Navigating the Market: Insights on Recent Fed and BOC Actions

Introduction

This week, the Bank of Canada (BoC) and the Federal Reserve (Fed) were finally compelled to act. They reduced interest rates because even their erroneous and delayed data could no longer justify the cautious approach they had clung to for the past six months and the last year, respectively.

At the same time, discussions surrounding AI growth—the only pillar that has prevented a technical recession and has single-handedly propelled the market into a bubble—began to show serious signs of potential fraud, threatening the entire market structure.

“Too Little, Too Late?”: The Fed and BoC Finally Pivot

The catalyst for this week's drama was last week's shocking revelation that about 50% of all reported job growth in the U.S. over the past year never actually existed. This massive revision forced the Fed's hand, creating the necessary cover for the Bank of Canada to follow suit with its own rate cut without risking a significant drop in the Canadian dollar. The BoC's decision was also motivated by its own disastrous national data, with the August employment report in Canada revealing widespread job losses and a continuously rising unemployment rate.

The Federal Reserve (Fed)

The Fed's 25 basis point (0.25%) cut was presented not as a reaction to the data, but as a measure of "risk management." This is a significant pivot. For months, the Fed claimed to be "data-dependent," yet it kept rates stable based on employment data that has now proven to be false.

The contradictions are staggering:

• A Convenient Change of Narrative: Fed Chair Jerome Powell stated that the massive job revisions were "almost exactly what they had anticipated," a claim that directly contradicts months of their narrative about a "strong and resilient labor market." He also changed the game for the labor market, declaring that the new breakeven threshold for job growth is between 0 and 50,000 jobs per month due to lower immigration—a massive drop from the previously used range of 150,000 to 250,000 jobs that justified maintaining high rates.

• Ignoring Reality: Powell insisted that "households are generally in good shape," despite a surge in defaults on consumer loans and credit cards, which are nearing 2009 levels.

• A Fractured Committee: Despite a nearly unanimous vote, their own "dot plot" (a chart showing where each Fed member expects interest rates to be in the future) revealed complete political polarization. Nine members expect two or more cuts by the end of the year, while seven foresee none, exposing a deep internal division.

  
  

The reality is that a symbolic 0.25% cut will not reverse a slowdown that the Fed allowed to worsen based on discredited data.

The Bank of Canada (BoC)

The BoC followed a similar strategy, cutting its rate by 25 basis points (0.25%) citing GDP contraction in the second quarter and a weakening labor market (unemployment rate at 7.1%).

However, its policy seems contradictory, and its narrative is flawed.

• The Unspoken Reason: The rate cut was likely motivated by the growing difficulties in the Canadian housing market. With prices trending downward nationally since March 2022—when the BoC, belatedly, began raising rates—some small cuts are unlikely to reverse the trend but signal a growing panic about market stability.

• Erroneous Justifications: The Bank claimed that inflation had decreased due to the removal of retaliatory tariffs, but Governor Macklem also stated that economic weakness forced businesses to absorb costs because consumers are out of resources. Both cannot be the main reason.

• Unrealistic Forecasts: Strangely, the BoC forecasts 1% growth in the third quarter despite clear evidence of widespread economic contraction in eight of the nine retail sectors.

  
  

The most likely scenario for Canada is stagflation (a toxic mix of stagnant economy and high inflation), as massive government stimulus measures are expected to reignite inflation while the underlying economy remains stagnant.

Major Story Developing: AI Discourse Takes Water

The boom in capital expenditures (CAPEX) in AI—the money companies spend on physical assets like servers and equipment—has been the primary driver of the market since the 2022-2023 bear market. In fact, it's the only reason the overall economy has avoided an official recession. This has created a "silent recession" for many, as the immense wealth generated remains heavily concentrated in one sector, not benefiting the average citizen.

This week, this pillar began to wobble.

A disclosure that flew under the radar revealed that Nvidia has a master service agreement (MSA) with key partners like CoreWeave and Lambda, requiring Nvidia to buy back any unsold data center capacity.

This is a major alarm signal for several reasons:

• Artificial Demand: This strongly suggests that Nvidia may be subsidizing its own sales through "revenue round-tripping" (a deceptive practice where a company sells products to a partner and then commits to buying services back from that same partner, creating the illusion of real sales), just to maintain its high growth figures.

• Late Disclosure: The agreement was made over two years ago but was only disclosed recently, raising serious questions about transparency and potential securities fraud.

• Insider Actions: This news comes as Nvidia's CEO has sold a significant amount of his shares since July—behavior that is not typical of a leader extremely confident in future growth.

  
  

What does this mean? If the most significant growth driver in the market is built on fragile foundations, the risk of deflating the entire AI bubble increases significantly.

On the Ground: Consumers Are Strapped for Resources

While Wall Street debates AI valuations, the real economy sends clear distress signals.

• The Canary in the Credit Market: Tricolor Holdings, a subprime auto lender (a company that lends to borrowers with poor credit) with nearly $2 billion in debt, collapsed this week. This is a powerful and concrete sign of growing strain in the credit market, with auto loan defaults returning to levels seen in 2009.

• The Proof in the Data: Pain is widespread. Recent data showed that retail sales in Canada experienced widespread contraction, down in eight of nine subsectors.

• The "Why": This is happening because households are stretched thin. Consumer sentiment hovers near its lowest levels in 50 years as people worry about job security.

  
  

Noteworthy Signals on My Radar

• Market Complacency vs. Reality: In a classic disconnect, spreads on corporate bonds (the extra interest investors demand to hold riskier corporate debt compared to safe government bonds) are at their lowest levels in 20 years, while consumer sentiment remains near historical lows.

• A New Tariff on Labor: The Trump administration announced $100,000 fees on new H-1B visas, a "tariff on labor" that follows previous tariffs on goods and will have significant economic consequences.

• Real Estate Woes in Canada: Housing inventories in Canada continue to pile up, reaching a peak not seen in nearly 20 years, while mortgage defaults accelerate.

• Technical Tension: Most asset classes are rising together in an unusual correlation and are trading more than three standard deviations (a measure of how far an asset's price is from its long-term average) above their moving averages, suggesting that a "return to the mean," or a return to normal levels, is highly probable.

  
  

Looking Forward

This week, I’m keeping an eye on:

• Thursday, September 25: U.S. Q2 GDP (3rd estimate) and corporate earnings.

• Friday, September 26: The Fed's preferred inflation indicator, the PCE price index.

  
  

Your Path Forward: A Tailored Next Step

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