Strong Start to 2023
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Global equities were higher on the week amid further evidence that US inflation continues to slow. The yield on the US 10-year Treasury note fell 0.13% from the week before to 3.47%, while the price of a barrel of West Texas Intermediate crude oil added $4 to $78.75. Volatility, as measured by the Cboe Volatility Index (VIX), fell to 19.3, close to its lowest level in a year, from 21.5 a week ago.
MACRO NEWS
We are off to a strong start in the first nine days of trading in 2023 with all major indices posting positive returns. Despite this impressive start to the year, the World Bank slashed its 2023 growth outlook and warned of a global recession. It expects 1.7% global growth this year, about half the pace it forecast in June. Taiwan’s exports fell for the fourth straight month in December as global demand, particularly for semiconductors, softened. While we are expecting a recession to develop at some point in the second half of 2023, our expectation is for the US to experience a mild recession while Canada may be longer in duration.
In North America, we continue to see growth slowing but we also see resilient consumers, strong employment levels, and a stock market in Canada and the US that remains largely oversold and trading at a significant discount. In this environment, the term ‘Fortress North America” refers to the fact that we believe the equity markets, especially in the US, will likely be the best place to invest in 2023.
We remain less bullish on Europe as the Euro economies were behind in increasing interest rates and the Ukraine conflict has added to their problem will high inflation. We also remain less bullish on Asian equities as slowing global demand will significantly hurt their export industries.
From a fixed-income standpoint, we believe Bonds offer a significant opportunity for capital appreciation as interest rates begin to fall in the second half of 2023.
Our expectation for inflation in Canada and the US is that it is projected to continue to decline. We believe inflation will likely fall to 4% by mid-year and continue to drop back to the 2% level in 2024.
What does this mean for interest rates?
Canada will announce its next interest rate announcement on January 25th and we expect to see a 25 basis point increase. The Federal Reserve in the US will make its announcement on February 1st and we expect to see a 50 basis point increase.
What the markets are waiting for is for the Federal Reserve to announce that they have done enough and are at the end of the tightening cycle. We expect we will hear this in their March commentary.
Do not expect any interest rate relief if the first half of 2023, however. As evidence builds that Canada and the US are headed for a recession at some point in the second half of 2023, I believe we will see both central banks begin to reduce interest rates resulting in rates closer to where they were before the tightening started at some point in 2024. “Short-term pain for long-term gain.”
CANADIAN ECONOMIC NEWS
Canadian consumers, and the economy overall, have proven surprisingly resilient in the face of rising interest rates. Our economy added 104,000 jobs in December, well above expectations. We know that Canadian banks are increasing their reserves for defaults but delinquencies on mortgage payments remain around historic lows.
US ECONOMIC NEWS
Growth in consumer prices in the United States decelerated for the sixth straight month in December. The Consumer Price Index declined 0.1% from November and rose a more moderate 6.5% from a year earlier, down from November’s 7.1% pace. Since CPI peaked at 9.1% in June, falling energy and goods prices have contributed to the more measured pace of price gains–gains that have been concentrated largely in the cost of services. The fed will announce its interest rate moves on February 1st and March 22nd. Late this past week, several FOMC members said they expect to hike rates in smaller increments going forward.
EUROPEAN ECONOMIC NEWS
Bank of England Chief Economist, Huw Pill, said this week that inflation pressure may be easing as the labour market cools, though he warned of the potential for inflation to prove more resilient. Despite the positive monthly surprise, GDP shrank by 0.3% in the three months to the end of November.
JAPAN, CHINA and EMERGING MARKETS ECONOMIC NEWS
After working together for the past decade to overcome persistent deflation, the Bank of Japan and the Japanese government must now each play their own role. We believe the groundwork is being laid for an exit from the BOJ’s super loose monetary policy.
