Michael Watkins
October 13, 2023
Weekly Market Update
A much more positive week in the markets, but that inflation story is proving to be a tale dragging on almost as long as Tolstoy’s War and Peace. US inflation remained elevated in September, stoking the “will they or won’t they” debate with the US Federal Reserve Board’s (Fed) next interest-rate decision. The Fed still has a long way to go to bring inflation down to its 2% target, but the central bank has expressed its desire to do so without pushing the US economy into a recession.
- The annual inflation rate in the US was 3.7% in September, unchanged from the previous month. A Bloomberg survey of economists estimated inflation falling to 3.6% in September.
- Energy costs dropped again year-over-year in September, but this time at a relatively slower pace compared to August. Price increases for shelter, food and new vehicles slowed, while prices for used vehicles dropped.
- The core inflation rate remained elevated. Core inflation, which excludes more volatile items such as energy and food, was 4.1% year-over-year in September, down from the 4.3% rate in August. While September’s rate was the lowest since September 2021, it remains elevated.
- The Fed released the minutes from its last meeting on Wednesday afternoon. The minutes showed officials were largely undecided on the need for another rate hike. Still, all officials believe rates must remain higher for longer to bring down sticky inflation. The Fed’s next interest-rate decision is on November 1.
The Fed has reiterated its desire to bring inflation down to its 2% target while trying to ensure the US economy does not fall into a recession. The Bank of Canada is carefully navigating this mandate as well. It is essential to understand that tight financial conditions will likely persist for some time.
In global news, the International Monetary Fund (IMF) released its World Economic Outlook for October. The IMF expects slower growth next year, with tight financial conditions and other pockets of weakness weighing on its outlook. While economic conditions are uncertain, it is no time to lose focus on your investment plans.
- The IMF expects the global economy to grow by 3.0% in 2023, which is unchanged from its July report. However, the economic agency has reduced its outlook for 2024, expecting growth of 2.9%, compared to its earlier projection of 3.0%.
- Looking at prices, the IMF expects inflation to continue trending downward, due in part to the monetary tightening by central banks since 2022. Inflation was 8.7% in 2022, projected to decline to 6.9% this year and 5.8% in 2024.
- The IMF expects advanced economies to expand by 1.4% next year, while emerging markets economies might grow by 4.0%. Canada’s economic growth might soften to 1.6%, and the US is projected to expand by 1.5%. China’s economic growth could slow, partly due to ongoing weakness in its property market.
- While the IMF is projecting growth next year, its projections are filled with uncertainty. The economic body believes high inflation, rising borrowing costs and high government debt levels could weigh on growth next year. The IMF thinks the global economy might avoid a hard landing, but several risks to global economic health persist.
As we enter the fourth quarter, several economic outlooks for 2024 are hitting the headlines. A key theme might be that we are in a period of much economic uncertainty. Central banks are monitoring how rising borrowing costs impact households and businesses while geopolitical tensions around the world persist. Different regions will likely see varying degrees of economic expansion or contraction.
As always, please give us a call if you have any questions, or if you’d like to get together for a portfolio review. We’ve updated our Upcoming Events page if you’re interested in attending our seminars and client events in the coming months: https://www.watkinsgroup.ca/events?lang=en_US
Source: CIBC Morning Market Brief