After a tumultuous September and October, there was a lot of good that came out of November – especially on the inflation front where we saw a return of a downward trend in Canada, the U.S. and Europe.  Europe’s inflation rate coming in at 2.9% for the month of October was a genuinely positive surprise, and markets are now pricing in rate cuts by the ECB as early as April next year.  Outside of the inflation story last month, after this week’s economic data out of the U.S and Canada, major indices globally saw a meaningful lift during November.  The month-over-month returns were 8.9% for the S&P 500, 8.74% for the NASDAQ, 6.06% for the TSX, 1.5% for the FTSE 100 (UK), 5.73% for the STOXX Europe 600.  There remained a downward trend in equity markets in China with the Hang Seng relatively flat (-0.3%), however the NIKKEI 225 (Japan) saw a lift of 5.96%.

 

The major driver of this rally in equities has had one major undercurrent – a more positive outlook on inflation and the direction of interest rates.  As I mentioned at the beginning of this note, inflation has come down meaningfully across the board and though inflation here in Canada and abroad remains above target – there remains optimism that 2024 will bring with it an end to the higher for longer narrative near the middle of the year as central banks begin to cut rates.  As of Friday, the market is pricing in rate cuts by the Federal Reserve starting in May of next year – for which we expect a total sum of 100 basis points (1%) in cuts by the time December 31, 2024 arrives.  Dependent on the occurrence of recession here in Canada, the Bank of Canada’s hand may be forced resulting in cuts arriving as early as April next year.

 

This week saw the arrival of some key data points for both the Canadian and U.S. economies.  Firstly, here at home Q3 GDP reflected a contraction in the Canadian economy with a -1.1% result – this would have been substantially worse had government spending in the last quarter not increased by 7.3%. (RBC Economics)  Though Q2 GDP was revised up from -0.2% to a 1.4% increase, meaning Canada has yet to enter a technical recession (Two or more successive quarters of negative GDP growth), per-capita GDP has been on the decline over the last five quarters.  A positive note was household purchasing power remain little changed from last quarter, a testament to the fact inflation has come down while real wage growth continues to remain elevated (4.8% YoY in November).  This positive note is undermined when you consider the unemployment data that came out on Friday reflecting an increase in the unemployment rate from 5.7% to 5.8% in the month of November. (RBC Economics)

 

Key data out of the U.S. this week focused on both the labour market and personal consumption expenses (PCE Inflation).  As was expected, PCE inflation in the U.S. stayed flat month-over-month in October, coming in at 3.0% while core PCE inflation came in at 3.5%. (Reuters)  Of comfort to the Federal Reserve, but likely no one else, the U.S. labour market has also shown signs of cooling as more Americans applied for unemployment benefits than the previous week and wage growth slowed down from September's monthly increase of 0.5% to a modest 0.1% in October.  This soured market sentiment in trading on Thursday after the data was released, however after comments from Jerome Powell on Friday regarding the fact that the Federal Reserve’s monetary policy is “well into restrictive territory” we saw an impressive rally in equity and bond markets.  (BNN Bloomberg)  Yields on both Canadian and U.S. sovereign bonds declining by more than 4% and 3.25% on a 10-year term.  It is important to be mindful that this is just one trading day and headwinds persist for the global economy, especially with conflict in the Ukraine and Israel still a major geopolitical risk. In addition, Powell was adamant that rate hikes are still on the table if inflation does begin to lift again, but for now central bankers in the U.S., at home and abroad are comfortable with the restrictive level at which their interest rate policies currently sit.