Michael Watkins
November 03, 2023
Weekly Market Update
What a difference a week can make. Markets surged into the green this week on the back of another Fed rate hold and quarterly earnings coming out much better than anticipated. And in bad-news-being-good-news (for rate hikes and inflation), Statistics Canada (StatsCan) announced Canada’s gross domestic product (GDP) stalled for a second straight month in August. The slowdown provides further evidence Canada’s economy is coming under pressure amid rising borrowing costs and elevated inflationary pressures.
- Canada’s economy had no growth (0.0%) in August over the previous month. This marked the second consecutive month there was no change in Canada’s GDP. A Bloomberg survey of economists showed expectations of 0.1% growth in August.
- Demand across the country is softening amid ultra-tight financial conditions. As a result, consumer spending stalled, which impacted the retail and food services industries. Moderating demand also weighed on Canada’s manufacturing sector.
- Looking ahead, StatsCan estimates no growth in September, which suggests third-quarter economic activity could be muted, or even contractionary. After shrinking in the second quarter, another decline in the third quarter would push Canada’s economy into a technical recession (two straight quarters of falling growth).
- At its last meeting, the Bank of Canada (BoC) noted that its rate hold was in part due to stalling economic activity. The BoC’s benchmark overnight interest rate sits at 5.00%, with its final announcement of 2023 coming on December 6.
Recent data suggests economic activity across Canada is slowing, which could impact equity and fixed income markets. Concerns about a recession in Canada resulted in lower bond yields and a fall in the Canadian dollar yesterday. Financial markets could see some volatility as more data is released.
As was widely expected, the US Federal Reserve Board (Fed) delivered its second consecutive rate hold. The Fed undertook an aggressive path to tightening monetary policy since the beginning of 2022, seeking to bring down inflation. With inflation coming down and global economic conditions uncertain, the Fed appears to be treading carefully in its monetary policy decisions, looking to avoid over tightening, which could bring down the US economy.
- The Fed held its federal funds rate steady at a target range of 5.25%–5.50%. The rate hold was the second straight by the Fed as it monitors the impact of its policy on inflation, the labour market and the US economy.
- The Fed reinforced its commitment to bringing down inflation, while also trying to ensure it does not lift rates too high and drag down economic growth materially. The US central bank believes its current rate is restrictive and could continue to pull down inflation.
- Furthermore, the uncertain economic conditions prevailing in the global economy have helped push US bond yields higher in recent weeks, which could tighten financial conditions further and weigh on consumer and business activity.
- The Fed believes inflation remains at elevated levels, while the economy is strong. At the post-announcement press conference, Chair Jerome Powell did not entirely rule out another rate hike as the Fed is currently undecided on what it will do at its next meeting.
The Fed matched the Bank of Canada in holding interest rates steady at their most recent meetings. But the path forward could differ between the two central banks, with the Canadian economy stalling while the US economy expands at a relatively strong pace. The divergence between the two banks could put downward pressure on the Canadian dollar.
Across the pond, attention turned to the Bank of England (BoE) yesterday after the US Federal Reserve Board (Fed) made its interest-rate announcement on Wednesday. As was widely expected, the BoE held its policy interest rate steady at its November meeting. Central banks are turning to a phase of monitoring the impact of their current interest-rate levels while still not ruling out the potential for more rate increases.
- The BoE held its key interest rate steady at 5.25%, its highest level since 2008. November’s rate hold was the second straight by the BoE after 14 consecutive meetings of rate hikes, where it lifted its key rate from 0.10%.
- The BoE believes the rate hold was suitable in response to easing inflationary pressures and a marked slowdown in the UK economy. The UK central bank feels its current rate is at restrictive levels and should help push inflation down to its 2% target.
- The BoE increased its projection of inflation while noting it could still tighten policy further if warranted.
- On this side of the Atlantic, Bank of Canada (BoC) Governor Tiff Macklem appeared before the Senate Committee on Wednesday. Macklem indicated the BoC held interest rates steady largely due to slowing economic growth and moderating inflation. However, he also alluded to the real estate sector, where many mortgages are due for renewal. He believes these elevated rates will squeeze many Canadians, which could hinder Canada’s economic growth.
- In recent weeks, the BoC, Fed, BoE, European Central Bank and Bank of Japan have all held policy interest rates steady, seeking to monitor the impact of their current policy.
While the banks noted the possibility of more interest-rate increases, several conveyed that interest-rate decreases are unlikely, at least in the near term. As a result, expect an environment of higher interest rates for longer. Fixed income investments might offer a relatively attractive asset class for your portfolio given yields are at elevated levels. Bond prices could have some tailwinds over the long term should interest rates eventually begin to fall.
As always, please give us a call if you have any questions, or if you’d like to get together for a portfolio review.
Source: CIBC Morning Market Brief