To my clients:
It was an up week for North American stock markets with the Canadian TSX finishing up 0.5%; the U.S. Dow Jones Index up 0.2%; and the U.S. S&P 500 up 1.1%.
Point form again this week (I’ve had some feedback that this is preferred… I definitely won’t always write point form, but I’ll try to do so more often):
- Owing to signs inflation is slowing, Fed Chair Jerome Powell fueled markets to the upside in a Wednesday speech indicating that it may be appropriate to “moderate” the pace of rate increases as soon as the next policy announcement on December 14th
- The above comment suggests that a 0.75% rate increase is off the table at the next meeting, with the more likely increase being 0.50% or even an outside possibility of “just” a 0.25% increase
- If inflation continues to cooperate, the end of the Fed rate hike cycle is near… it’s possible the next hike might be the last
- Before the next meeting, there will be two more important reads on inflation with the Producer Price Index (a measure of wholesale inflation) to be released next Friday, December 9th, and the Consumer Price Index (a measure of retail inflation) to be released the following Tuesday, December 13th. These will be critical in determining the Fed’s course. I believe both will show a continued decline in inflation.
- It is also my belief that the Fed has already increased rates too far and the lagged effect of these increases will result in a mild recession in 2023
- Interestingly though, there is growing “chatter” amongst market strategists that continued economic resiliency might see a “soft landing” play out where a recession is avoided. This would be the best case scenario.
- Supportive of the soft-landing scenario was today’s employment report which revealed 263,000 jobs were created last month. Such job creation levels are very good by historical standards.
- Retail sales were also better than expected which reveals consumers are still spending (likely because most have a job)
- However, the ISM Manufacturing Index came in at 49.0, the first contractionary reading in this widely followed statistic since mid-2020 in the depths of pandemic lockdowns
- Overall, Should the Fed cooperate in 2 weeks’ time, the markets seem poised to grind higher into year-end, reducing the losses in what has otherwise been a very difficult year
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
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