It’s a new year, and I for one, am happy to turn the page from 2022. Calendar year 2022 was the 4^th worst year in investment returns since 1945. It is the worst year since 2008. On a positive note, the average return after a “down year” is 14.2%. The TSX finished the year down 9.4%, the DOW fell 8.78% with the S&P 500 falling 19.44%, and the Nasdaq fell 33.10%. As we begin to shift away from the focus on inflation and rate hikes, we should see volatility moderate as we progress through 2023.

Here in Canada, lower global commodity prices and a stronger Canadian dollar are likely to combine to bring a narrowing of the trade surplus. Our colleagues in CIBC Capital Markets Economics expect the surplus to moderate to $0.5 billion in November, down from $1.2 billion in October. We’ve got the Bank of Canada on hold for now, with risks titled towards a final 25bps hike. The market is pricing in 17bps for this month’s meeting, but we feel that’s a bit rich. This week’s employment numbers, plus the Bank of Canada’s outlook surveys (Jan 16^th), plus December CPI (Jan 17^th) will settle the debate ahead of the decision on January 25^th.

Looking south of the border, U.S. ADP Private payrolls rose by 235,000 in December, strongly above estimates of 150,000. Employment rebounded from the modest 127,000 advance in November. This comes on the back of yesterday’s strong employment component within manufacturing ISM and Jolts job openings, underlining market resilience. U.S. initial jobless claims fell by 19,000 to 204,000 in the last week of 2022. The December FOMC minutes underlined the Feds commitment to bring inflation back to target. Fed members noted upside risks to inflation remained a key factor. Only a couple noted that risks to inflation were becoming more balanced. Also importantly, there was no discussion on downside risks. Ongoing Fed policy resolution comes as the second in command at the IMF has detailed that U.S. inflation has not “turned the corner yet” and that it needs to “stay the course”. Currently, the market remains undecided as to whether the Fed will look for 25bps or 50bps for its next hike. The resolution of that view will come via the determination of relative labour market tightness. In this context, we would note the Fed minutes suggested that while labour market remains tight, employment growth could be slower than that seen in non-farms. Turning to politics, House leadership remains in limbo. After a further three rounds of voting on Wednesday, Kevin McCarthy has still failed to garner the requisite support in order to become House speaker. Twenty GOP lawmakers remain opposed to the process. While concessions appear to have been made it remains unclear as to whether a deal can be soon agreed. Rep. Scott Perry, Leader of the House Freedom Caucus, suggested the process “could go into the weekend”. For now, the market does not view the impasse as market-moving. That being said, GOP dysfunction cannot be ignored indefinitely.

Across the pond in the Eurozone, price pressures continue to ease. After the downside inflation surprises in Spain, Germany, and yesterday in France, today’s release of Italian provisional HICP bucked the trend of undershooting median expectations. Nevertheless, despite not matching its European counterparts, the annual reading dipped by 0.3%, we have not witnessed a retreat in annual prices in five months. Headline inflation is falling, due to lower energy prices. In this context, it is notable that benchmark European gas futures are trading at one-year lows, namely below levels seen ahead of the Russian invasion of Ukraine. However, there are signs that core inflationary pressures, a key focus of European Central Bank Chief Economist Lane, are also showing signs of consolidation. An easing in supply bottlenecks appears evident, easing pressure on beleaguered consumers. Yet despite the prospect of easier headline HICP, prices are set to remain well above target for a protracted period, underlining the ECB message from last month regarding rates needing to move significantly higher from here, at a “steady pace”, the implication being that 50bps clips remain the preferred strategy.

Unlike its Euro counterpart, the United Kingdom final services PMI was revised down, albeit only by a tick. However, the moderation leaves the series below the 50 boom/bust line (49.9) for a third straight month. Despite the upgrade to final manufacturing data witnessed earlier in the week, the composite reading remains at 49.0, this marks a fifth straight month of overall contraction. The extended run of sub-50 readings underlines that the UK likely entered recession in third quarter 2022, the downturn looks set to run through 2023, constraining the hand of the Bank of England in the process. Ongoing real estate headwinds, prices have fallen for four straight months for the first time since the GFC, allied to the perpetuation of falling living standards, as real incomes continue to slide, are set against the backdrop of continued public sector strikes. In terms of the inflation outlook, both one and three-year inflation expectations continue to advance, from 7.2% to 7.4% in one year and 3.9% to 4.0% over three years. However, the survey reports an easing in expectations for unit cost growth.

Asian markets closed higher as Hong Kong hit a six month high while Japan and other regional markets had gains. China’s December Caixin services Purchasing Manager's Index remained in contraction, but fell at a slower rate than expected as Covid weighed on consumer demand. The World Health Organization said China was under-reporting virus deaths, and comments will likely provoke a response from Beijing. China had previously announced that it is scrapping all quarantine and testing requirements for inbound travelers as of January 8^th. Several countries imposed forms of restrictions on inbound travel from China; predominately a requirement of a negative test. The Chinese economy likely contracted in the fourth quarter of 2022, and likely only grew by 2% year-over-year in real terms for 2022, according to China Beige Book International.

Oil prices climbed, as China’s Covid reopening added optimism for an economic rebound and support in demand.

As always, give us a call if you have any questions or if you’d like to book a review. Please note that as of January 1^st, you now have an additional $6,500 in Tax Free Savings Account room should you wish to top up your accounts.