The month of November is proving to be one of the stronger periods of the year with global equity and bond markets moving notably higher. The gains have offset some of the weakness experienced during the first part of the fall. A few factors have driven the recent market strength, particularly inflation trends, which continue to show signs of abating. We discuss this more below.

 

The U.S. inflation reading for the month of October was released this week. The “headline” inflation figure includes all categories (goods and services). The “core” inflation figure removes more volatile inputs such as energy and food prices. Both measures came in below expectations. Both suggested that the easing of inflationary pressures continues to progress. A year ago, the year-over-year figures stood at nearly 8.0% for headline inflation and nearly 6.5% for core inflation. Today, these figures are about 4.0% and 3.2%, respectively.

 

In Canada, the recent inflation data has told a similar story. The figures for October will be released over the next few days. The figures for September, released nearly a month ago, reflected an easing in inflation trends, which provided some relief to investors after a brief reacceleration in inflation numbers during the summer. The Canadian headline and core figures as of September were both under 4.0%, meaningfully lower than the 6.5%-7.0% range witnessed a year ago.

 

Beneath the surface, some inflationary pressures remain strong in Canada. For example, shelter, which represents about 25% of the Canadian Consumer Price Index, continues to reflect notable pricing pressures. Mortgage interest costs are up nearly 30% year-over-year and have been the biggest contributor to Canadian CPI of late. Interest costs will not moderate soon, given the need of many Canadian households to refinance their mortgages over the months to come.

 

The key takeaways with respect to inflation trends differ depending on one’s perspective. For consumers, falling inflation does not equate to falling prices, but rather a lower rate of price increases. Consumers may still be faced with a relatively high cost of living compared to years ago. For investors, falling inflation is a meaningful tailwind, because it improves the odds that central banks such as the U.S. Federal Reserve and Bank of Canada will not have to tighten financial conditions further by raising interest rates. This effect has been reflected in recent positive market movements.

 

It is important to distinguish between the end of interest rate hikes and the beginning of interest rate cuts. For the latter to occur, a greater decline in the rate of inflation or the emergence of broader economic weakness is required. These scenarios are possible outcomes looking out twelve months.

 

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