. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. There is no assurance as of the date of this material that the securities mentioned remain in or out of the SEI Funds.

Statements that are not factual in nature, including opinions, projections and estimates, assume certain economic conditions and industry developments and constitute only current opinions that are subject to change without notice. Nothing herein is intended to be a forecast of future events, or a guarantee of future results.

This material may contain "forward-looking information" ("FLI") as such term is defined under applicable Canadian securities laws. FLI is disclosure regarding possible events, conditions or results of operations that is based on assumptions about future economic conditions and courses of action. FLI is subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from expectations as expressed or implied in this material. FLI reflects current expectations with respect to current events and is not a guarantee of future performance. Any FLI that may be included or incorporated by reference in this material is presented solely for the purpose of conveying current anticipated expectations and may not be appropriate for any other purposes.

Information contained herein that is based on external sources or other sources is believed to be reliable, but is not guaranteed by SEI Investments Canada Company, and the information may be incomplete or may change without notice. Sources may include Bloomberg, FactSet, Morningstar, Bank of Canada, Federal Reserve, Statistics Canada and BlackRock. All data as of 9/30/2024 unless otherwise noted.

There are risks involved with investing, including loss of principal. Diversification may not protect against market risk. There may be other holdings which are not discussed that may have additional specific risks. In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavourable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity. Bonds and bond funds will decrease in value as interest rates rise.

Index returns are for illustrative purposes only, and do not represent actual performance of an SEI Fund. Index returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.