At the close of business last Friday, global equities were higher on the week while the yield on the US 10-year Treasury note rose sharply to 4.25% from 4.02% last Friday. The price of a barrel of West Texas Intermediate crude oil was little changed at $85.75. Volatility, as measured by the Cboe Volatility Index (VIX), dipped to 30 from 32.5.

 

MACRO NEWS

This past week I attended a 3-day investment conference in San Diego, where we met with many investment managers, economic, and asset allocation advisors. The following are the key takeaways.

Without exception, everyone we talked to thought the Bank of Canada and the Federal Reserve in the US have done enough to see inflation continue to come down over the next year to target levels of 2 to 3 per cent while maintaining employment objectives. Having said this, they see our central banks as laser-focused on fighting inflation aggressively and they expect mistakes by both central banks, which will mean more aggressive hikes and the strong possibility of recessions in both countries in 2023. We expect both central banks to raise rates two more times in 2022 and then pause. The recessions are expected to be short-lived in the US. However, Canada’s recession is expected to last longer. What this means is that both central banks are likely to just as aggressively start reducing interest rates in the second half of 2023.

One interesting comment made was “Never let a good crisis go to waste,” meaning that both bonds and equities in North America are trading at historic lows and the opportunity for above-average appreciation of both asset classes over the next year is very compelling.

From an asset allocation point of view, these are our takeaways:

• Fixed income valuations are the most compelling in 15 years. We expect to see equity-like returns from the bond component of our balanced funds in 2023
• As the Consumer Price index continues to come down, we expect the equity markets in Canada and the US to continue to respond well; The US equity markets should outperform Canada.
• Europe is clearly already in a recession and European equities are expected to continue to underperform
• Asian economies and equities have been hit hard by the strong US dollar and China’s continuing Covid lockdowns
• Although emerging market equities remain the most attractive, from a valuation standpoint, investing in emerging markets is a safer play using large companies with head offices in the US doing business in emerging markets

These meetings confirmed the changes we recommended, and the asset structures we currently have in place in your portfolio

 

CANADIAN ECONOMIC NEWS

The Bank of Canada will make its next interest rate announcement on October 26. We expect they will announce a further 75 basis point increase, which will probably have the effect of putting the Canadian economy on track for a recession in early 2023.

For those in variable rate mortgages, expect to continue to see two more rate increases this year, then rates holding steady until the second half of 2023 when we expect to see interest rates falling once again. If your cash flow can continue to support a variable rate, we would recommend this as the best strategy at this time.

 

US ECONOMIC NEWS

Earnings News

With about 20% of the constituents of the S&P 500 Index having reported for Q3 2022, blended earnings per share show that earnings growth is running at 1.4% while sales rose about 8.8% compared with the same quarter a year ago. Based on early reports, US consumer demand remains resilient despite falling real wages.

Market expectations for the US Federal Reserve’s terminal policy rate reached 5% this week but eased on Friday with the expectation that the Federal Reserve may slow its tightening pace later this year.

The Conference Board’s US index of leading indicators fell 0.4% in September. Its persistent downward trajectory suggests a recession is increasingly likely in early 2023.

A closely watched homebuilders sentiment gauge compiled by the National Association of Homebuilders fell further into the red this past week, coming in at 38, well below the measure’s neutral level of 50.

 

EUROPEAN ECONOMIC NEWS

Inflation in the United Kingdom rose 10.1% year over year while core prices rose 6.5%. Investors are pricing in a significant chance of a 100-basis-point rise in the Bank of England’s policy rate at the central bank’s next rate-setting meeting on November 3rd.

British Prime Minister Liz Truss resigned on Thursday after just 44 days in office, making her the shortest-serving parliamentary leader in British history. Truss was forced out by members of her Conservative Party after her plan to reinvigorate economic growth was received poorly by financial markets. A new Conservative Party leader is expected to be chosen within a week, with Truss remaining as caretaker. It is expected that the entirety of the prime minister’s low-tax, high-growth agenda will be swept aside by the incoming government. UK bond and currency markets rallied on hopes of greater policy stability after Truss’ departure.

After months of debate, the European Union has agreed to move forward with a cap on market prices for natural gas and expects to have a mechanism to limit price gains in place in the next several weeks. Europe’s main gas benchmark fell 6% on the news. Germany and the Netherlands had been reluctant to adopt a cap for fear that producers would export to countries with higher prices, but they have now dropped their opposition.

 

JAPAN, CHINA and EMERGING MARKETS ECONOMIC NEWS

The news daily is focused on the Russian invasion of Ukraine. However, in my meetings at the investment conference this past week, it was clear that the focus of the analysts and fund managers is more centred on the risk of China invading Taiwan. US Secretary of State Anthony Blinken said this past Monday that China is planning to annex Taiwan on a much faster timeline than previously thought.

The comments came in the wake of a speech from President Xi Jinping to the National Congress of the Chinese Communist Party in Beijing, in which Xi pledged reunification with Taiwan: “We will continue to strive for peaceful reunification with the greatest sincerity and the utmost effort, but we will never promise to renounce the use of force, and we reserve the option of taking all measures necessary.”

On Wednesday, Admiral Mike Gilday, the chief of US naval operations, warned that a move by China against Taiwan could come before the end of 2023.