Markets in the past couple of months have been nicely in the green, however December looks likely to buck that trend. It’s not really surprising as December is traditionally a month of reconciliation and tax-harvesting. Still, as central banks have been steadily raising rates, the focus has started to shift away from inflation, and onto the possibility of recession. Here at CIBC, we still feel that we’re looking at a low-growth environment, as opposed to a negative one, in North America in 2023.

Turning to local economic news, in Canada the seasonally adjusted annualized rate of housing starts fell to 264,159 units from a revised 264,581 units in October, the Canadian Mortgage and Housing Corporation (CMHC) said. Economists had expected starts to fall to 255,000. Our colleagues in CIBC Capital Markets Economics were looking for 250,000 which would have represented the smallest increase since March.

Down south in the States, it’s all about the DOTs. The FOMC slowed the pace of rate hikes as expected, taking the fed funds rate 50bps higher, to leave the ceiling at 4.5%. The updated median projections now show the fed funds rate at 5.1% at the end of 2023 (up from 4.6% previously), and falling to 4.1% at the end of 2024, and 3.1% at the end of 2025 (both 25bps above prior projections), while rates are still seen at 2.5% in the long run. The dots are skewed to the upside, and the higher interest rate projections meant that the unemployment rate forecast was upgraded by a couple of ticks, and is expected to end next year at 4.6%, and stay there through 2024. In line with this, GDP growth will be slower than previously thought next year (at 0.5%, from 1.2% in the previous projections), with an acceleration to 1.6% in 2024 (from 1.7% previously). However, PCE inflation isn't expected to get to target until 2025 still, with the projection showing both core and headline at 2.1%. The inflation forecast was upgraded for 2023-24, so any good news on the inflation front ahead could cause policymakers to hike by less than shown in these projections. The statement reiterated the need to take into account the lags with monetary policy works as well, and we expect to see enough progress in cooling activity to require only one additional 50bps rate hike ahead, which would bring the ceiling on the fed funds rate to 5.0%; slightly below the median projection. While the Fed moderated the pace of tightening, as expected, the Fed Chair attempted to portray a hawkish message. The apparent unity of the Fed message is notable. Powell underlined that the bank is intent on keeping financial conditions tight, in order to squeeze out inflation. In other economic news, U.S. retail sales declined 0.6% in November, below forecast, and U.S. Initial jobless claims decreased to 211,000 versus estimated 230,000.

Across the pond, after being wrong-footed by sudden price rises, the European Central Bank has been raising rates at an unprecedented pace. Inflation has soared since economies reopened after the COVID-19 pandemic, driven by supply bottlenecks and then surging energy costs following Russia's invasion of Ukraine. Today, the ECB raised the rate it pays on bank deposits by 50 basis points to 2%, moving further away from a decade of ultra-easy policy. And in the United Kingdom, the Bank of England’s rate-setting committee voted 6-3 to raise Bank Rate to 3.5%, its highest since 2008, from 3.0% as it eyed the risk of persistent inflation pressures, even with a looming recession and hopes that inflation might have peaked when it hit a 41-year high in October.

Asian markets closed lower tracking overnight Wall Street losses. The Hang Seng fell 1.55% with mainland China mixed. Korea saw sharp declines while Taiwan was flat.

Oil prices dipped on recession worries.

As always, give us a call if you have any questions, or if you’d like to get together to review your portfolio.