Michael Watkins
January 27, 2023
Money Education Financial literacy Economy Good reads Professionals Commentary In the news News Trending Weekly update Weekly commentaryWhat's Happening This Week - January 27
The Bank of Canada hiked rates by a further 25bp today but provided some unexpected guidance that this may be the peak for the current cycle. The 25bp increase, taking the overnight rate to 4.5%, was well anticipated by the consensus. The Bank pointed to stronger than expected growth at the end of 2022, a tight labour market and still elevated short-term inflation expectations as reasons for the policy move today. However, the statement also pointed to an easing in the 3-month rates of core inflation, and the expectation that overall inflation will come down "significantly" this year due to the energy prices, improvements in supply chains and the lagged effects of higher interest rates. Possibly because of greater confidence that inflation is easing, the Bank changed its guidance to state that if the economy evolves as it expects then the policy rate will be kept on hold at its current level, although the statement also warned that the Bank was willing to raise rates further if needed. The MPR projections for GDP growth are set at 1% this year and 1.8% in 2024, which is little changed relative to October but a bit higher than our own forecasts. Because of that, we suspect that the economy will indeed evolve in-line or even a little weaker than the Bank suspects, and that today's hike in interest rates will indeed mark the final one of this cycle.
The US economy grew at an impressive 2.9% annualized pace in the fourth quarter, in line with our forecast, and a touch above the 2.6% expected by the consensus. The growth was driven by inventory restocking as supply chain issues faded, and consumption, with both services and goods gaining ground. While the headline figure represented a very modest deceleration from the 3.2% pace of growth seen in quarter three, final domestic demand (which removes inventories and net trade) slowed more significantly, to 0.8% annualized, from 1.5% in quarter three, as business investment cooled markedly, with the equipment category posting a decline. The core PCE price index slowed to 3.9% quarter-over-quarter, from 4.7% in the prior quarter, in line with expectations. With inventories now elevated across many industries, and consumers running through excess savings, we see the potential for a contraction in the economy in the first quarter as the impact of past rate hikes materializes more fully, and consistent with a tapering off of momentum in recent monthly indicators.
Over in the Eurozone, the headline Ifo (inflation marker) advanced for the fourth straight month, to 90.2 in January, this marks the highest reading since June. However, the outturn was a tick below expectations. Moreover, the current assessment actually moderated, from 94.4 to 94.1, the market was looking for 94.9. However, in line with the strong uptick in ZEW expectations, we have witnessed a similar, if less powerful, advance in business expectations. The easing in gas price and supply pressures, allied to the benefit of the Chinese re-opening narrative, prompted expectations to advance by a further 3.2 points, we have seen similar gains in the previous two reports. As a consequence, expectations are running at the highest level since May. Despite the moderation in current conditions and the unexpected decline in flash German manufacturing witnessed yesterday the improved global tone, in line with that from Davos last week, should continue to provide scope for the European Central Bank to tighten by 50bps next week. In other news, Bloomberg reports that the U.S. and the European Union are discussing a deal where EU minerals and raw materials would qualify for some of the benefits and tax breaks of Biden’s inflation reduction act. Beyond macro dynamics, it would appear that the balance of military power continues to shift against Russia as the first anniversary of the Ukrainian invasion comes onto the horizon. Germany is now set to send 14 Leopard 2 tanks to Ukraine in the next three months. Moreover, they are also set to allow other European nations, including Poland, to re-export their tanks. Russia has immediately suggested that the move escalates the conflict to a new level, albeit that concern has yet to be materially transmitted to the market.
In the United Kingdom, Bloomberg reports that another survey of business sentiment has fallen to its weakest level in years. Monthly producer prices materially retreated in both November and December. After November numbers were delayed due to technical issues relating to dataset calculation issues, the delayed data series backs the presumption of a material retreat in pipeline price pressures. Factory gate or PPI output prices declined by 0.8% in both November and December. The correction in price pressures into year-end is notable in view of median assumptions anticipating a modest monthly uptick. Although annual output prices remain elevated, at 14.7%, the correction from the July cyclical high of 19.9% is substantive. The material retreat in pipeline price pressures, base effects are set to be particularly powerful in both quarter one and quarter two, adds the narrative of easing price dynamics. We would add into that mix the rapid correction in money supply growth and sliding real economy data, including spending and consumer confidence. All told the PPI retreat further supports our notion of the Bank of England hiking by a mere 25bps next week. Meanwhile, ex-Prime Minister Truss is expected to join Tory right wing calls for tax cuts ahead of the March budget.
Asian markets ended mixed as Japan finished lower while Hong Kong gained over 2% and South Korea and other southeast Asian markets closed higher. Mainland China, Taiwan, India and Australia all closed for various holidays. China says Covid deaths and severe cases drop by more than 70%.
Oil prices rose, lifted by expectations of demand recovery in China and on news U.S. crude inventories have risen less than expected.
Thanks to everyone that came out to our book re-launch yesterday. The event was well attended and we hope everyone had a good time. If anyone was unable to attend, but would like a copy of the new book, please let us know. As always, give us a call if you have any questions, or if you’d like to get together for a portfolio review.