Imagine a business cycle where twists and turns rotate through sectors of the economy like a game of musical chairs. Only in this game, one chair is replaced by another, turning the traditional game of musical chairs into a never-ending game where no players are left behind. A never-ending game of musical chairs is the blueprint for a rolling recession.
Rather than trying to dodge the inflation / recession raindrops let’s take a collective deep breath, step away from the forces of supply and demand that throw more curve balls than Sandy Koufax and focus on the output side of the economic equation. Where we can drill down on the tool that measures the collective well-being of a nation; Gross Domestic Production, or its’ acronym: GDP.
INFLATION COOLS BUT LESS THAN EXPECTED The June read in the Consumer Price Index (CPI) supported the position that inflation is receding. US inflation came in lighter than expected rising 0.1% month over month (through May month end) which was in line with...
A SLOW GROWTH ENVIRONMENT If you listen to the analysts, first quarter earnings will be challenged. Consensus estimates have earnings declining by 6% to 7% year over year across the entire S&P 500 spectrum of companies. This is the most severe reset since the...
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%.
