Strong Start to the New Year

man walking down the road to 2023

At the close of business last Friday, global equities were higher for the first week of the new year. The yield on the US 10-year Treasury note declined 163 basis points to 3.60% since our report while the price of a barrel of West Texas Intermediate crude oil fell $4.50 to $74.75. Volatility, as measured by the Cboe Volatility Index (VIX), rose from 21 to 21.5.



With a few exceptions, most major global equity indices fell at least 10% in 2022, and many fell much more. The S&P 500 posted a total return of -18.1%, the MSCI ACWI fell 18.4% while the EAFE and emerging markets indices fell 14.5% and 20%, respectively. As investors know, bonds offered portfolios little protection, as exemplified by the Bloomberg Global Aggregate Index posting an 11.2% loss last year. On the bright side, researchers at Deutsche Bank found that big down years in US bond markets (which they define as featuring yield rises of over 70 basis points) were followed by up years in 15 out of 21 occurrences.



The Canadian labour market added 104,000 jobs in December. This was well above expectations of a slowing economy. Our unemployment rate fell to 5 per cent, which marked the fourth month of decline. With all economists and analysts that we follow predicting a slowdown, these employment numbers show that the economy is still not slowing. The Bank of Canada makes its next rate announcement on January 25th.

What has become increasingly clear is that our Central bank and the Federal Reserve are focused on inflation. We will receive more CPI numbers before their next rate move, and it is this number more than anything else that will determine future rate moves.



Friday’s employment report in the United States was a mixed bag. In December, the economy added a more-than-expected 223,000 jobs, though downward revisions to the prior two months offset the upside surprise. The central bank will, however, take comfort in a rise in the labour force participation rate to 62.3% from 62.1% and be heartened by a smaller gain in average hourly earnings of 4.6% from a downwardly revised 4.8% in November. Taken together with data earlier in the week showing that US job openings remain extremely elevated, there is little in the report to change the Fed’s hawkish outlook in the near term.

For months, markets have taken every grain of evidence of moderating inflation as a sign that the Fed will soon halt its rate hikes and start cutting them shortly after that. But the minutes of the December FOMC meeting, released Wednesday, show that the central bank is contemplating no such thing. Indeed, they show that no member of the rate-setting committee expects to cut rates in the first half of 2023. The committee also made clear that higher stock prices and lower bond yields—easier financial conditions, in the Fed’s parlance—could cause it to have to hike further than expected if those conditions bolster economic activity and slow inflation’s decline. While goods prices are moderating rapidly, the Fed remains concerned that a robust labour market will boost continued wage growth. On Thursday, the International Monetary Fund warned that the US has not yet turned the corner on inflation and urged the central bank to stay the course on rate hikes. Short-term interest rates will be announced by the federal reserve on February 1, 2023, but it may be small compared to 2022 decisions.

Top US banking regulators, including the Fed and the Federal Deposit Insurance Corporation, issued a statement on Tuesday highlighting the risks posed to the banking systems by crypto-assets. Among the perils focused on were fraud among market participants, legal uncertainties around custody practices, contagion risks within the crypto ecosystem, and its lack of mature, robust risk management and governance.



Concerns over the potential for blackouts and the rationing of natural gas have eased amid unseasonably mild temperatures in much of Europe. Stockpiles remain above average. While prices are much higher than usual for this time of year, they are way below the peak levels hit last summer when Russian supplies were halted. Lower energy prices should ease the cost-of-living crisis that swept through Europe in the wake of the Russian invasion of Ukraine.

Lower energy costs helped bring down euro zone inflation from 10.1% year over year in November to 9.2% in December. However, stripping out food and energy, prices rose a record 5.2% last month, which should keep the European Central Bank in a hawkish posture.



As of Thursday morning, for the first time since 2014, no bond in Bloomberg’s database carried a negative yield. At the peak two years ago, over 4000 issues worth $18.4 trillion had negative yields. The widening of the Bank of Japan’s yield curve control band and the belief that its super loose monetary policy will end later this year has helped drag the remaining negative yielders back above zero. Japanese Prime Minister Fumio Kishida said this week that his government will review its inflation accord with the Bank of Japan when the central bank’s new governor takes office in early April, setting the stage for a policy shift.

Amid the rapid spread in China of the COVID virus after restrictions were suddenly lifted, the World Health Organization said that two known Omicron variants are driving the wave of infection but that no new variants had been reported. In recent days, mobility data in China has shown an increase in activity, suggesting that the initial reopening wave has crested.



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