To my clients:

It was a mixed week for North American stock markets with the Canadian TSX finishing up 0.2%; the U.S. Dow Jones Index finishing down 0.2%; and the U.S. S&P 500 finishing up 1.6%.

What a week: there were big developments at the U.S. Federal Reserve as well as in U.S. economic news (it is, after all, the first week of a new month with the typical “Big 3” economic reports I always comment upon). I’ll keep my comments brief, but will touch upon each of these themes.

First, and most importantly I believe, Jerome Powell of the U.S. Federal Reserve clearly softened the Fed’s rhetoric when discussing this week’s 0.25% increase in interest rates in the U.S. During his press conference, Mr. Powell cited signs of “disinflation” in the economy no less than a dozen times. “Disinflation” is when the pace of inflation slows, and is distinct from “deflation” when prices actually fall. For reference, during the prior press conference in December, disinflation was cited a grand total of…….. 0 times. By frequently citing disinflation, as well as softer language sprinkled throughout his comments, it certainly appeared as though the Fed might be contemplating the end to its rate hiking cycle. Clients will know that, heading into this meeting, my expectation was that this would be the last rate increase given that the annualized month-over-month inflation rate the past seven months is already below the Fed’s target of 2.0%. Further, owing to the lagged effect of rate increases, I believed the Fed had already increased rates too far.

But then came the U.S. Employment report this morning showing a staggering 517,000 new jobs were created in January, and a new 54 year low in the unemployment rate! This is stunning strength in the labor market at any time – let alone in an economy said to be materially slowing. Thus, fearing possible wage inflation from the strong demand for labor, this report may just inspire the Fed to go a bit further with its rate increase agenda. Incidentally, the ISM Services Index also re-accelerated in January back to a solid expansionary reading, with just the ISM Manufacturing Index remaining in contractionary territory. All else being equal, and despite the increased prospects for an additional rate increase in the U.S. as a result of this morning’s employment report, the improved economic metrics suggest that a so-called economic “soft landing” might actually be a real possibility. As a reminder, a “soft landing” occurs when the Fed raises rates to slow the U.S. economy yet doesn’t slow the economy enough to cause recession. Soft landings are rare but, if achieved, represent an economic holy grail of sorts.

For client portfolios it’s been a very good start to the year so far. Economic prospects (see above) are looking better also. But with such massive forces continuing to ebb and flow, I’d caution that market volatility is likely to continue. As always, I’ll monitor with interest and vigilance.

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
Toll Free: 1.844.665.9900 │Email: nick.scholte@rbc.com

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