Connecting the Dots II: US Economic Data and Fed Policy
Last week, I talked about how Canadian economic reports connect and impact Bank of Canada (BoC) decisions, which in turn affect investors. This week, I will dive into the American economic reports, exploring how the US Federal Reserve (Fed) uses data to shape interest rates, and what that means for us Canadian investors.
Many of these reports mirror their Canadian counterparts, but the US economy plays an outsized role in global markets—including Canada. There is a saying, ‘When the US sneezes, Canada catches a cold.’ 😊 For investors, keeping an eye on US data is crucial because Fed moves often create ripple effects that cross borders and impact our portfolios.
Understanding how the Fed uses reports like job numbers, inflation trends, and Gross Domestic product (GDP growth to set rates is key to navigating market movements. Let us look at the major US economic reports, released monthly, and explore how they influence Fed decisions and affect us as investors:
Labour Reports: JOLTS and ESS – Why Jobs Count
Let us start with labour reports like Job Openings and Labor Turnover Survey (JOLTS) and the Employment Situation Summary (ESS). These provide insight into the health of the job market. JOLTS shows how many jobs are available and how many people are quitting (a sign of confidence in finding something better!). ESS provides the unemployment rate and wage growth.
Think of job market as the heartbeat of the economy. Lots of job openings and low unemployment show strength, meaning people have money to spend, which fuels business growth—good news for investors
Economic Reports: GDP – The Big Picture of Growth
GDP measures the overall health of the economy by tracking the total value of goods and services produced. If the US economy is growing steadily, the Fed may raise rates to prevent overheating and inflation. Slower GDP growth or signs of an economic slowdown, on the other hand, could lead the Fed to hold or even cut rates to support the economy. For Canadian investors, US GDP trends matter since a strong US economy can boost demand for Canadian exports, while a slowdown may hurt it.
Inflation Reports: CPI and PCE – Why Prices Matter
When it comes to inflation, the Fed leans on two key reports: the Consumer price Index (CPI) and the Personal Consumption Expenditures (PCE). The CPI, released monthly, measures changes in the price of everyday consumer goods like groceries and gas. If CPI data shows that prices are rising quickly, it can spark inflation fears and lead the Fed to raise rates to rein in spending.
The PCE is the Fed’s preferred measure of inflation because it offers a broader view of price changes, capturing both out-of-pocket expenses and costs covered by employers, such as health insurance. The Fed pays particular attention to the core PCE. The core PCE excludes volatile items like food and energy, making it a more stable reflection of underlying inflation trends. When the PCE climbs, it reinforces inflationary pressures and strengthens the case for rate hikes. These inflation reports are key for Fed policy, giving investors a clear signal of where interest rates may head.
How the Fed Reacts to this data
The Fed does not base its decisions on a single report. It weighs a mix of data – labour, GDP, and inflation trends – to get a fuller picture of the economy. Strong job creation, steady GDP growth, and rising inflation may prompt rate hikes, while weaker growth or tame inflation could lead the Fed to hold rates or cut them.
For Canadian investors, these moves can have significant implications. Since US interest rates affect global financial conditions, a Fed rate hike can strengthen the US dollar, making Canadian exports cheaper for Americans and potentially boosting demand. This increased demand can have a positive impact on Canadian stocks. Conversely, rate cuts can weaken the US dollar, making Canadian goods relatively more expensive in USD terms, which might dampen demand and put pressure on Canadian markets.
Impact on Stock Markets and Investors
What does this mean for us as investors? When the Fed raises rates, borrowing costs rise, potentially slowing consumer spending and corporate expansion – especially in growth sectors like technology. Stocks may come under pressure, while bonds might look more appealing, leading investors to shift their money away from stocks and into bonds.
On the other hand, when the Fed cuts rates, it often spurs more spending and investment, boosting stock prices, particularly in growth industries. However, if rate cuts come amid economic weakness, it could signal trouble ahead and increase market volatility.
By understanding how these economic reports fit together, you can better anticipate market trends and adjust your investment strategy accordingly. Whether the Fed is signaling higher rates or potential cuts, staying aware of these shifts helps you make informed decisions for your portfolio.
When you are new to investing, all these economic reports – Canadian and American – can feel like a lot to digest. But once you understand how these pieces connect, you will start to see the bigger picture – and how the Fed uses this data to make the decisions they do, which in turn can impact your investment outcomes.
Now that you have a sense of how US economic data connects, let’s see what the Fed did with the latest numbers in this week’s interest rate decision – and catch up on everything else that happened this week….
Items that may only interest or educate me ….
Canadian Economic news, US Economic news, The Fed goes big, ….
Canadian Economic news
This past week’s key economic data that the BoC considers when deciding whether to raise or lower the interest rate.
Consumer price Index (CPI)
Statistics Canada’s latest CPI report shows that inflation cooled in August, with prices dipping by 0.2% after rising 0.4% in July. On a year-over-year basis, inflation slowed to 2.0%, down from July’s 2.5%, marking the slowest pace since February 2021. This drop now brings inflation in line with the BoC’s 2% target, surprising some analysts who had expected a slight decrease to 2.1%.
Taking a closer look, the ‘Alcoholic beverages, tobacco products, and recreational cannabis’ category posted the biggest monthly gain, up 0.8%, while gasoline prices slid by 2.6%. On a yearly basis, shelter costs (which include rent and mortgages) jumped 5.3%, while gasoline prices dropped 5.1%.
Core inflation, which strips out the more volatile food and energy components, also edged down by 0.1% from July but remained up 2.4% compared to last August.
With headline inflation now hitting the BoC’s target, the central bank can turn its attention to stimulating economic growth. This could open the door to a larger rate cut of 0.5%, to give a much-needed boost to an economy that is slowed on a per capita basis due to the higher interest rates. However, the BoC will need to tread carefully to prevent inflation from falling too low, as rates significantly below 2% could increase the risk of deflation, reduced economic activity, and pressure for further BoC intervention.
Canadian market volatility
Canada’s Volatility Index (CVIX) started the week at 13.21, spiked to 14.68 following the Fed’s decision to lower the US interest rate, and then quickly dropped below 11, ending the week at 10.23. The volatility index was relatively stable for most of the week, except for that mid-week spike.
Tracked under the ticker VIXI on the Toronto Stock Exchange (TSE), the CVIX measures anticipated market volatility. Readings below 10 indicate a calm, stable market; values between 10 and 20 signal moderate volatility and typical market fluctuations, while levels above 20 suggest heightened uncertainty and increased market turbulence.
Retail Sales
On Friday, Statistics Canada reported that retail sales in July rose by 0.9%, exceeding the expected 0.6% increase and rebounding from June’s 0.3% decline. Annually, retail sales were also up 0.9%, a significant improvement from June’s modest 0.2% growth.
Breaking down the data, the ‘Other motor vehicle dealers’ subsector saw the largest monthly increase, jumping 5.6%, while ‘Electronics and appliances retailers’ experienced the biggest decline, falling 2.0%. Year over year, ‘Health and personal care retailers’ posted the most substantial gain, up 5.8%, whereas ‘Shoe retailers’ suffered the steepest drop, down 6.9%.
Core retail sales, excluding gasoline stations, fuel vendors, and motor vehicle and parts dealers, rose for the second consecutive month, increasing by 0.6% in July. This gain not only surpassed expectations but also outpaced June’s 0.3% rise. On a year-over-year basis, core retail sales grew by 0.9%, slightly down from the 1.2% increase recorded in June.
July’s retail sales surge was likely driven by the anticipation of lower interest rates, which had been on consumers’ minds for months. The BoC’s rate cuts freed up cash previously tied up in debt repayments, providing consumers with more disposable income—and it seems they did not hesitate to spend it. 😊
An early estimate for August suggests a 0.5% sales growth, though this figure may be revised as more data comes in.
US Economic news
This past week’s key data points that the Fed considers when deciding whether to raise or lower the interest rate.
Federal Open Market Committee (FOMC)
The Fed’s FOMC lowered the key interest rate by 0.5%, bringing the benchmark rate to 5.0%. For more details on this decision, see the section below titled ‘The Fed Goes Big.’
American market volatility
The CBOE Volatility Index (VIX), often referred to as the market’s “fear gauge,” started the week at 17.17, up from the previous week’s close of 16.56. It surged to 19.20 on the day of the Fed’s rate announcement before dropping to 16.15 by the week’s end. The early week volatility stemmed from uncertainty over how much the Fed would lower rates. Once the rate cut was announced, the removal of uncertainty caused volatility to drop sharply.
The VIX measures projected market volatility over the next 30 days. Levels below 12 indicate a calm market, while readings between 12 and 20 reflect normal fluctuations. A range of 20 to 30 suggests rising uncertainty, and levels above 30 signify extreme stress, often linked to major market disruptions or crises.
Retail Sales
The Commerce Department’s Census Bureau reported that retail sales rose by 0.1% in August, handily beating expectations of a 0.2% decline. This follows an upwardly revised 1.1% gain in July. Year-over-year, retail sales increased by 2.1%.
Looking closer, ‘Miscellaneous store retailers’ saw the largest gains, with sales rising 1.7% month-over-month and 10.7% annually. Conversely, ‘Gasoline stations’ experienced the steepest declines, with sales falling 1.2% from July and 6.8% from the previous year.
Core retail sales, which exclude motor vehicles, parts, and gasoline stations, rose by 0.2% in August, down slightly from July’s 0.4% increase. Annually, core retail sales were up 3.3%.
While the stronger-than-expected retail sales suggest that consumers are still spending, this data alone is unlikely to significantly influence the Fed’s upcoming rate decision.
The Fed goes big
The Fed has kicked off its long-anticipated rate cuts with a hefty 0.5% reduction, lowering the US overnight rate to 5.0%. This marks the first cut in four years, following a stretch of aggressive hikes aimed at curbing inflation. The move signals the end of the Fed’s most intense inflation-fighting campaign since the early 1980s, when inflation soared to 14.8% and interest rates shot above 20%. In contrast, today’s lower inflation environment makes this shift feel far less dramatic. 😊
The reasoning behind such a bold cut comes as inflation hits its lowest point in three years, paired with signs of a cooling economy and job market. Many analysts argued the Fed may have waited too long to act and believed a larger cut was necessary to stay ahead of potential economic weakness. The policy shift was widely expected, as inflation had eased without causing major economic damage. Still, some worried the economy had slowed more than anticipated, making this jumbo rate cut feel overdue.
Fed Chair Jerome Powell addressed these concerns in his post-meeting press conference, reassuring markets that “The US economy is in good shape. It is growing at a solid pace. Inflation is coming down. The labour market is in a strong place. We want to keep it there.” Despite Powell’s optimism, the size of the cut surprised some observers. Although inflation has cooled to 2.9%, it remains above the Fed’s 2% target, leading some to argue for a more cautious approach. In fact, the decision was not unanimous –one official dissented, favoring a smaller 0.25% reduction, marking the first non-unanimous vote in two years.
Looking ahead, most Fed officials anticipate lowering rates by another 0.5% this year, aiming for a total 1% reduction. While future cuts will hinge on evolving economic data, this bold initial move marks a significant shift in the Fed’s strategy.
When the Fed makes a large rate cut like this – from 5.5% to 5.0 – it sends ripples throughout the economy, impacting consumers, investors, and even Canadians with American investments. For consumers, lower rates mean cheaper borrowing. Whether you are considering a mortgage, car loan, or credit card, this can translate to lower monthly payments. However, if you are a saver, your savings account may earn less interest, making saving feel less rewarding.
For investors, rate cuts often boost the stock market. Lower borrowing costs allow businesses to invest more in growth, potentially driving up profits and stock prices, especially in sectors like technology and real estate. Bondholders could see gains as well since existing bonds with higher rates become more valuable when new bonds offer lower returns. Additionally, lower mortgage rates tend to stimulate the real estate market, driving more demand for homes.
Canadian investors are not left out either. A lower US rate can weaken the American dollar, which may strengthen the Canadian dollar in comparison. This could affect the value of American investments when converted back to Canadian dollars. On the flip side, a stronger US economy – fueled by cheaper borrowing – could increase demand for Canadian exports, benefiting industries like manufacturing and resources. So while the rate cut is happening in the US, its effects are likely to be felt on both sides of the border.
Overall, this bold rate cut marks a turning point in the Fed’s strategy, signaling a shift from fighting inflation to supporting the economy’s growth. For consumers, it could mean cheaper borrowing costs, and for investors, new opportunities in both stocks and bonds. Even for Canadians, the ripple effects are real, with potential impacts on currency exchange rates and exports. As the Fed continues to monitor economic data, it is a reminder that these decisions do not just happen in a vacuum – they directly shape the financial landscape and could influence your next investment move or even your monthly budget.
Weekly Market Review
Monday: another mixed day in the markets with the Nasdaq Composite Index (Nasdaq) the only index to lose ground. Investors are waiting to find out if the Fed lowers rates by 0.25% or 0.5%. Oil prices edged higher after much of the oil produced in the US gulf coast region remained offline after Hurricane Francine reached landfall last week.
In Canada, the Toronto Stock Exchange (TSX) notched its third consecutive record high, driven by a boost in commodities. Investors were betting on a Fed rate cut, which typically benefits the commodities sector. In trading, Healthcare posted the biggest gain, while Communications Services suffered the biggest loss.
In the US, the Dow Jones Industrial Average (DJIA) closed at a record high, boosted by expectations of the upcoming rate cut. The S&P 500 Index (S&P) also moved higher but was limited by declines in the Technology sector. In trading, Financials improved the most while Consumer Cyclicals and Technology were the only sectors to decline.
Tuesday: all four indexes remained near the flatline, with only the Nasdaq managing to close above it, as investors awaited the Fed’s rate decision tomorrow. Investors are confident that the Fed will lower the US interest rate but are uncertain of the size of the reduction, although many are leaning towards a 0.5% cut. Oil prices rose on supply disruptions caused by last week’s hurricane and speculation that lower interest rates will spur demand, overcoming concerns of lower demand from China.
In Canada, the TSX’s win streak came to an end as inflation fell to the BoC’s 2% target, causing investors to worry about the economy slowing too much. In trading, the Energy sector advanced the most while the Consumer Staples sector had the biggest decline.
In the US, both the S&P and DJIA briefly hit record highs in morning trading before falling into negative territory in the afternoon. The latest retail sales report indicated consumers were still willing and able to spend money. In trading, Energy posted the biggest gain while Healthcare suffered the sharpest drop.
Wednesday: the indexes spent most of the morning in the red, before a brief spike into the green on news the Fed cut the US interest rate by 0.5%, before falling back into the red at the end of the day. It seems like many investors took some profits after the recent run up and today’s brief surge. The price of oil ended lower as investors took the jumbo rate cut to indicate potential economic weakness ahead.
In Canada, the TSX was weighed down by lower oil and commodity prices. In trading, Healthcare was the big winner, while Utilities fell the hardest.
In the USA, all three indexes bounced up and down throughout the day before ending lower. In trading, the Energy and Communications Services were the only sectors to advance, while Utilities posted the largest loss.
Thursday: after digesting yesterday’s rate cut by the Fed, investors got back into the markets and sent all four indexes soaring into positive territory. Oil prices also climbed following the rate cut, driven by the expectation that lower interest rates will boost available cash, leading to increased demand.
In Canada, buoyed by the news out of the US, the TSX also set a record high close, getting a boost from higher commodity and oil prices. In trading, the Technology sector posted the biggest gain while the Utilities sector recorded the biggest loss.
In the USA, the S&P and DJIA both closed at record highs. The Nasdaq did not set a record but did post an impressive 2.5%, led by the big technology stocks. In trading, the Technology sector recorded the largest increase, while the Utilities sector suffered the biggest decline.
Friday: all four indexes pulled back from yesterday’s highs, but the TSX and DJIA were able to scramble back into the green with a last-minute push. The jumbo-sized rate cut has investors worried that the US economy is slowing more than originally thought.
In Canada, the TSX barely made it into positive territory, but it was enough to set another record high close. Stronger than expected retail sales data and higher commodity prices, particularly for gold and uranium, were the main drivers for the TSX’s gain. In trading on Bay Street, the Communications Services sector advanced the most, while the Healthcare sector had the biggest decline.
In the US, the DJIA small gain was enough for it to set another record high close. Otherwise, it was fairly uneventful day in the American markets. In trading on Wall Street, Utilities was the big winner, while the Industrials sector saw the biggest drop.
Weekly Market and Portfolio Review
For the week, the TSX (SPTSX) gained 1.3%, the S&P 500 (SPX) rose 1.4%, the DJIA (INDU) climbed 1.6% and the Nasdaq (CCMP) increased 1.5%.
| Index | Weekly Streak |
| TSX: | 2 – week winning streak |
| S&P: | 2 – week winning streak |
| DJIA: | 2 – week winning streak |
| Nasdaq: | 2 – week winning streak |
The first week of September might have been the worst of the year, but the second week flipped the script, delivering the best performance of 2024. With that rollercoaster behind us, everyone was on edge, wondering how this past week would unfold as investors eagerly awaited the Fed’s decision on interest rates.
As you can see in the chart above, the week started cautiously, with markets treading water as everyone held their breath for the Fed’s announcement. But everything changed midweek when the Fed unveiled a blockbuster 0.5% rate cut—its first since launching the most aggressive rate hike campaign in history back in early 2022. This dramatic cut injected fresh energy into the markets, sending all four major indexes soaring.
This rate cut, possibly the most anticipated in history, was framed as a precautionary measure to protect the economy’s resilience rather than a reaction to cooling labour and inflation data. Fed Chair Powell reassured investors, stating that the Fed now has “greater confidence” in inflation steadily moving toward its 2% target. Most Fed officials expect the rate to drop by another 0.5% by the end of the year, with two FOMC meetings left on the calendar.
In Canada, the ripple effects of the Fed’s rate cut were felt immediately. With the US as Canada’s largest trading partner, the Fed’s rate cut had an immediate positive impact on Canadian markets, reflecting the close economic ties between the two countries (the US purchases 75% of Canadian exports). This move by the Fed might even pave the way for the BoC to accelerate its own rate cuts, possibly mirroring the Fed’s bold 0.5% reduction at their next meeting.
Now that the long-awaited rate cut has arrived, it seems investors are already hungry for more rate cuts. 😊
| Portfolio | Weekly Streak |
| Portfolio 1: | 2 – week winning streak |
| Portfolio 2: | 2 – week winning streak |
| Portfolio 3: | 2 – week winning streak |
Following the strong performance from the previous week was no easy feat, but all three portfolios managed to keep their winning streaks alive, each extending it to two consecutive weeks. Interestingly, 68% of the holdings in each portfolio posted gains, reflecting a solid week across the board.
Portfolio 1 lagged behind the other two despite some standout performers. CrowdStrike (NASD: CRWD) led the charge with a 15% gain, followed by Carnival Cruise Lines (NYSE: CCL) up 14%, Hammond Power Solutions (TSE: HPS.A) up 11%, and Lightspeed Commerce (TSE: LSPD) up 10%. However, Rivian Automotive (NASD: RIVN) weighed on the portfolio, sliding 12% and capping its overall growth.
Portfolio 2 outperformed Portfolio 1, though only slightly. The standout stocks included Hammond Power Solutions and Airbnb (NASD: ABNB), both climbing 11%. Additionally, iA Financial (TSE: IAG) reached an all-time high, further boosting the portfolio’s performance.
Portfolio 3 emerged as the top performer, increasing in value more than both the other portfolios and the indexes. This strong showing came despite not having any individual stock post a major weekly gain, underscoring the portfolio’s balanced and resilient structure.
Sure, a repeat of last week’s 3+% across-the-board growth would have been fantastic, but any week where all three portfolios increase in value is a win in my book. It’s a solid step forward, keeping the momentum alive and proving that steady wealth generation can set the stage for long-term success.
Companies on the Radar
This week, three companies appeared on my radar, though none of them are ‘new.’ These are not unfamiliar names or businesses I know little about—they are all large American companies:
- Coca-Cola (NYSE: KO): A global beverage giant, best known for its flagship soft drink, Coca-Cola. They offer a wide range of non-alcoholic drinks, including sodas, juices, teas, and bottled water, catering to consumers worldwide.
- IDEXX Laboratories, Inc. (NASD: IDXX): Specializing in animal health care, IDEXX develops diagnostic products and services for veterinary practices. Their offerings include tools for disease detection, medical imaging, and laboratory testing to support the health of pets and livestock.
- Zoetis Inc. (NYSE: ZTS): A leading animal health company that discovers, develops, manufactures, and commercializes vaccines, medicines, diagnostics, and other technologies for both companion animals and livestock.
All three have shown steady growth in revenue and earnings per share over the last few years. While none may be ‘sexy’ stocks, they offer solid potential for steady growth and would bring diversification and balance to any of the three technology heavy portfolios.
They join the three companies already on my radar list, listed below.
- Payfare Inc. (TSE: PAY), a small-cap Canadian company that provides gig workers with instant access to their earnings along with a comprehensive suite of digital banking services.
- Vertiv Holdings (NYSE: VRT), a large American company that designs and builds infrastructure and continuity solutions to businesses around the world.
- On Holding AG (NYSE: ONON), a medium cap Swiss company, founder-run, sports products company.
The Radar Check was last updated September 20, 2024.
Portfolio Update
Portfolio 1
Portfolio 1 for the week ended September 20, 2024: UP 
- Amazon.com (NASD: AMZN) has mandated office workers return to work at corporate offices five days a week, beginning in 2025.
In other Amazon news, the company’s Amazon Web Services (AWS) division has contracted Intel (NASD: INTC) to build custom artificial intelligence (AI) chips for use in their datacentres. - Sea Limited (NYSE: SE) has teamed up with Alphabet’s (NASD: GOOGL) YouTube to launch a new online shopping service, starting in Indonesia and gradually expanding throughout Southeast Asia. This partnership allows consumers to purchase items they see on YouTube directly through links to Sea Limited’s e-commerce platform, Shopee.
- BCE (TSX: BCE) announced they sold their 37.5% stake in Maple Leaf Entertainment and Sports (MLSE) to Rogers Communications (TSE: RCI.B) for C$4.7 billion. The purchase will make Rogers the majority owner of MLSE, the parent company of the Toronto Maple Leafs. For BCE, the infusion of cash will help them as they restructure following declining revenues from their legacy phone and news business units.
- The European Union’s (EU) anti trust regulator, the European Commission (EC), has begun proceedings to ensure Apple (NASD: AAPL) complies with their ruling that the company opens up its ecosystem to competitors. The EC will spell out what Apple must do to comply with the EC’s regulations.
Activity
No significant activity to report this week.
Dividends
Dividends Received this week for the following companies:
Companies followed by DRIP (Dividend Re-Investment Plan) indicate additional shares were purchased with the dividend. Any cash leftover was added to the cash balance.
Canadian $
Yellow Pages Ltd (TSE: Y)
Decisive Dividend (TSE: DE) DRIP
US $
Alphabet Inc (NASD: GOOGL)
BSR Real Estate Investment Trust (TSE: HOM.U)
General Motors (NYSE: GM)
Quarterly Reports
No quarterly reports this past week.
Portfolio 2
Portfolio 2 for the week ended September 20, 2024: UP
- The Walt Disney Company (NYSE: DIS) announced they have reached an agreement in principle with DirecTV to provide access to Disney owned networks, including ABC and ESPN, to DirecTV subscribers.
Activity
No significant activity to report this week.
Dividends
Dividends Received this week for the following companies:
Canadian $
SmartCentres Real Estate Investment Trust (TSE: SRU.UN)
iA Financial Corporation Inc (TSE: IAG)
Whitecap Resources Inc (TSE: WCP)
Supremex Inc. (TSE: SXP)
US $
No US$ dividends this past week.
Quarterly Reports
No quarterly reports this past week.
Portfolio 3
Portfolio 3 for the week ended September 20, 2024: UP
- Microsoft (NASD: MSFT) announced two shareholder friendly actions. The Board of Directors approved a share buy back program of up US$60 billion which will reduce the number of outstanding shares and mean a bigger piece of the pie for shareholders. The second action was a 10% increase in the quarterly dividend, raising it to US$0.83 per share.
In other Microsoft news, the company signed a deal with Constellation Energy (NASD: CEG) to supply electricity to their datacentres in the region. To do this Constellation plans to restart one of the nuclear reactors at the Three Mile Island nuclear facility. - TD Bank (TSE: TD) announced current Chief Executive Officer Bharat Masrani will retire next year. Taking over will be Ray Chun, head of their Canadian banking division.
Activity
No significant activity to report this week.
Dividends
Dividends Received this week for the following companies:
Companies followed by DRIP (Dividend Re-Investment Plan) indicate additional shares were purchased with the dividend. Any cash leftover was added to the cash balance.
Canadian $
SmartCentres Real Estate Investment Trust (TSE: SRU.UN) DRIP
US $
No US$ dividends this past week.
Quarterly Reports
No quarterly reports this past week.