Market Watch: November 2022

Global financial markets extended their rebound from October’s lows, encouraged by the prospect of peaking inflation and the possibility of the Fed slowing the rate hikes. S&P 500 companies reported an average EPS growth of 2.4% over the same quarter a year earlier in Q3 2022, with 70% of S&P 500 companies reporting a positive EPS surprise and 71% reporting a positive revenue surprise. It was the weakest pace of growth since the third quarter of 2020. Energy was the strongest among all 11 sectors for the third quarter in a row, with profits growth of 137.0% in the most recent quarter.

The S&P/TSX Total Return Index was up 5.54 percent in October. After stronger-than-expected growth in Q3, Canada’s economy is cooling, perhaps allowing the central bank room to slow rate hikes.

The Canadian economy grew faster than predicted in the third quarter. Still, there are indicators of a significant slowdown, raising uncertainties about how much the Bank of Canada will hike interest rates next meeting. In the third quarter, Canada’s GDP rose at an annualized pace of 2.9 percent, about twice as quickly as forecasters predicted. Their estimated consensus was 1.5 percent. However, early October statistics suggested that the economy did not increase that month.

However, The Canadian job market created 108,000 jobs in October, up +0.6% month on month, offsetting a large portion of the losses suffered during the summer season. The unemployment rate stayed at 5.2%, slightly higher than the 4.9% record low set in June and July. Six of the eight industries tracking job growth reported increases, headed by construction and manufacturing but offset mostly by wholesale and retail trade.

On the monetary policy front, the resilience of the latest job market report while inflation remains too high might pressure the central bank to uphold a hawkish monetary policy. The BoC lifted rates by 50 basis points last month, raising the policy rate to 3.75%, the highest since January 2008, when it was 4%. It also predicted that growth would slow beginning in the fourth quarter of this year and lasting until the middle of next year. Markets anticipate another 25-basis point increase at the BoC’s next policy meeting on December 7, with a 20% probability of a 50-basis point rise.

The S&P 500 Total Return Index was up 5.59 percent in October after October’s inflation reading was considerably better than expected.

Following two quarters of decline, the US economy expanded at an annual rate of 2.9% in the third quarter, despite mounting fears of a downturn. The preliminary report of the 2.6% growth rate provided the previous month was revised downward. However, business expenditure was low. Large constructions, such as office buildings and drilling rigs, saw a dramatic drop in investment. The home market has also suffered as a result of rising interest rates. The economy is expected to fall in the fourth quarter, with projections of -0.6%.

Moreover, the October employment numbers painted a mixed picture of the US labor market. Employers reported solid job growth, with 263,000 new employees added to payrolls during the month and a 50,000 increase from September. A second household poll provided a somewhat grim picture of employment: a net loss of 328,000 jobs resulting in an increase in the unemployment rate to 3.7%. While differences between the two metrics are regular, the extent of last month’s divergence is unusual.

Regarding monetary policy, the Fed Raised its key interest rate by 0.75 percent to a range of 3.75 percent to 4%, the highest level in 15 years. It was the central bank’s sixth rate rise of the year, boosting the cost of mortgages and other consumer and commercial loans and raising the likelihood of a recession. Inflation grew 7.7% in the year that ended in October, a far lower rate than the 8% projected by experts and the weakest annual inflation estimate since January. Although Fed Chair Jerome Powell stated earlier this month that the Fed still hasn’t finished with its effort to contain inflation, there is significant evidence that the Fed could be ready to slow down. Fed funds futures are currently pricing in a roughly 80% likelihood of a 0.5 percent hike at the Fed’s next decision meeting in December, which is less than the 0.75 percent hikes made at the prior four meetings.

The MSCI ACWI Ex-US Total Return Index was up 11.82 percent in October after China indicated a relaxation of COVID policy following massive protests.

China has shifted its COVID stance by moving to relax several virus controls. The vice-premier of the government also stated that the country was in a new scenario. It happens as China faces widespread opposition to its zero-COVID policy. Restrictions were quickly eased in key cities like Guangzhou shortly after the city experienced violent demonstrations. A neighborhood in Beijing’s capital also permitted COVID sufferers with moderate symptoms to isolate at home, a far contrast from previous this year’s measures, which saw entire neighborhoods closed down, sometimes as a consequence of just one positive case. Some restrictions were also eased in other large cities like Shanghai and Chongqing.

For the first time in 17 months, eurozone inflation decreased in November. Lower rises in energy and service prices aided in lowering consumer price increases to 10% from a record level of 10.6% in October. In 14 of the 19 eurozone member countries, inflation has slowed. Interest rates are expected to climb higher, according to central bank officials. Before releasing the most recent consumer inflation figures, European Central Bank (ECB) President Christine Lagarde warned the European Parliament that eurozone inflation had not yet peaked and may increase in the coming months.

In the UK, the Chancellor of the Treasury delivered his much-anticipated Autumn Statement, outlining the government’s medium-term budgetary goals to return the country to fiscal credibility and sustainability. The overall package of actions reflects a fiscal austerity of £55 billion by the end of the fiscal year 2027-2028, with spending cutbacks totaling £30 billion and tax hikes of £25 billion. Inflation rose to 11.1% annually in October, up from 10.1% in September, the highest level in 41 years. The biggest drivers of increasing inflation were gas and electricity prices, followed by food prices. Economists anticipate a peak in inflation in Q4 2022, followed by a steep reduction the following year. The strong job market and high inflation necessitate more rate hikes, although slower, as the Bank of England begins to focus on the impending recession. Economists predict a 50 basis point increase at the December 15 meeting.

The Portfolio Management Team