🏦 Canada and EU Cut Interest Rates for the First Time in 4 Years

What does this mean for you as an investor?

🏦 Canada AND Europe Cut Interest Rates - What Does This Mean For You?

🥳 It’s the end of an era! Rate cuts have officially come.

After 4 YEARS of rate increases and pauses, Canada officially became the first G7 country to cut interest rates, with a 0.25% cut from 5% to 4.75% this Wednesday. The EU followed suit on Thursday with its own 0.25% rate cut.

🧐 So it’s time to put my economics degree to good use and break down what this means for YOU as an investor. We’re going to cover:

  • 💵 Why did rates get cut & are more to come?

  • 🇺🇸 What this means for the USA and the global economy

  • 🏡 Impact on real estate & REITs

Wait, Why Do We Care So Much About Interest Rates Again?

In case you need a refresher, interest rates have a HUGE impact on the stock market. Here are just a few ways:

  • When interest rates are high, many investors may opt for GICs and HISAs since the ‘risk premium’ for stocks isn’t high enough. Lowering interest increases demand for equities, driving stocks higher.

  • Lower interest means people and companies can borrow more, accelerating spending and making debt cheaper.

Ok! With that in mind, let’s dive in…

💸 Why did Rates Get Cut & Are More to Come?

The primary goal of central banks is to manage inflation and ensure a stable economy. Its biggest tool to do so is by setting the interest rate or the ‘overnight rate.’

🎯 The target range of inflation for most central banks is ~2%, but with all the free money handed out during COVID, inflation in Canada soared all the way above 8% in June 2022!

🥊 To combat this, the Bank of Canada increased the interest rates 8 times, all the way from 1% to 5%.

💡 Increasing interest rates lowers inflation because higher interest rates drive people to save more and borrow less, meaning they buy less. Less demand = lower prices.

With inflation back on track, the Bank of Canada clearly feels it can relax a little, leading to the interest rate cut! 😮‍💨 

This is likely the first of many, with CIBC estimating 3 more rate cuts this year, with the next anticipated for July.

“We’ve come a long way in the fight against inflation… monetary policy no longer needs to be as restrictive”

Tiff Macklem, Governor of the Bank of Canada

🇺🇸 What This Means for the US and Global Economy

With Canada and Europe cutting rates this week, all eyes are on the US Fed for its next move.

In the US there is a 55% probability of a rate cut in September by the Fed

Reuters Poll

Even so, ‘persistent' inflation’ has dashed hopes for greater rate cuts in the US, with inflation still at 3.4% (compared to 2.7% in Canada). Experts recently slashed their estimates of interest rate cuts from 1.5% in 2024 cuts to only 0.44%.

The US sets the tone for the global economy, with Macklem (Canada) saying, “There are limits to how far we can diverge from the United States,” so Jerome Powell’s ability to rein in inflation will be critical in the months ahead.

🏡 REITs are up… and then back down

Many expected REITs to have a nice jump from the interest rate drop, as lower interests reduce the cost of borrowing, making real estate more attractive, and they sort of did… for a day.

📈 On Thursday, the 3 most popular REITs on Blossom $REI-UN (2,987 holders), $SRU-UN (2,250 holders), and $O (962 holders) were up +3% each.

📉 But the party ended on Friday with each falling -3.23%, -1.75% and -1.73% respectively, mostly undoing the week’s gains.

This surprised many on Blossom, given it’s the first-rate cut in 4 years, with @sonofrely commenting,"I fully expected REITs to go wild today”.

But it’s important to keep in mind, as @mr.financial pointed out in the same post, “Markets are forward-looking, and analysts were 80% on the rate cut coming”, so much of the jump was likely already priced in.

In any case, this was certainly not the bump that many REIT investors hoped for, with most REITs down 10-20% in the past year, so it looks like we’ll have to wait and see whether further cuts help the beaten-down asset class.

💡 There are many insightful posts in the Blossom feed about the recent interest rate cuts. Just search ‘interest’ on the Home feed to join the discussion!

💵 Capitalize on Yields Before Further Rate Cuts

The Bank of Canada’s recent decision to cut interest rates by 0.25% is expected to be the first of several on the horizon.

With Canadian investors currently holding billions of dollars in cash alternative solutions (like HISA and money market funds)1, it begs the question of how best to put this cash back to work, while still maintaining an attractive yield in the face of rate cuts.

🏦 GuardBondsTM may be the answer!

GuardBondsTM is a suite of funds with defined maturity dates allowing you to capitalize on currently high yields and aren’t subject to declining yields as interest rates fall2, like HISAs and money market funds would be.

Investing in discount bonds, the GuardBondsTM suite provides investors the ability to earn attractive monthly income and capital gains3 which makes the GuardBondsTM suite incredibly attractive for improved tax-efficiency4 within non-registered accounts.

*See GuardBonds Footnotes and Disclaimer at the end of the newsletter. Guardian Capital LP is the Manager of the GuardBondsTM funds.

🤯 We Planned an Entire Mini-Investing Conference in 4 days…

🚨 Big news for our Toronto readers!!

On top of doubling our venue for the Toronto event to host an EPIC meet-up of over 600+ DIY investors, we’ve planned an ENTIRE MINI-CONFERENCE to complement the event!

If you’re not from Toronto - don’t worry! We’re still probably coming to a city near you and will have an awesome panel discussion and Q&A at each event (tickets here).

🍁 But if you are from the 6, here are some of the awesome optional sessions you can attend in between the food, drinks, and mingling:

🥳 Can’t wait to see you there!!

🎙️ Top Discussions this Week

👇 Click to see the full post!

🎥 Enjoying the Weekly Buzz 🐝? Check out my video recaps on Instagram!

Footnotes from Guardian Capital Group LP:

[1] Source: Morningstar, based on all Canadian Funds as of May 31, 2024.

[2] Assumes that investors hold their investment in the GuardBonds fund until its maturity date. The value of the GuardBonds fund will fluctuate from day to day, and may be impacted by subscriptions and redemptions, and an investor will be subject to market risks if they sell their units prior to the defined maturity date.

[3] When a discount bond matures at par value the price appreciation is treated as a capital gain, which is taxed more favorably than interest income.  

[4] Tax efficiency is dependent upon the proportion of discount bonds held by a GuardBonds fund, which cannot be predicted and is expected to fluctuate over time, depending on prevailing market conditions as well as the impact and timing of subscriptions and redemptions.

Disclaimer from Guardian Capital Group LP:

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