Canada
Having raised interest rates at the fastest pace in 40 years, the Bank of Canada has squarely set its sights on quelling inflation – and quickly. Regardless of the economic impact, the Bank clearly sees inflation as enough of a threat that it warrants a strong response. This leaves the near-term future of the economy, and in particular the housing market, in question. While job growth has slowed dramatically over the summer months, job openings continue to suggest that there is strong latent demand from consumers. With the economy under pressure from rising living costs and interest rates, the equity market has declined, with even the energy sector beginning to give back its phenomenal 2022 returns.
United States
Employment and consumer spending remain bright spots for the world’s largest economy. However, there are signs the U.S. Federal Reserve’s (the Fed’s) interest rate hikes are tamping down business activity, as intended, in order to fight inflation. The housing market is also showing signs of weakness, which is a key indicator that the current U.S. business cycle is nearing its end. Stocks have reflected the uncertainty around the tenacity of inflation, the Fed’s end goal for interest rates, and the sustainability of corporate profits in the face of an increasingly likely economic decline. While the consensus view for economists is that the U.S. will suffer a recession in 2023, the degree of its severity remains in question, leading to ongoing market volatility for investors.
Europe
The sharp rise in inflation has hit consumers and businesses across the region hard. Global supply issues, a post-pandemic surge in local demand and the resurgence of tourism have combined with surging energy prices to drive up the cost of living. The embargoes against Russian oil, and the country’s own refusal to supply natural gas to the region’s markets that support Ukraine, is leading to an energy shock crisis for some of Europe’s largest economies. While the European Central Bank is likely to continue to tighten monetary policy, it must tread a fine line between taming inflation and snuffing out economic activity in the months ahead. Investment markets have responded by moving sharply lower, and the economy is likely to give little support to equity values in the months ahead.
Emerging Markets
Emerging markets have been underperforming developed markets for more than a decade, with the most recent culprit being the juggernaut U.S. dollar. However, a number of the largest emerging-market economies are now in a stronger position to rebound than developed markets, as many of their central banks were ahead of the curve in tightening monetary policy last year. Asia’s economic growth is likely to slow in the months ahead due to tighter financial conditions, and China continues to curtail its growth with COVID-19 lockdowns. Higher inflation is expected to trigger a quickening in monetary tightening across Asia, with governments offering increased financial assistance to households. Worries over slowing growth have also hit the region’s markets, with most markets in bear or sharp correction territory.
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