We got GDP data to close out last week, with December numbers showing a 0.2% M/M expansion (2.2% Y/Y) following a contraction in November. An increase in household spending, exports, business investment, and construction activity all contributed positively to results.

We’ll need more of that to change the longer term trend though, with GDP per capita falling 1.4% Y/Y in 2024, after a 1.3% contraction in 2023.

American data has deteriorated recently as well, with the Atlanta Fed’s GDP forecast dipping into negative territory, from expectations of >3% growth just a month prior.

With a number of headwinds to growth in Canada and the U.S. (excluding tariffs), increasing duration exposure is an interesting option for riding out near-term market uncertainty in our view.

Canada’s challenges are broad-based

Ignoring the impact of tariffs that could begin biting into U.S. exports this week (~25% of GDP), Canada still faces a number of near-term roadblocks to sustainable growth.

The job market remains troublesome, with sticky unemployment and a declining number of available jobs.

Companies aren’t investing in inventory, as they try to work through existing balances that were built in anticipation of demand that didn’t come.

Adjustments to the country’s immigration policy should flatline growth in non-permanent residents, which have become a significant contributor to GDP growth in recent periods (though this move should boost GDP per capita).

The savings rate is trending higher as well, potentially indicating a more cautious consumer. While increased savings is long-term supportive of GDP growth, it likely puts a ceiling on near-term consumer spending as long as it remains elevated.

U.S. GDP slowdown could be self-inflicted

The U.S. has a different set of circumstances threatening its growth, with the impact of its Department of Government Efficiency (DOGE) posing the biggest near-term risk.

At roughly a third of GDP according to the IMF, any major cuts to federal spending would be meaningful to near-term GDP prints ($100B in savings claimed so far).

Job loss is another DOGE-driven issue the American economy will have to grapple with. Estimates have risen to ~100K government employees either taking a package or being fired thus far and there should be a lot of runway left, with a significant number of contract and grant workers, and ~10% of civil service workers not past probation.

These initiatives may already be having an impact, as the Truflation U.S. inflation index (directionally accurate, real-time indicator) has dropped nearly 100 bps in a matter of days.

Lower rates & flight to safety: buy duration?

Markets appear to be expecting less monetary easing in the future, as both the Canadian and U.S. yield curve inch higher following a prolonged period of inversion.

The Big-6 banks are calling for near-term easing in Canada and a prolonged easing cycle in the U.S., but future rate policy is far from certain.

With core inflation still above target, central banks no longer have an obvious choice to cut, which could open the door for a negative growth shock. In such an event, increasing duration exposure (long-term bonds, utility/telecom equities, etc.) should benefit from both lower rate expectations and a “flight to safety”.

Betting against duration has become popular as of late, with short interest on TLT (long-term U.S. bonds) more than doubling over the past year. Should the above scenario unfold, the unwind of a potentially crowded trade could make it play out faster.