October 28, 2022Money Education Financial literacy Economy Good reads Commentary In the news News Trending Weekly update Weekly commentary
What's Happening Today - October 28
Okay, so apparently I should just go away all the time according to the market’s reaction to my NYC visit. Of course I’d like to take all the credit, but there are maybe a few other things causing the markets to rally this past week.
The Bank of Canada continued hiking interest rates in an effort to bring inflation back under control, although the 50bp move, to take the overnight rate to 3.75%, was a little less aggressive than the consensus and market had expected (75bp was almost fully priced in). The statement and downgraded growth forecasts within the MPR hint at an economy that is losing momentum maybe a little quicker than previously anticipated. Housing is seen to have retreated "sharply" but there was also reference to consumer and business spending softening, as well as weaker international demand. Growth forecasts of just under 1% next year and 2% in 2024 represent downgrades from where they stood previously and a near brush with recession. However, even with the weaker growth profile, the Bank stated that its preferred measures of inflation are not yet showing meaningful evidence of easing, and as such the statement still suggested that interest rates "will need to rise further". As such, this may just represent a slightly slower path to the same peak interest rate (4.25%) that we had forecast prior to today's smaller than anticipated 50bp hike. For December, Macklem’s pretty clear that the decision between 25 or 50 will come down to three things:
i) The impact of higher interest rates on spending, and how this feeds into extant price pressures.
ii) How global supply disruptions resolve, and to what extent this translates into lower inflation domestically.
iii) How inflation expectations are evolving.
We’re still fairly comfortable with the idea that terminal is around 4.25%. That means that if we see the Bank by 50bps in December, that likely takes us into the ‘finely balanced’ zone. Alternatively, a 25bps hike for December would likely be followed by another 25bps hike at the January meeting.
Turning to the US, third quarter GDP is on the docket and the house call here was for a +2% quarter-over-quarter annualized result. Meanwhile, the street is closer to +2.4%. Well, in another positive boost, U.S. third quarter GDP actually increased at a 2.6% annual pace, and U.S. weekly jobless claims totaled 217,00 verses 220,000 expected. Which brings me to the specter of recession south of the border. While I was in New York, I had the privilege of hearing some fantastic speakers on a myriad of subjects, with of course, the focus on the global economy. The aggregate expectation for the U.S. is still that they slip into recession at some point in 2023, however the feeling is that should the U.S. have negative GDP growth, it would look to be relatively shallow.
Across the pond in the Eurozone, the base case calls for a 75bps hike for the three main policy rates. The European Central Bank is still in the ‘front-loading’ phase, which means aggressive hikes to take policy back to neutral. Recent surveys conducted by Bloomberg suggest that the private sector sees that at as being consistent with a deposit rate closer to 250 bps. We’ve also heard from several ECB speakers as well on the need to get to at least 200bps by the end of this year. The latter two points suggest that another non-standard sized hike is likely in the cards before the end of the year. Several ECB speakers have already mentioned that there probably won’t be an active Quantitative Tapering process until administered rates are at neutral. That means the base case is still that it’s a 2023 story. However, there might be some tweaking to the language around reinvestments. The ECB has left this open ended for a long time now.
Over in the United Kingdom, the medium-term fiscal plan will be delayed until November 17th. That means the Bank of England won’t have it in hand for their decision next week, and also means that markets should calibrate expectations lower for that date (which they have). Prime Minister Sunak is said to be reconsidering tax hikes and spending cuts as the delay in publishing the fiscal statement could shrink the gap in public finances as gilts rally.
Asian markets closed mixed as investors digest the latest economic data in the region. Nikkei closed lower due to tech and bank stocks, while Greater China was mixed.
Oil prices rose boosted by record U.S. crude exports and a weaker U.S. dollar, but were capped by demand concerns in China.
As always, give us a call if you have any questions, or if you’d like to get together for a review.