Central Banks Nearing End of Increases

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At the close of business last Friday, global equities were higher on the week. The yield on the US 10-year Treasury note dropped to just below 4% from 4.25% a week ago. The price of a barrel of West Texas Intermediate crude oil rose to $88.15 from $85.75 last Friday while volatility, as measured by the Cboe Volatility Index (VIX), fell to 27 from 30.



First, the Reserve Bank of Australia surprised markets by hiking rates less than expected early in the month. Then the Bank of Canada caught the markets off guard on Wednesday by raising rates a less-than-expected 0.5% and signalling the rate-hiking cycle is getting closer to its end. It remains to be seen if the US Federal Reserve downshifts when its rate-setting committee meets next Wednesday.

Composite purchasing managers’ indices, which combine the manufacturing and services sectors, weakened further in most developed markets. The euro zone composite dropped to 47.1 from 48.1 last month, while in the UK, it dropped to 47.2 from 49.1. In the US, the index dropped to 47.3 from 49.5. Japan bucked the trend, with the composite edging up to 51.7 from 51. A number above 50 shows economies expanding while below 50 signals contraction.



In a surprise move, The Bank of Canada increased interest rates by only 50 basis points. What is more important, however, are the comments by the BOC governor who said the central bank is nearing the end of the tightening cycle. The TSX rallied on the news and gained 3.2% for the week.



With about 52% 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 2.1% while sales rose about 9.4% compared with the same quarter a year ago. Stripping out the contribution to earnings growth from the energy sector, EPS declined about 5%.

The interest rate increases by the Federal Reserve are beginning to show their effect. The US economy grew at an annualised rate of 2.6% in the third quarter, reversing two quarters of contraction. An improving trade balance and moderate consumer spending were contributors to growth while business investment in structures and residential investment both tumbled amid sharply higher interest rates. A shift in spending patterns from goods to services continues. Core measures of growth, such as final sales to domestic purchasers, which grew at just a 0.1% annual rate, showed the economy is close to stalling.

The Federal Reserve will announce its decision on an interest rate increase on Wednesday. We are expecting the announcement will give clarity to the path of future interest rate increases. If we hear similar comments to that of the Bank of Canada, we also expect to see markets rally going into the week’s end.



The European Central Bank on Thursday raised rates 0.75%. ECB President Christine Lagarde surprised markets by saying a substantial part of the tightening cycle is done and pointing out that there are clear signs of an economic slowdown in the euro zone. The more balanced view from Lagarde, moving away from an earlier inflation-centric focus, prompted investors to trim bets on further aggressive tightening by the ECB.

King Charles appointed Rishi Sunak prime minister of the United Kingdom on Tuesday. Sunak retained Jeremy Hunt as his Chancellor of the Exchequer, a move that soothed nervous markets. Sunak, who served as chancellor in Johnson’s cabinet, is seen as substantially more fiscally responsible than his immediate predecessor. Expectations of Bank of England rate hikes have moderated dramatically as well. During the worst of the market crisis, expectations for the terminal rate for this cycle were above 6.25%. Today, the market expects the policy rate to top out at around 4.75%.



The 20th National Party Congress of the Chinese Communist Party concluded last weekend with Xi Jinping securing an unprecedented third term as the party’s general secretary. Xi was able to staff the party’s Politburo and Politburo Standing Committee with allies and loyalists, cementing his hold on power. Those officials are generally seen as less market-oriented than their predecessors and less experienced overall. Markets fear the consolidation of power by Xi could stifle the economy and private enterprise. In the short term, the country’s zero-COVID policy and tighter regulation, along with the potential for an early military move against Taiwan, could limit investors’ appetites for Chinese assets.

We are recommending a move out from emerging market equities into global equities with exposure to emerging markets through multi-national large companies with head offices in developed markets.

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