Key Inflation Date Coming This Week


At the close of business last Friday, global equities were higher on the week, but they gave up their early week gains as solid US employment and wage data reinforced the likelihood of continued aggressive rate hikes by the US Federal Reserve. The yield on the US 10-year note rose to 3.89% from 3.74% a week ago, while the price of a barrel of West Texas Intermediate crude oil rose $10 to $90.15 after OPEC+ announced a production cut. Volatility, as measured by the Cboe Volatility Index (VIX), declined to 30.7 from 32 a week ago.



The World Trade Organization warned that global trade is expected to grow by just 1% in 2023 while global economic growth should slow to only 2.3%. Supply chain disruptions have improved, bringing down the cost of transporting goods, but sharp interest rate increases, geopolitical tensions, and the trend toward de-globalisation are significant headwinds.

Expectations for this quarter’s earnings season have been cut dramatically. What this means for you is that many of the companies you own in your portfolio are likely to exceed earnings estimates, which should give rise to a strong rebound. The bottoms-up estimate for S&P 500 earnings per share has been cut to $55.51 from $59.44 over the course of the quarter, a decline of 6.6%. Estimates are typically pared back as the quarter progresses, but this cut is significantly larger than average. Earnings are now expected to increase 2.9%, down from a rise of 9.8% seen at the beginning of the period.



Canada reported both a rebound in employment in September, adding 21,100 new jobs, and a downtick in the unemployment rate to 5.2%, solidifying expectations for a 0.5% rate hike from the Bank of Canada on October 26th.

Our belief is that the Bank of Canada and the federal reserve in the US have now done enough to slow growth and tame inflation. We do not expect any interest rate relief until mid-2023. What does concern us is that rhetoric in the news is suggesting continued large rate increases. The central banks have two important jobs—to keep inflation around 2% and full employment. If they increase rates too much, it can tip the economy into a recession rather than a soft landing. We will get our next CPI announcement for both Canada and the US on October 13th and we expect to see a further decline in the rate.



The United States added 263,000 new jobs in September, down from the 315,000 added in August, while the unemployment rate dropped back down to 3.5%, after a bump up to 3.7% in August. Average hourly earnings rose 5% year over year. Earlier this week, the Bureau of Labor Statistics reported that US job openings declined by 1.1 million in August while weekly jobless claims rose to 219,000 from 190,000 the week before, which market participants hoped were harbingers of a cooling labour market. Although the labour market in the US is slowing, nothing in this week’s data is likely to change the trajectory of the tightening cycle as, in the Fed’s eyes, the labour market and wages remain too strong. The next Fed rate decision happens in early November.



One of the more controversial pillars of the British government’s recent mini-budget, the elimination of the 45% income tax rate on the nation’s highest earners, was dropped this week amid opposition from members of the ruling Conservative Party. The government also announced it will release its plan to cut the United Kingdom’s debt at the end of October, accelerating its previously scheduled release date in late November, along with forecasts from the Office for Budget Responsibility, which will assess the plan’s economic impact. The value of the pound has stabilised on foreign exchange markets in recent sessions, though gilt yields remain volatile. Despite the government’s tax-cut reversal, Fitch Ratings warned it may downgrade the UK’s AA-credit rating because of an expected rise in fiscal deficits over the medium term.



Rolling COVID-related lockdowns in China have hampered economic activity in the world’s second-largest economy. Already, purchasing manager surveys have shown slowing activity, particularly in export-oriented countries like South Korea, as demand from the US and Europe weakens.

The Reserve Bank of New Zealand raised rates 0.5% this week, having debated a 0.75% hike.



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