Kyle Prevost, editor of Million Dollar Journey and founder of the Canadian Financial Summit, highlights the week’s financial headlines and explains what they mean for Canadian investors.
Have we reached peak interest rates?
On Wednesday the Bank of Canada raised its policy rate by 25 basis points to 4.5%. The increase was widely expected and marks the eighth consecutive meeting in which the central bank has hiked its key lending rate. Given the cooler-than-anticipated inflation readings reported last week, this moderate move fits the current economic picture.
What made the announcement notable was Governor Tiff Macklem’s language: “With today’s modest increase, we expect to pause rate hikes while we assess the impacts of the substantial monetary policy tightening already undertaken.” That statement signals a potential stop to the tightening cycle while the BoC watches how yesterday’s moves filter through the economy.
Canada is among the first G10 economies to openly suggest a pause. In fact, a majority of economists polled expected this could be the final hike for the year. That said, Macklem was careful to add a condition: if inflation remains stubborn, the BoC will not hesitate to raise rates further.
For Canadians on variable-rate mortgages, even a pause is bittersweet: the higher policy rate means another roughly $21 per month for every $100,000 of mortgage debt will be added to mortgage payments going forward. Central bankers continue trying to reach a Goldilocks level—tight enough to cool demand and curb inflation, but gentle enough to avoid widespread job losses.
CNR profits reveal the railway remains a cash engine
Canadian National Railway (CNR/TSX) reported fourth-quarter results showing EPS of $2.10, slightly above expectations of $2.09, and revenues of $4.54 billion versus forecasts near $4.51 billion. The stock rose modestly on the day.
Far from showing a collapse in profits, CNR delivered a 23% year-over-year jump in earnings per share, and the board approved an 8% dividend increase—its 27th consecutive year of higher payouts. The company’s dominant market position gives it pricing power: although operating expenses climbed about 20%—largely from higher fuel costs—management implemented a fuel surcharge that helped lift revenues by roughly 21% for the quarter.
A weaker Canadian dollar also helped boost reported revenues. If oil prices stabilize and Canadian monetary policy proves less hawkish than the U.S. Federal Reserve, that currency advantage could persist into the year.
CNR now trades at a price-to-earnings ratio near 23.5 with a dividend yield around 1.8%. The core question for investors is not whether CNR will remain profitable—its economics make that likely—but whether current prices fairly compensate buyers for expected future cash flows. At the moment, many investors seem willing to pay a premium for the relative stability railway stocks offer.
Will earnings stop big tech’s slide?
Since the era of record-low rates during the pandemic ended, technology stocks have taken the brunt of market repricing. Early 2023 earnings, however, have eased some of the worst-case scenarios.
Notable results reported in U.S. dollars include:
IBM (IBM/NYSE): EPS $3.60 (in line with estimates) and revenue $16.69 billion (slightly above expectations).
Tesla (TSLA/NASDAQ): EPS $1.19 (above the $1.13 estimate) and revenue $24.32 billion (beating the $24.16 billion forecast).
Microsoft (MSFT/NASDAQ): EPS $2.32 (versus $2.29 expected) and revenue $52.75 billion (marginally below the $52.94 billion estimate).
Tesla drew particular attention with a material beat and an upbeat production target: CEO Elon Musk said the company could produce up to two million vehicles in 2023, barring a major, unforeseen disruption. Despite strong order signals, Tesla’s gross margin contracted to 25.9%, the lowest in about 15 months—evidence that price cuts and promotional activity are affecting profitability even as volumes grow.
Microsoft beat on earnings but trimmed growth expectations for Azure cloud revenue, while IBM’s results were broadly in line with forecasts as the company moves to cut costs, including a workforce reduction of roughly 1.5%—about 3,900 jobs.
These reports show that a return to profitability for tech names is possible, but investors still must weigh growth prospects against current valuations and the changing interest-rate environment.
Canadian productivity challenges and the new Bill Morneau
Former finance minister Bill Morneau—now a CIBC board member and author—has shifted his public role from politician to commentator and policy advocate. In his new book, Where To From Here: A Path To Canadian Prosperity, he calls for renewed focus on issues that have received limited attention from recent federal governments: reversing the gradual rise of the OAS eligibility age, boosting international competitiveness, and creating a clearer economic-growth agenda.
“From the end of the Second World War to the mid-1970s, few countries exceeded Canada’s rate of economic growth. As one measure, the weekly earnings of Canadians grew at an average of 2.54 per cent annually over that period after accounting for inflation, more than doubling our earned income. Pretty impressive, but from 1982 to 2019, our country’s real GDP rose an average of just 1.3 per cent annually, which is not impressive at all.”
Morneau’s core argument is straightforward: Canada’s long-running productivity shortfall limits our ability to fund world-class health care, education and social services. Addressing productivity requires politically difficult choices—raising competition by opening markets, removing inefficient provincial trade barriers and concentrating on policies that increase output per worker.
Politically popular but productivity-light initiatives—large taxpayer-funded “investments” that do not materially raise national output—are easier to announce than to defend. When taxpayer dollars are redistributed to create jobs at a high cost per position, the net gain for national productivity can be small. A frequently cited example in discussions about these programs is the rough cost-per-job metric that critics use to argue the economic trade-offs are not favourable.
Measured by GDP per member of the labour force, Canada lags several peers: data cited by policy analysts show Canada’s GDP per worker is materially lower than that of the United States and a number of European economies, indicating clear room for improvement. Canada benefits from strong immigration, ample resources and robust institutions; translating those advantages into higher per-worker output is the country’s central economic challenge.
Bill Morneau says he wants to restart a serious public conversation about these issues. Whether governments and voters are ready to accept the trade-offs required to lift long-term productivity remains to be seen, but the topic deserves more sustained attention than it currently receives.
Kyle Prevost is a financial educator, author and speaker. When he’s not on a basketball court or in a boxing ring trying to recapture his youth, you can find him helping Canadians with their finances at MillionDollarJourney.com and through the Canadian Financial Summit.