Global equities were higher on the week but off their peaks, as robust US labour data suggest the US Federal Reserve may need to tighten monetary policy more than investors have expected. The yield on the US 10-year note was little changed at 3.53% after trading as low as 3.33% in the wake of what was perceived as a dovish Fed press conference. The price of a barrel of West Texas Intermediate crude oil fell about $3 from a week ago to $77.50 while volatility, as measured by the Cboe Volatility Index (VIX), was little changed at 18.5.
Financial markets rallied on Wednesday and Thursday after the Fed, the European Central Bank, and the Bank of England all raised rates at their early-February meetings. The Fed slowed its tightening pace to 0.25%. We were expecting a .50% increase after a 0.5% hike in December and a series of four 0.75% hikes ended in November. The fed funds target range now stands at 4.50% to 4.75%. Markets have priced in less than one additional quarter-point rate move. The markets are also expecting rates will start to come down in Canada and the US in the second half of the year.
CANADIAN ECONOMIC NEWS
There are a growing number of politicians from both major parties that are speaking openly about our federal budget. Their point is that the amount of spending by our federal government is making it much harder for the Bank of Canada to bring down inflation. We hope that the next budget will curb spending and align with our central bank to bring inflation back to the 2% goal.
US ECONOMIC NEWS
With about 50% of the constituents of the S&P 500 Index having reported for Q4 2022, blended earnings per share show that earnings declined 5.4% while sales rose about 4.3% compared with the same quarter a year ago. Companies with more global than domestic exposure are reporting weaker earnings and sales in Q4.
It is clear from the Fed that they are nearing the end of their tightening cycle. However, the US economy added 517,000 jobs in January, far exceeding the consensus forecast of an increase of 188,000. The surge in job creation saw the unemployment rate fall to a 53-year low of 3.4%. Average hourly earnings rose 4.4% year over year, down from 4.6% in December. The strong data means the US may actually achieve a soft landing and avoid a recession later this year.
I have been asked a lot about the debt ceiling in the US. Failing to raise the debt ceiling and a nation that is the reserve currency of the world with 31 trillion in debt, defaulting on their obligations would be catastrophic for the US. President Joe Biden and Speaker of the House of Representatives Kevin McCarthy met at the White House on Wednesday to discuss raising the nation’s debt limit. Republican lawmakers want an agreement to limit future spending in exchange for raising the limit while the White House contends Congress should raise the ceiling without conditions. While no agreement was reached after Wednesday’s talks, McCarthy said he is optimistic that the two sides can reach common ground. We agree. We have seen this play out each time raising the debt ceiling comes to congress. They debate until the eleventh hour and then agree to compromise.
EUROPEAN ECONOMIC NEWS
The ECB was hawkish, hiking fifty basis points and all but promising an additional half-point hike in March. The BOE signalled that inflation has peaked and that the British economy is likely already in recession.
JAPAN, CHINA and EMERGING MARKETS ECONOMIC NEWS
China’s manufacturing purchasing managers’ index rose more than 10 points in January as the lifting of COVID restrictions caused a surge in economic activity. The PMI rose to 52.9 from 42.6 in December. Forecasts for economic growth have been raised in the wake of the economy’s rapid reopening. For example, the International Monetary Fund this week raised its China GDP forecast to 5.2% in 2023 from October’s outlook for 4.6%. We believe that China and other emerging markets are likely in for sub-optimal performance in 2023 and 2024 as purchasing managers in developed markets continue to cut back on orders as their economies continue to slow.