To my clients:

It was a down week for North American stock markets with the Canadian TSX finishing down 0.1%; the U.S. Dow Jones Index down 1.4%; and the U.S. S&P 500 down 3.3%.

Last week I noted that “the show” this week would be the U.S. Federal Reserve policy announcement – and indeed it was. The announcement itself was largely in-line with expectations in that the Fed raised rates by 0.75% (although there were hopes that perhaps a lesser 0.50% increase might be in the cards as was the case with the Bank of Canada the week prior), but the accompanying press release suggested that a slowed pace of rate increases may well be forthcoming in future policy announcements. Markets initially surged on the news. HOWEVER, in the subsequent press conference just 30 minutes later, Fed Chairman Jerome Powell quashed expectations for an “easier” Fed, suggesting that although the pace of rate increases might slow, the “ultimate destination” might be higher than investors currently expect. With these precise words, markets turned sharply lower (particularly growth/tech stocks).

I’ll be honest – I find the Fed perspective unsettling. As I’ve written in these communiques before, if one looks at the month-over-month inflation rate (and NOT the year-over-year rate) it is apparent that inflation has already slowed materially. Further, in the headline data, there are very material lags in the biggest component of the inflation measure – namely housing costs. Anecdotal evidence widely suggests that housing costs are coming down – and coming down fast. But in the official data these costs are still rising. To my eye, that’s a big problem. Admittedly, the Fed is also interested in reducing labor force strength, and this metric is not cooperating (more brief comments on that below). But still it’s worth pointing out that of the major global central banks, the U.S. Federal Reserve is beginning to stand alone on an island. As noted, the Bank of Canada already began slowing it pace of rate hikes, and the European Central Bank and the Bank of England have both indicated a willingness to do the same with much less aggressive rhetoric. My hope is that the aggressive stance put forth by the Fed is more of an attempt to “jawbone” the economy into submission rather than actually follow through on its objectives. And I’ll also add that the Fed’s current stance really does appear to be an attempt to atone for being slow to react to inflation it deemed transitory in late 2021 – “face-saving” if you will. Regardless, a mild recession in early 2023 seems a near certainty at this juncture.

This is the first week of a new month and, with it, the usual “Big 3” economic indicators I rarely, if ever, fail to mention. But this week these measures are the “sideshow”, and not “THE” show discussed above. Nonetheless, I’ll note that ISM Manufacturing slightly beat expectations at 50.2, although this is just barely in expansion territory with the line of divide between expansion and contraction being found at a reading of 50.0. ISM Services came in significantly better at 54.4 which is a low-end “decent” reading by historical standards. But it was with employment where real strength remains in that the U.S. created 261,000 more jobs in October, and the prior September reading was revised upward by an additional 31,000. Nonetheless, this last bastion of true strength will also roll over if the Fed doesn’t let up on the brakes soon.

That’s it for this week. All the best,

Nick

Nick Scholte, CIM, FCSI

Senior Portfolio Manager

Scholte Wealth Management
RBC Dominion Securities Inc. │ Tel: 604.257.7569 │ Fax: 604.235.9950
3200-1055 West Georgia │ Vancouver, BC │ V6E 3P3
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