The past several weeks have been eventful. Reporting of third-quarter corporate earnings results and forward guidance has begun. Central bank policy announcements have also driven the market narrative. Given the previously downbeat economic expectations, and nearly unanimous negative investor sentiment, the recent news has been a positive catalyst, leading to gains across most global equity and bond markets. We share some key takeaways below.

 

The Bank of Canada unveiled its latest interest rate decision on Wednesday, October 26^th. The Bank raised its overnight rate for the sixth time this year, bringing the policy rate to 3.75%. The 0.50% increase, which is still sizeable by historical standards, was less than the 0.75% expected by many investors. The increase was also less than the preceding two interest rate hikes of 1.00% and 0.75% delivered in July and September, respectively. The Bank of Canada cautioned that the policy rate will “need to rise further”, but guided that future increases may be equal to or less than 0.50%.

 

Not surprisingly, Canadian bond and equity prices responded favourably. There is a growing sense that monetary policy may be transitioning to a phase where central banks will be more gradual with their actions. Global investors paid attention to the Bank of Canada’s announcement, because the BoC was one of the first central banks to act forcefully earlier this year in an effort to tighten financial conditions. Global investors will look to other central banks to slow the pace of their tightening. Notably, the European Central Bank, which only began to raise rates this past summer, raised its policy rate by 0.75% in recent days.

 

Third quarter corporate earnings results have been mixed. On the negative side, the large “mega-cap” technology companies generally disappointed relative to most expectations. Some challenges were company-specific in nature but, generally speaking, the forward-looking guidance provided by the technology businesses, ranging from semiconductors, to software makers, to online and e-commerce platforms, pointed to weakening conditions across a broadening set of end markets.

 

In contrast, the results from the U.S. banks and payment networks suggested that the U.S. economy, and the U.S. consumer in particular, remain resilient. Cash balances among U.S. households continue to be above average. While consumer spending is expected to moderate in the face of high inflation and growing economic uncertainty, spending reductions have not materialized yet. In addition, lending activity has remained healthy, with strong loan growth across commercial and mortgage loans, as well as credit cards. Overall, U.S. bank management teams were consistent in their assessment - they expect challenges to eventually surface, but there are few signs of an imminent shift.  Canadian banks will report the results for their fiscal years ending October 31^st one month from now.

 

We continue to believe that the North American economy is more resilient than some may appreciate. We expect that the economic and earnings challenges will be more meaningful in the first half of next year, once this year’s rate hikes have been more fully digested. It is important for investors to remember that global markets are forward-looking, and tend to reflect the outlook for corporate earnings two or more years into the future. A shift to a more patient approach by central banks in the short-term would still be welcomed by investors, because such a shift would reflect greater confidence in the timing and effectiveness of controlling inflation. We believe a pivot to a more measured approach, and greater certainty regarding the timing of an eventual economic recovery, are only several months ahead of us.

 

If you have any questions, please do not hesitate to contact us.