December 09, 2022Money Education Financial literacy Economy Good reads Commentary In the news News Trending Weekly update Weekly commentary
What's Happening This Week - December 9
The Bank of Canada policy announcement took center stage yesterday as the Bank increased the overnight lending rate by 50 basis points to 4.25%, the highest since the beginning of 2008. The move was in-line with CIBC's forecast while the market, more broadly, was calling for a 25bps move. Although the BoC followed through with another ʽnon-standardʼ hike, they have introduced some conditionality as regards future action. The bank has gone from the policy rate “will need to rise further” to the Bank now “considering whether” the policy rates need to go higher.
Moreover, the bank left hints that they are close to a pause as they detailed that prior hikes are filtering their way through the real economy and ʽrestrainingʼ domestic demand (which was flagged in the third quarter GDP). The BoC has clearly detailed that having taken rates to 4.25%, in line with our current terminal rate assessment, the debate should now shift from the size of the hike, to whether they need to act at all going forward. Hence we can expect an increasing focus on key incoming data. Our colleagues in CIBC Capital Markets Economics are of the opinion that rates have reached their zenith. Indeed, they expect that the Bank of Canada will keep the overnight rate there through 2023 and ease only gradually in 2024. Our Economics colleagues assume it will be necessary for the “pain of these higher rates to persist for a while to stall economic growth and thereby cool inflation”.
South of the border, although the BoC may have prepared the ground for a potential pause, the Fed remains prepared for action. Ahead of PPI tomorrow and more importantly CPI, on the eve of the Fed decision the U.S. terminal rates continue to oscillate in a 4.90-5% range. Although terminal rates may have eased back from extremes (we have witnessed U.S. curve inversion test 85bps), this marks a level not seen since 1981. The deepening inversion comes as the market expects ongoing Fed action, amplifying recession fears into 2023. We would note that the Financial Times is reporting a survey by the Initiative on Global Markets at the University of Chicago Booth School of Business, which suggested that 85% of economists surveyed expected the National Bureau of Economic Research (the arbiter of US recession) to declare one next year. Note that our house assumption for 2023 U.S. GDP currently stands at 0.7% (slow growth, but not recession).
Across the pond, after the HBoS house price series registered the fastest monthly price fall since 2008, the latest example of United Kingdom real estate fragility comes via the RICS house price series retreating from -2 to -25.1 in November. A fourth straight double-digit price decline, we have not seen a similar trend since early 2008, underlines residual weakness in the sector. In this context, we would note the long-term correlation between house prices and trade-weighted Sterling. Beyond real estate concerns, and looming public sector strikes, December looks on course to witness the largest number of strike days since 1989. Sliding house prices and burgeoning public sector strikes, impacting activity, underlines the prospect of GBP negativity, especially should risk uncertainty extend into year-end. ONS data suggests consumer spending increased in cash terms into early December, in line with usual seasonal trends. However, in view of the aggressive uptick in consumer prices we can expect retail sales volumes to remain compromised, which will be detailed in the November retail sales data due on December 16th.
Asian markets closed mixed today. Japan’s Nikkei closed near a one-month low, while Hong Kong’s Hang Seng index rallied 3.3% on reopening reports. Japan’s economy contracted at an annualized quarterly contraction of 0.8% in its third quarter, which was less than expected, bolstering a view that the economy is slowly recovering from the country's latest Covid-19 wave. It seems that Japanese corporates have become increasingly disenchanted with Prime Minister Kishida’s administration. According to a Reuters survey, more than two-thirds of companies have lost confidence in the administration, largely due to its handing of inflation. Political disenchantment comes despite a modest upgrade in final third quarter GDP (quarterly activity was revised up a tick to -0.2%). That being said we would note that private consumption increased by a mere 0.1% in the third quarter, we have not witnessed a weaker quarter since the first quarter of 2021. Net exports (-0.6%) dragged on broad economic activity growth for the second quarter in three. The trade drag comes as the economy witnessed a twelfth straight monthly trade deficit. Although we have not seen a longer negative trade trend since 2014-15 it is notable that nominal exports have rebounded significantly over the last two months. The trade shortfall has been accompanied by the current account slipping into negative territory for the first time in this cycle. We last witnessed an adjusted current account deficit in March 2014.
Oil prices rose as easing anti-COVID measures in China boosted the demand outlook.
As always, give us a call if you have any questions, or if you’d like to book a portfolio review.