Hi everyone,

I’m back from my Mexican adventure, and I’ve spent the last couple days getting back up to speed. It doesn’t look like a great deal has changed while I was away, with the markets looking fairly flat in the aggregate (lots of ups and downs along the way though). Here in Canada, the big news was that the Bank of Canada did indeed pause their rate hiking. Markets were reminded that the Bank of Canada is going to keep its eyes on the home front, as the central bankers showed no tendency to follow the increasing hawkish tone from their counterparts in Washington. Yesterday's decision to keep rates on hold but leave open the risk that a further hike might be needed, came as no real surprise. But the absence of any stated concern over a larger gap to U.S. rates, or the resultant recent weakening in the Canadian dollar, adds weight to our view that rates can stay on hold north of the border even as the Fed has signaled another 75 basis points to come. The Bank needs a clearer picture of where growth and inflation are headed in order to either opt to hike again or more definitively set aside that prospect. With so little time since it initiated its conditional pause, it simply doesn't have enough data to provide that clarity. Indeed, the statement cited the conflicting signals seen in recent weeks. GDP growth for quarter four came in below their expectations, inflation has been easing off (if still too high), but labour markets remain very tight, with January's employment surge no doubt raising eyebrows at the Bank. Other than a reference to the US dollar strengthening (i.e. against other currencies in general), the Bank didn't highlight any concerns about a pass through to Canadian inflation from a weaker Loonie. Canadian short-term rates had drifted up in recent days as markets judged that a more hawkish Fed, and the resulting foreign exchange rate moves, might drag the Bank of Canada back to the rate hiking table, and today's statement could see a bit of that unwind. Overall, the Bank sees the economy's fate as generally in line with its prior views, expecting the slowdown in growth to ease labour market tightness, and pull inflation towards 3% by mid-year. But it needs a sustained slowing in growth to go the rest of the way to its 2% CPI target. The text of the message is partly designed to speak to Canadians as to why a cooler job market would be welcome. While economists typically think about an easing in wage pressures as helpful for business costs, the Bank also mentions that a slower pace for labour income gains also reduces the ability of businesses to pass on higher costs in their prices. We expect the economy to evolve largely in line with the Bank's hopes, and therefore see the overnight rate grounded at 4.5% over the balance of the year, which appears to be the central bankers' base case. In the job market, we might just be seeing the final throes of hiring related to last year's increases in labour demand, with that hiring delayed by the difficulty in filling vacant positions. Elsewhere, and to a greater extent than in the U.S., we're seeing the predicable impacts of higher rates on interest sensitive demand, including no growth in final domestic demand over the last half of 2022.

South of the border, the picture is looking a bit different. U.S. initial jobless claims rose 21,000 to 211,000 versus 195,000 expected. The second phase of Powellʼs Capitol Hill testimony witnessed the Fed Chair detailing that the FOMC has not yet made any decision regarding the magnitude of the March hike. The obvious sub-text of that reference is that it really depends upon the data, not least non-farms tomorrow, ahead of CPI on Tuesday. With regards to the policy narrative the publication of the Beige Book added little, it merely underlined that labour market conditions remained solid and inflationary pressures widespread. After the major adjustment in terminal rates and extension in US 2-10 inversion, post the first phase of Powellʼs testimony, we have seen a slight paring back in terminal rate assumptions despite January JOLT job openings coming in ahead of expectations. While openings were above median expectations, at 10.824m from an upwardly revised 11.234m, there were some signs of cooling within the report. The job opening rate fell to 6.5%, also the quit rate continued to edge down, to 2.5%. The correction in the latter suggests that workers are feeling more unsure about leaving their current jobs. The reduction in the quits rate, underlining there is less certainty as regards the ability to move to an alternate (higher paying) job has, at least ahead of NFP, helped moderate peak terminal rate assumptions. Currently, we are pricing in around 42bps for the March 22nd FOMC, down a tick from yesterday. The upcoming session witnesses a limited data backdrop, namely claims and Challenger job cuts. Businesses announced almost 103k job cuts in January, more than four times the level seen in January 2022. Continued tech sector job losses could well extend into February. Moreover, we would note that despite a strong ADP headline the release revealed signs of construction sector weakness. The combination could underline looming labour market challenges which may soon influence terminal rate expectations. In other news, according to Politico, the Biden budget is expected to focussed on four sectors. Firstly, it will aim to reduce the deficit by nearly USD3trn over 10 years. Beyond that ambition it aims to reduce costs for families and protect and strengthen Medicare and Social Security. The final criteria is Invest in America, this of course ties in with the Inflation Reduction Act. In terms of the first dynamic, it appears that President Biden intends to highlight divergent economic ideologies into the next Presidential election. The presentation of the budget package, in Philadelphia rather than in Washington, is expected to include a 25% minimum tax on billionaires, doubling the capital gains tax rate for investment from 20% to 39.6% and rising corporate tax rates from 21% to 28%. The measures will surely witness material challenges and pushback in Congress. The budget announcement comes ahead of a looming debt stand-off across the summer.

European markets are lower, becoming range bound with real estate and mining stocks leading declines, while food and beverages gained slightly. France today voted to raise the retirement age by two years to 64, despite strong opposition from labour unions. Under pressure from the U.S., Netherlands is preparing to restrict exports of certain chipmaking machines to China. We head into the European Central Bank quiet period ahead of the March 16^th policy decision, against the backdrop of French Central bank Governor Villeroy detailing that French inflation is set to peak before mid-year. Moreover, Villeroy has validated the presumption that the ECB will do whatever is required, via tightening, in order to bring CPI back to target, over time. The French CB Governor is a modest hawk. His comments of contrast with ECB policy criticism from Italian CB chief Visco witnessed yesterday. Evidence of internal dissent risk making the policy backdrop ever more challenging for President Lagarde. Despite the Visco dissent we can expect the market to continue to currently price in terminal rates above 4.00%.

Meanwhile in the UK, the latest RICS house price survey reveals the most pessimistic outlook since 2009. This comes as the price balance dipped to -48 in February, versus -46. The house price balance, which measures the difference between the percentage of surveyors seeing rises and falls, has fallen for ten straight months. However, we would note that as recently as September the index remained in positive territory. The series dropped 68 points in quarter four alone as the Truss fiscal debacle resulted in a spike in mortgage rates, impacting housing affordability. In this context the RICS blame higher mortgage rates and a tighter lending climate for the sentiment downtrend. The lagged nature of the RICS data suggests the fiscal damage wrought by the Truss administration through quarter four has still to fully dissipate. However, the RICS point towards some signs of optimism within the more forward-looking elements of the survey.

Asian markets closed mostly lower with China, Hong Kong, Korea and Taiwan lower in volatile trading. China's February annual consumer inflation slowed to the lowest rate in a year as consumers remained cautious. Japan rose to a 6-1/2-month high in a five-day winning streak with expectations for no looming change to the Bank of Japan policies. We head into the final Bank of Japan decision of the Kuroda era against the backdrop of Japan narrowly avoiding a technical recession, quarter four GDP was revised down from 0.2% to flat. The catalyst for the downgrade proved to be consumption growth being trimmed from 0.5% to 0.3%. Beyond the consumption downgrade the correction in business investment was also notable. The retreat could suggest a lack of confidence in the broader recovery narrative. However, as global macro headwinds were far more extreme in quarter four than is currently the case we would be wary of extrapolating such weakness. While this is may be the last Bank of Japan policy meeting for Kuroda, his successor is halfway through his approval process. BoJ nominee Uedaʼs candidacy has been ratified by the lower house of the Diet, we can expect upper chamber approval overnight, underlining the transition to Ueda BoJ leadership from April 9th. In terms of the policy transition, we continue to monitor spring wage negotiations with particular interest. Kuroda has previously detailed the need for wage deals in excess of 3%, we would expect Ueda to maintain similar such considerations. Therefore, we would note with particular interest reports that 18 unions, under the umbrella of UA Zensen, they represent workers in service, textiles and distribution sectors, are reported to have agreed an average wage hike of 5.28%. An above inflation deal will help support discussion of a move away from mere cost push inflation.

Oil prices steadied, as a larger-than-expected draw in U.S. crude stocks and expectations for China demand, offset worries of interest rate hikes and slow economic growth.

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