We all knew that aggressive interest rate hikes would eventually break something. The first shoe dropped on March 10th and March 11th, when the Federal Deposit Insurance Corporation (FDIC) took control of two insolvent commercial banks: Silicon Valley Bank (SVB) and Signature Bank (SBNY) were the second and third largest bank failures since Washington Mutual collapsed in 2008.

The Bank of Canada (BoC) is out front once again. The BoC was the first of the G-7 central banks to deliver outsized rate hikes early in the cycle and is now the first to signal a pause after raising the overnight lending rate by 25 basis points (0.25%) on Wednesday January 25th, 2023. The BoC’s overnight lending rate now stands at 4.5%, a 15-year high.

Despite clear signs that inflation is cooling, central bankers remain hawkish. Notable among the hawks is U.S. Federal Reserve (Fed) Minneapolis President Neel Kashkari, who penned a recent essay that put a bold exclamation point on their concerns about inflation. He believes the Fed should keep raising rates until it can say, with confidence, that the policy initiatives have quelled inflation. In short, look for more rate hikes at least through the next two meetings and possibly through June 2023.

It seems that economists are changing their views as often as Putin changes generals. Case in point: the International Monetary Fund’s (IMF’s) World Economic Outlook (WEO) published in mid-October, revised downward 2023 growth expectations. The IMF now believes the global economies will collectively grow at 2.3% in 2023, which is 0.2% below the previous WEO forecast released in July. Look for more of the same in the coming months as economists compete in a race to the bottom.

Let’s take a collective deep breath. September, which historically is the worst month for stocks, has passed – and it did not disappoint! We saw 10% declines in U.S. markets, while Canadian stocks, buoyed by energy and basic materials, lost less than half that amount.

For the past two months financial markets have been stuck in a trading range that runs the gambit between fear and greed – a classic tug of war buttressed by vague macro-economic scenarios that are, at best, subjective.

Efforts to pinpoint the terminal interest rate[1] vary depending on the latest iteration of ‘Fed speak’. Currently, market participants seem to have priced in an interest rate trajectory that will culminate somewhere between 3.75% to 4.25%.

are causing the imbalances.

What impact are global transportation bottlenecks having on prices along the supply chain? How much of the demand surge is a desperate attempt by consumers to feel normal again? What impact is the Ukraine war having on food and energy prices? Did government sponsored pandemic relief programs provide too much stimulus? Each of these factors has an impact. The chart to the right is our best guess as to the relevancy of each of these components.