Major central banks held interest rates steady in the fourth quarter. This raised expectations for interest rate reductions in 2024. Read on for our view of the economy and financial markets.


  • The U.S. Federal Reserve Board (Fed) pointed to reducing interest rates in 2024
    • The Fed held the target range of its federal funds rate steady at 5.25%-5.50%. 
    • Investors increased their expectations of the Fed reducing interest rates in 2024.
    • The Fed expects the U.S. inflation rate to moderate further in 2024, but likely remain above its 2% target.
  • North American labour markets are cooling but remain historically strong
    • The Canadian and U.S. labour markets helped fuel consumer strength after the pandemic. The economies on both sides of the border benefited as a result. The increased spending by consumers added to inflation.
    • In Canada, the number of people without jobs increased slightly over the past few months. Unemployment is still low compared to previous years. The situation is similar in the U.S. Wages are continuing to go up in both economies and contributing to high inflation rates.
    • Despite slowing, labour markets remain strong in a historical context. This is giving the central banks a reason to delay interest rate decreases.
  • Uneven global economic growth
    • The global economy continued to expand. However, the pace of economic growth varied among major economies.
    • Canada’s economy contracted in the third quarter (as reported in the fourth) as a result of falling exports and softer consumer spending. The economies of Japan, the U.K. and Europe also fell.
    • Conversely, the economies of the U.S. and China expanded in the third quarter.

Pointing to lower interest rates

The Bank of Canada (BoC), Fed, European Central Bank (ECB) and Bank of England (BoE) held interest rates steady. The central banks believe their interest rates are high enough to help slow economic activity and bring down inflation.

At its last meeting of the quarter, the Fed took on a positive tone on inflation’s progress. In turn, market participants were likelier to assume interest rate reductions in 2024. This assumption also sent equity markets higher.

The BoC believes it may be too soon to consider reducing interest rates. Expectations will rise in 2024 as they downgrade their outlook for Canada’s economy and inflation.

These central banks are attempting to slow economic activity and inflation without sending their respective economies into a deep recession.

How are significant economies doing?

  • The U.S. economy grew at an annualized pace of 4.9%
  • China’s economy expanded by 4.9% year-over-year
  • Europe’s economy shrank by 0.1%
  • Gross domestic product in the U.K. also shrank by 0.1%
  • Japan’s economy contracted by 2.9%, annualized

Global financial markets finish higher

Global equity markets rose.

  • Global equities advanced, largely in response to expectations that inflation will continue to moderate and major central banks will begin reducing interest rates.
  • Equities in Canada, the U.S., Europe, Japan, the U.K., EAFE and emerging markets finished higher, while those in China declined.
  • Major indices in the U.S. advanced (S&P 500 Index, NASDAQ Composite Index and Dow Jones Industrial Average).
  • Global technology stocks were key drivers of financial market performance over the quarter. Expectations of lower interest rates helped valuation and growth prospects.

Global yields fell.

  • Global bond prices rose as yields dropped. 
  • Expectations rose for central banks to reduce interest rates in 2024.
  • Canadian bond yields declined.
  • Oil prices fell. The Organization of the Petroleum Exporting Countries (OPEC) maintained production cuts over the year. Meanwhile, demand for oil is expected to moderate amid weakening economic conditions globally.
  • Gold prices advanced amid economic and geopolitical uncertainty.

Global inflation is easing

  • Inflationary pressures worldwide are easing, a sign that central banks’ aggressive rate increases may be working.
  • The inflation rate in Canada and the U.S. was 3.1% in November.
  • Europe’s inflation rate was 2.4% in November. Inflation in the U.K. was 3.9%. This helped reinforce the recent rate holds by the ECB and BoE.
  • Inflation in Japan was 2.8% in November.
  • Conversely, China is experiencing deflation. Consumer prices fell by 0.5% year-over-year.

How is the Canadian economy doing?

Canada’s economic activity slowed as consumers faced tight financial conditions

  • Canada’s economy shrank at an annualized pace of 1.1% over the third quarter of 2023. This follows a revised 1.4% expansion in the second quarter. The revision kept the Canadian economy out of a technical recession.
  • Elevated inflation and high borrowing costs weighed on Canadian consumers over the third quarter.
  • Canada’s manufacturing sector struggled under the weight of lower output and new orders. 
  • Canada’s inflation rate was 3.1% in November, well below the 3.8% reading in September. This was largely the result of falling energy prices.
  • Conversely, inflation remained above the BoC’s target due in part to high mortgage costs.
  • Canada’s labour market was relatively strong as the economy added jobs. Wage growth was also relatively elevated. Canada’s unemployment rate is historically low, reaching 5.8% in November 2023. 
  • Canadian equities delivered a positive return. The top performing sectors were Information Technology and Financials. The Energy sector posted a negative return and was the weakest performer.
  • Canadian bond prices surged higher while yields dropped. 
  • The yield on the benchmark 10-year Government of Canada bond fell.

What can investors expect in the future?



Canadian economy

A weakening Canadian consumer may continue to weigh on Canada’s economy. Canadians are facing high interest rates and high inflation. The threat of a recession lingers despite avoiding a technical recession.

Canadian interest rates

While the BoC noted it may be too soon to discuss reducing interest rates, it may be inevitable in 2024. Inflation is showing clear signs of easing, while economic conditions are weakening.

Canadian consumer spending

While the overall spending pattern is trending downward, the holiday season could boost spending. High inflation and borrowing costs affect many households.

U.S. interest rates

The Fed’s positive tone on inflation’s slowdown encouraged markets to increase expectations of interest rate cuts in 2024.

Hoping to spur China’s economy

The government announced spending and support measures to help its struggling property market. This could help stabilize China’s economy. China has seen positive developments at the end of 2023, such as improving retail sales and faster industrial production growth.

Commodity prices

Ongoing geopolitical tensions could challenge commodity markets in 2024. Escalating tensions could hinder oil supply and push up prices. Russia-Ukraine tensions are continuing to impact the production of two critical commodities – grain and oil.

This commentary contains information in summary form for your convenience. Although this commentary has been prepared from sources believed to be reliable, Sun Life can’t guarantee its accuracy or completeness. Plus, this commentary is intended to provide general information and should not be seen as providing specific individual financial, investment, tax, or legal advice. The views expressed are those of the author and not necessarily the opinions of Sun Life. Please note, any future or forward-looking statements contained in this commentary are speculative in nature and cannot be relied upon. There is no guarantee that these events will occur or in the manner speculated.