At the close of business last Friday, global equities gained this past week on hopes that central bank tightening cycles are nearing an end despite higher bond yields, a stronger dollar and firm oil. The yield on the US 10-year Treasury note rose nine basis points from last Friday to 4.34%, retesting the highest levels of the cycle. On the week, the price of a barrel of West Texas Intermediate crude oil rose $2.40 to $90 while volatility, as measured by the Cboe Volatility Index (VIX), fell to 13 from 14.5 a week ago.
This past week, we attended an investment conference. Some key points are as follows:
We expect growth and inflation to continue to slow, leading to a mild recession in the first half of 2024. We expect this to be followed by robust growth. There is risk to the downside in the very short term. Oil has experienced a significant climb and going forward, we are negative on oil prices remaining elevated. Your portfolio managers are building more defensive positions in your portfolio at this time. From a bond perspective, bonds are most attractively priced in the last 15 years and are averaging a 5% yield.
Your fund managers have been adding to duration and long-term bonds. Investment grade corporate bonds are now at their lowest prices in 30 years. We are recommending that exposure to high-yield bonds be reduced. Mid Cap equities historically outperform large cap equities and this sector is also very attractively priced. We remain optimistic about the performance of your portfolio through the end of this fiscal year.
As noted above, with a mild recession expected in the first half of 2024, we expect our central bank and the federal reserve in the US to start cutting interests rates at some point in the first half of 2024. With bonds currently yielding 5 percent, the prospect of reduced interest rates adds the potential for capital gains on top of the current yields for the bond exposure in your portfolio. 2024 is shaping up to be a very good year.
CANADIAN ECONOMIC NEWS
It is worth noting that only 5 percent of Canadian exports go to China. The majority of our exports continue to go to the US and the announcement of the strike and major US auto manufactures is a cause for concern. We will continue to follow this closely.
US ECONOMIC NEWS
After peaking at 9.1% in June 2022, US consumer prices fell every month until June of this year, when the inflation rate bottomed at 3%. Since then, inflation has rebounded to 3.7% while the core rate has continued its decline, easing to 4.3% in August from 4.7% in July. On a month-over-month basis, CPI rose at its fastest pace in over a year, rising 0.6%, with gasoline costs accounting for over half the advance. Core CPI, which strips out food and energy costs, rose at its fastest rate since February, gaining 0.3% on the month. Core services inflation, a focus for Fed policymakers, rose for the second month in a row, by 0.37%, led by a jump in auto insurance prices. Producer prices also advanced in August. Despite the inflation uptick, traders see just a 33% chance of an additional Fed rate hike in coming meetings. Investors hope the US Federal Reserve will soon indicate that rates have peaked for this cycle.
EUROPEAN ECONOMIC NEWS
With European economic data softening, markets were unsure if the European Central Bank would deliver a rate hike on Thursday. But with inflation stubbornly high, policymakers raised rates 0.25% to a record-high 4% while also signaling they are likely finished hiking for this cycle. The central bank’s statement said that “based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.” The central bank raised its 2024 inflation forecast to 3.2% from 3% while lowering its 2023 and 2024 growth forecasts. ECB President Christine Lagarde said that risks to growth are “tilted to the downside.”
Wage growth in the United Kingdom is presenting a challenge for the Bank of England as it tries to get inflation under control. Wages rose at a 7.8% annualized pace in the three months ending in July, outstripping the 6.8% rise in inflation and increasing fears of a wage-price spiral. Stagflation worries increased following news that the UK economy contracted by 0.5% in July while industrial production declined 0.7%.
JAPAN, CHINA and EMERGING MARKETS ECONOMIC NEWS
Economic activity in China rebounded modestly in August, with retail sales rising 4.6% year over year, beating forecasts and nearly doubling July’s 2.5% rise. Industrial production rose 4.5% from a year ago, eclipsing July’s 3.7% advance. The uptick in activity raised hopes that recent targeted efforts to boost the economy are helping to stabilize it. This week, the People’s Bank of China cuts its required reserve ratio by 0.25% to 7.4%, adding additional stimulus, with more measures expected in the coming months.