Market Watch: November 2023

Global financial markets experienced a positive shift due to the belief that central banks have reached the peak of their tightening cycles based on the latest data. Commodity prices, particularly Brent crude oil, declined from their October highs despite ongoing conflicts in the Middle East. The price per barrel dropped to $80, influenced by increased US supply and a lack of adherence to production quotas by OPEC+ members. Natural gas prices saw a 15% decrease, reflecting expectations of reduced demand amid an anticipated economic slowdown, mild weather, and high storage levels in Europe.

The S&P/TSX Total Return Index was up 7.48 percent in November as inflation slowed to 3.1%, allowing the Bank of Canada to maintain steady interest rates.

Although Canada’s economy seems to steer clear of a recession in 2023, there is a noticeable softening in overall growth. Canada’s third-quarter GDP growth fell below expectations, with a 1.1% annualized decline. However, the disappointment was mitigated by a significant upward adjustment to second-quarter growth of 1.4% annualized instead of a slight contraction.

Canada’s labor market surpassed predictions with a gain of 25,000 jobs in November, despite the rising unemployment rate and reduced hours worked revealing growing economic challenges. The unemployment rate increased to 5.8%, the highest since January 2022. Notably, the finance, insurance, and real estate sectors experienced an 18,000-job decline in November, marking a significant downturn in these industries over the past few months. This trend aligns with central banks, including Toronto-Dominion Bank, announcing substantial staff reductions in the coming year.

Canada’s annual consumer inflation decelerated to 3.1% in October, down from September’s 3.8% and below the anticipated 3.2%. This marked a significant slowdown from June’s 8.1%, the highest in 39 years. The decrease is mainly attributed to a 7.8% drop in gasoline prices in October. Excluding gasoline, the CPI rose 3.6%. The CPI increased by 0.1% MoM in October, aligning with market expectations and showing a rebound from a 0.1% decline in September. The uptick is attributed to factors like travel tours and property taxes. Adjusted for seasonality, the CPI fell by 0.1% on a monthly basis.

On monetary policy, economists expected the Bank of Canada to maintain its current interest rates at the upcoming announcement, signaling a likely end to rate hikes. The GDP contraction of 1.1 percent in Q3 has led experts to anticipate a slowdown in economic growth. Despite mixed data, projections suggest the Bank may refrain from rate cuts, with discussions on potential cuts resurfacing in April 2024 to prevent a deeper recession.

The S&P 500 Total Return index was up 9.13 percent in November as Q3 GDP exceeded expectations at 5.2%. Inflation decelerated, paving the way for a more lenient 2024 monetary policy.

The US economy experienced more robust growth in the third quarter than initially reported. This was driven by better-than-expected business investment and increased government spending. The revised data revealed a 5.2% annualized pace of GDP, surpassing the initial 4.9% reading and exceeding the 5% forecast by economists. The upward revision primarily stemmed from higher nonresidential fixed investment, including structures, equipment, and intellectual property. Government spending also contributed to the optimistic estimate, rising 5.5% for the July-through-September period. However, consumer spending was revised downward to a 3.6% increase, down from the initial estimate of 4%.

US inflation decelerated more than anticipated in October. On a year-over-year basis, overall (3.2%) and core (4.0%) inflation were lower than the consensus expectations of 3.3% and 4.1%, respectively. The decrease in headline inflation was attributed to reduced energy prices, an ongoing decline in food inflation, and a moderation in core goods prices. Although progress was observed in the services sector, it occurred slower. Despite these changes, the cost of shelter, a significant component of core inflation, remains persistently high, showing a 6.7% increase compared to its level a year ago.

On monetary policy, anticipation of a more lenient monetary policy in 2024 increased. Interest rate futures now indicate a high likelihood of the Federal Reserve reducing overnight rates by more than 1.35% next year, with virtually no possibility of further rate increases. In early November, investors foresaw a 40% chance of an additional rate hike, coupled with only a 0.75% likelihood of expected cuts. The heightened optimism towards policy changes is fueled by various factors, including increasing unemployment, decelerating inflation, and notable remarks from several central bank officials expressing contentment with the existing inflation trend.

The MSCI ACWI Ex-US Total Return Index was up 9.02 percent in November as China grappled with deflation pressures, Europe faced a slowdown, and the Bank of England held rates amid inflation caution.

China faced deflation in October, with the Consumer Price Index dropping 0.2% YoY (below the expected 0.1% decrease). The Producer Price Index fell for the 13th consecutive month, declining 2.6% YoY (versus the expected 2.7% drop). Weak inflation is linked to real estate challenges, low consumer confidence, falling commodity prices, and declining exports. Despite prior optimism, recent data suggests a more pessimistic outlook, prompting expectations of further policy measures. The November 2023 Third Plenum may include initiatives like increased urbanization and actions to boost consumption and business sentiment for economic growth.

The Eurozone area experienced a 0.1% decline in GDP in Q3, aligning with the recent downturn in economic activity. Nevertheless, there is a positive trend in euro area inflation, with initial headline and core inflation dropping in October to 2.9% and 4.2%, respectively. This decrease is attributed to lower energy prices and the influence of base effects in the year-over-year calculation compared to October of the previous year. The European Central Bank remains cautious about declaring victory regarding inflation, citing concerns about wage growth and potential energy price increases. Despite this, the results are seen as encouraging. With higher interest rates still affecting the economy, rate cuts are expected as early as spring 2024.

The Bank of England voted 6-3 to maintain the bank rate at 5.25%, in line with expectations. This marks the second consecutive pause in the current hiking cycle. The Monetary Policy Committee’s statement indicated a commitment to keeping policy rates unchanged for an extended period, challenging market expectations of 25 basis points cut by September 2024. BoE Governor Andrew Bailey warned against complacency on inflation, emphasizing the potential to “squeeze inflation” with the current policy stance. While leaving room for future hikes, the likelihood of further increases seems low unless significant inflation or wage data surprises exist.

The Portfolio Management Team