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Scotiabank strategist Hugo Ste-Marie interprets this week’s inflation data in a way income investors and potential homebuyers probably won’t like. The hotter-than-expected consumer price index (CPI) report is, to Mr. Ste-Marie, a sign that the Bank of Canada will have to wait to cut interest rates.

The headline inflation number came in as expected at 3.4 per cent, up from 3.1 per cent in November, thanks to stubbornly higher gasoline prices. The real problem was core inflation – with the volatile food and energy components removed - which was expected to fall from 3.5 per cent to 3.4 per cent but instead climbed higher to 3.7 per cent.

The strategist notes that core inflation has remained sticky above 3.5 per cent since mid-2022 and wage growth is above 5 per cent. Arguably the biggest issue, both for the Bank of Canada and the socioeconomic health of the country, is soaring rent costs. Asking rents for newly rented apartments is climbing at an 8.6 per cent year-over-year pace.

Mr. Ste-Marie’s colleague at Scotiabank, head of capital markets economics Derek Holt, wrote that investors should not be betting on rate cuts in March or April. As far as the consensus call on the Street that cuts will be arriving by June, he adds “to this point I just don’t see the required evidence.”

Mr. Ste-Marie expects that the late 2023 drop in bond yields - the 10-year government of Canada bond fell from 4.24 per cent in early October to the 3.40 range now - will be at least partially reversed in the coming months thanks to the persistence of inflation pressure. Indeed, the ten-year yield bottomed on Dec. 20 and has already retraced roughly 40 basis points of the decline.

This implies that the rally in credit sensitive sectors – the S&P/TSX REITs total return index has climbed 19.4 per cent since October and the S&P/TSX Utilities index rose 10.3 per cent – is likely to retrace and erase some of the gains.

The timing of interest rate cuts – or if they happen at all – will likely prove the most important determinant of portfolio returns in 2024. Investors were reminded of the negative effects of higher bond yields on returns in early 2022 and to the extent they climb this year, investors should expect volatility for both equity and fixed income.

-- Scott Barlow, Globe and Mail market strategist

Also see: How economists and market bets for BoC rate cuts are reacting to Canada’s inflation data

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Stocks to ponder

Capital Power Corp. (CPX-T) This is a cheap stock with a big dividend. Now, investors with particularly long-term horizons can point to the company’s nuclear ambitions as a third compelling reason to own the shares, says David Berman.

The Rundown

The first four months of the year are a ‘danger zone’ for TFSA contributors

One financial planner calls the first four months of the year a “danger zone” for making deposits to tax-free savings accounts. During this period, Canada Revenue Agency info that shows TFSA contribution room for the current calendar year can be based on incomplete information. Contributions you made to your account in the previous calendar year will likely not be reflected until March or April. And as Rob Carrick points out, that means you could be hit with some sizeable penalties.

Is 2024 the year to focus on small-cap stocks?

Goldman Sachs equity strategist David Kostin is recommending U.S. small-cap stocks as a pocket of value in a market that is very expensive by most measures. But should anyone really set foot in the small-cap value quagmire given years of underperformance? Robert Tattersall, who has had a 50-year career as a value-oriented portfolio manager in Canada, offers his advice.

Coming flood of U.S. Treasury issuance unsettles some investors after blazing rally

Cracks are forming in the market’s bullish consensus for bonds, as resurfacing fiscal concerns duel with expectations that cooling inflation will push the Federal Reserve to cut interest rates in coming months. While expectations for Fed easing may be driving bond prices now, some believe U.S. Treasury issuance, expected to nearly double to $2 trillion in 2024, could be a counterweight.

Markets won’t give up on March Fed cut

For all the rhetorical pushback from officials, markets are doggedly clinging to March as the month of the Federal Reserve’s first interest rate cut in four years - following two years of historically brutal credit tightening. Even though futures pricing for a move has ebbed and flowed over the weeks since Fed policymakers electrified markets last month by penciling 75 basis points of cuts for 2024, they have consistently assigned a 50 per cent or greater chance of a move as soon as March. But listening to the full sweep of Fed speakers, that seems brave, says Reuters columnist Mike Dolan.

Weak data, limited stimulus keep investors away from China

China’s patchy economic growth and a renewed slump in home sales have redoubled investors’ resolve to steer clear of the country’s markets, sending shares tumbling as foreigners quit in the absence of fresh policy support.

Why the oil market refuses to catastrophize

Psychologists sometimes warn anxious and depressed clients about the danger of catastrophizing - fixating on the worst possible outcome, exaggerating serious but unlikely risks rather than evaluating all outcomes rationally. The same advice is useful for analysts and investors in commodity markets, where sensible forecasts and decisions should be based on an accurate estimate of the full distribution of outcomes not just one segment of it. In the oil market, focus on the whole distribution risks, not just the extreme tails, helps explain why prices have fallen despite the spreading conflict in the Middle East, says John Kemp of Reuters.

Others (for subscribers)

Number Cruncher: How Apple, Amazon and the other Magnificent Seven look under scrutiny

Number Cruncher: 16 U.S. dividend stocks offering more than just attractive yields

Scott Barlow’s Top Links: CIBC analyst reveals his top stock picks in Canadian energy for 2024

Technical analysis: Watch these chart levels before buying or selling Canadian banks

Wednesday’s analyst upgrades and downgrades

Tuesday’s analyst upgrades and downgrades

Wednesday’s Insider Report: CEO unloads shares of this financial stock trading near a record high

Activist investors enjoy strong rebound in 2023, gird for more proxy fights

Trump-linked stocks jump after former president’s emphatic win in Iowa Republican contest

UBS lifts 2024 year-end S&P 500 target to 5,150, tops big banks

Globe Advisor

Will investors’ love affair with AI tech stocks persist this year?

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Ask Globe Investor

Question: What criteria does John Heinzl use when looking for new stocks for his model Yield Hog Dividend Growth Portfolio? Does he stick with a short list of the old standards such as banks and utilities?

Answer: As a buy-and-hold investor, I’ve made only a handful of changes in the model portfolio since its inception in 2017. Three of the original 22 securities are gone – Pizza Pizza Royalty Corp., A&W Revenue Royalties Income Fund and Algonquin Power and Utilities Corp. – and two have been added – Restaurant Brands International Inc. and SmartCentres Real Estate Investment Trust. Another original member, Canadian REIT, was replaced by Choice Properties REIT when they merged in 2018.

Apart from those trades, I’ve focused on reinvesting my dividend income in the portfolio’s existing names, which include banks, utilities, power producers, pipelines, telecoms and REITs. Unlike a dividend reinvestment plan (DRIP) that buys additional shares automatically, I let my cash accumulate and reinvest it when a particular stock’s valuation looks attractive. (Nothing against DRIPs; I just like having more control over the reinvestment process.) Consistent with the portfolio’s primary mission of generating a high and growing income, I look for stocks with above-average dividend yields, a track record of increasing those dividends and a high probability of continuing to do so. I also focus on stocks with wide “moats” – competitive advantages.

--John Heinzl (E-mail questions to jheinzl@globeandmail.com)

What’s up in the days ahead

The Contra Guys look at a Nasdaq-listed stock they just bought: China Automotive Systems.

Click here to see the Globe Investor earnings and economic news calendar.

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Compiled by Globe Investor Staff

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