It has been a relatively calm and positive start to the year for global equities and bonds. The past few weeks have been marked by Q4 corporate earnings reports, more layoff announcements from the technology sector, and closely-watched updates from the Bank of Canada and the U.S. Federal Reserve. We address all three below.

 

The Bank of Canada unveiled its latest policy announcement that was largely in-line with most investors’ expectations. The Bank of Canada raised its benchmark interest rate for the eighth consecutive time. The increase of 0.25% was its smallest move since it began raising interest rates nearly a year ago. Investors were understandably focused on the central bank’s future plans and, in particular, the following statement: “we expect to pause rate hikes while we assess the impacts of the substantial monetary tightening already undertaken.”

 

The debate that is likely to intensify in the months ahead is the duration of the pause, and whether the Bank is likely to reduce rates at some point later this year. Inflation has been moderating, and leading indicators of economic activity are slowing. These are prerequisites for policymakers to even consider the easing of financial conditions. Nevertheless, in our view it is premature to anticipate a rate cut. A more pronounced downturn in the economy will be needed to convince policymakers that they can at least temporarily turn the page on inflation and shift their attention back to growth.

 

The fourth quarter earnings reporting season has played out over the past few weeks. In absolute terms, the results have been unfavourable, with earnings declining year over year across many sectors. The results have, however, been consistent with investor expectations. As a consequence, equity markets have reacted positively. The forward-looking guidance offered by many companies has been predictably soft, given expectations of a mild economic contraction. U.S. consumers and businesses were, however, in relatively healthy financial conditions to start the year, with ample liquidity and deposit balances. This financial strength will provide support for consumption, investment and debt payments going forward.

 

The technology sector has also been in focus recently. Over the past few months, tens of thousands of layoffs have been announced by some of the world’s most influential technology companies. While headline-grabbing, the layoffs are not as meaningful as one might think. First, some of these actions are simply an unwinding of the extreme hiring that took place in recent years, particularly in the midst of the pandemic when demand for anything digital exploded. In addition, while the broad technology sector makes up a large part of the U.S. and global stock market (more than 20%), its economic impact is far less meaningful. The tech sector represents closer to 5% of U.S. GDP and an even smaller proportion of U.S. employment. The layoffs will have a relatively limited impact on the overall economy.

 

The past few weeks have reinforced some of our convictions for the year ahead: inflation and growth are moderating, and central banks are nearing the end of their tightening campaigns. This position represents a marked difference from one year ago, and should foster a more normal and healthy backdrop for investment portfolios this year.

 

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

 

Drew M. Pallett LL.B. CFP

Senior Portfolio Manager and Investment Advisor 

RBC Dominion Securities

Email: drew.pallett@rbc.com

Website: www.pallett.ca