Inflation Cooling; Markets Responding

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At the close of business last Thursday, global equities were higher on the week amid solid early Q1 earnings reports. The yield on the US 10-year note rose to 3.51% from 3.28% on Thursday of last week while the price of a barrel of West Texas Intermediate crude oil added $2.50 to reach $83.Volatility, as measured by the Cboe Volatility Index (VIX), fell to 17.5, the lowest level since December 2021.



The International Monetary Fund updated its World Economic Outlook. The global growth outlook was downgraded by 0.1% to a sluggish 2.8% in 2023 but is expected to improve modestly to 3% in 2024, though the risks to the outlook are heavily tilted to the downside. Additionally, the IMF stated that many countries should tighten fiscal policy to ease inflation, restore debt sustainability and rebuild fiscal buffers.



As expected, the Bank of Canada kept rates unchanged at policy-setting meetings this past week. The Bank of Canada held its target for the overnight rate at 4½%, with the Bank Rate at 4¾% and the deposit rate at 4½%. The Bank is also continuing its policy of quantitative tightening.

We can see that in many countries, inflation is easing in the face of lower energy prices—normalising global supply chains, and tighter monetary policy. However, labour markets remain tight and measures of core inflation in many advanced economies suggest persistent price pressures, especially for services.

As the word “recession” is now in the minutes of central bank communications, I believe we will begin to see interest rates start to come down in the second half of this year. As more households renew their mortgages, we continue to recommend variable rates. The Bank of Canada expects inflation to fall quickly to around 3% in the middle of this year and then decline more gradually to the 2% target by the end of 2024.



The US budget deficit for March nearly doubled from year-ago levels, rising to $378 billion from $193 billion. That brings the fiscal year-to-date deficit to $1.1 trillion, up 65% over the same period a year ago.

Central banks rarely explicitly forecast recessions, but the US Federal Reserve staff just did, stating that the fallout from the banking crisis will be the catalyst for a recession this year. The more credit tightens, the less the Fed will need to hike rates. Markets currently expect that the central bank will pause after one more quarter-point hike at its policy-setting meeting in early May.



We fully expect that the European Central Bank will continue with interest rate hikes as we proceed this year. Inflation is still too high, especially core inflation.



New Bank of Japan Governor Kazuo Ueda said that it is appropriate to keep the central bank’s super loose monetary policies in place for now.






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