Looking Ahead in 2023

Businessman's hand writing 2023 on glass

At the close of business last Friday, global equities were higher on the week but off their best levels after a few weaker-than-forecast tech earnings reports. The yield on the US 10-year note firmed five basis points from a week ago to 3.82% while the price of a barrel of West Texas Intermediate crude oil was steady at $76.50. Volatility, as measured by the Cboe Volatility Index (VIX), was virtually unchanged at 13.9.



The Conference Board’s index of leading indicators fell for the fifteenth straight month in June. That’s the longest streak outside of a recession since the inception of the index in 1959. Another traditional harbinger of recession, the 2s-10s Treasury yield curve, inverted more deeply this week, to -105 basis points.

Current valuations suggest global equity values are priced fairly .



This is a staggering figure: For every $1 in income, Canadians have over $1.8 in debt.

Soft landing, hard landing, no landing?

These terms seem to be front and centre in the financial media, and many people aren’t even sure what they mean. The question is whether we’ll experience a recession in Canada. We believe that the recession has been postponed, not cancelled. Despite the aggressive policy tightening we’ve seen so far, economic activity in Canada proved to be more resilient than expected amid a strong rebound in the services sector. Data year-to-date suggests that Canada had a better start to the year than expected and so far, none have slipped into official recession. However, we argue that an eventual declaration of recession doesn’t matter as much when it comes to asset allocation, since it’s typically announced retroactively. The capital markets are forward looking, so by the time it’s proclaimed, it’s often already too late to make portfolio changes.

The key for us is to identify where the balance of risks lies. Given the economic data that we look at, we suggest that the economy is likely to weaken before it gets better. While there are many new factors at play this time around (pent-up savings from stimulus cheques, potential job hoarding, geopolitics, and climate change, among others), it’s important not to fall into the trap of saying “this time is different,” because it rarely is. Our best tool remains the same as we have used in the past: our table of recession indicators. While not perfect, the trend in economic data points helps to paint either a picture of improving or weakening economic health. As economic variables ebb and flow, it’s not simple enough to use a binary outcome for these signals. Rather, we prefer to use a traffic light signal system; green is good, yellow is slowing, and red is full stop, indicating recessionary levels. We further break the signals down to whether they to lead the economy, occur at the same time, or lag.

We maintain that Canadian growth will deteriorate as we move closer to a recession by year-end.

The Canadian dollar is projected to increase to 75 to 77 cents relative to the US dollar over the next twelve months.




With just under 17% of the constituents of the S&P 500 Index having reported for Q2 2023, blended earnings per share shows that earnings declined 9.4% compared with the same quarter a year ago. The energy and materials sectors have shown the sharpest declines. Sales growth is flat year over year.

Former US Federal Reserve Chair Ben Bernanke said Thursday that a 0.25%-basis-point hike from the FOMC this week may be its last of the cycle.

Last week’s more benign US inflation data and news this week that used car prices continue to fall, saw US 10-year Treasury yields slip to 3.73% on Wednesday. However, Thursday morning’s weekly jobless claims data came in below expectations, falling to the lowest level in two months. This suggests that the labour market remains tight and that upward pressure on wages remains a concern. Yields rose to 3.85% following the release of the data.



Inflation in the United Kingdom rose more slowly than expected in June, snapping a string of upside surprises. CPI rose 7.9%, down from 8.7% in May. Core inflation rose 6.9%, down from 7.1%. Markets now see a 0.25% hike as slightly more likely than a more aggressive half-point rise when the Bank of England’s monetary policy council next meets on 3 August.

Two of the more hawkish members of the European Central Bank Governing Council, Germany’s Joachim Nagel and Klaas Knot of the Netherlands, both said this week that they expect the ECB will probably hike rates at its policy-setting meeting this week, but they stopped short of endorsing a further hike in September. Knot said a September hike is “by no means a certainty,” while Nagel said the data will decide whether the ECB hikes further. Futures markets anticipate a 0.25% rise next Thursday and reckon there is a 60% chance of a further quarter-point move in September.



A joint statement from China’s Communist Party and its government vowed to improve conditions for private businesses and promised to treat private and state-owned enterprises equally. The statement is seen as a tacit admission that the recent government crackdown on private businesses went too far.

Amid weaker-than-expected economic growth, youth unemployment in China rose to 21.3% in the second quarter, raising concerns over possible unrest.

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