Market Watch: October 2022

Global financial markets posted the first monthly gain since July amid increased volatility. The third quarter earnings season is off to a pretty strong start, with 45% of the S&P 500 having already reported. About 55% of the disclosed firms have generated sales that surpassed analyst projections by a mean of 1.4%. Regarding earnings, 72% have outperformed analyst forecasts. Moreover, a less aggressive rise from the Bank of Canada (BoC), increasing predictions of a Fed deceleration, and signals of economic growth slowing all contributed to the relief of financial market conditions.

The S&P/TSX Total Return Index was up 5.57 percent in October after Canada’s GDP grew above projections in August.

The Canadian economy grew by 0.1 percent in August, somewhat higher than expected. According to a preliminary estimate, economic growth fell to a 1.6 percent annualized rate in the third quarter, with increasing interest rates fanning recession worries. This is down from a 3.3 percent growth rate in the second quarter; however, the projection is virtually probably subject to revision.

Moreover, the Canadian labor market rose in September for the first time in four months, but gains were modest, indicating that it is approaching its full potential. Canada created 21,000 jobs (vs. 20,000 expected) in September, with both full-time and part-time jobs steadily rising. The unemployment rate decreased to 5.2 percent, erasing part of a 0.5 percentage point increase to 5.4 percent in August.

On monetary policy, the BoC has slowed its pace, boosting its benchmark rate by 50 basis points rather than the 75 bps expected by analysts. Despite making a smaller-than-expected increase and conceding that much has already been done, the Bank of Canada underlined that more raises would be required to manage excess inflation and labor market tightness. However, following 350 basis points of rate rises in a brief period, the pace of future hikes is becoming less predictable as central banks opt for less prior guidance. At the same time, they assess the delayed economic effect of the strong tightening that has already been done. On that issue, the Bank of Canada altered its economic estimates and anticipates GDP growth to decline to just below 1% in 2023, down from 3.25% in 2022 (vs. earlier estimates of 1.8% growth in the upcoming year). The BoC also reduced its inflation estimate for 2023 from 4.6% to 4.1%, reflecting the assumption that rising prices will relax closer to the 2% objective by 2024 as tighter economic circumstances make their way through the economy.

The S&P 500 Total Return Index was up 8.10 percent in October after the US economy recovered last quarter after contracting in the year’s first half.

After two months of decline, the US economy grew in the third quarter, indicating that activity remained solid amid the Federal Reserve’s intense initiative to hike interest rates to curb inflation this year. GDP increased by 2.6% from July to September. Following a 1.6% decline in Q1 and a 0.6% decline in Q2, there was fear that the economy had entered a recession. Economists expected a 2% increase in the third quarter; however, some well-watched economists anticipated a slightly higher increase. While the positive figure is reassuring, indicating that output rises even as prices and salaries increase, it may also suggest that the economy can survive additional Fed rate hikes.

Moreover, businesses in the United States recruited more employees than predicted in September, while the unemployment rate fell to 3.5%, indicating a robust labor market that will support the Federal Reserve’s aggressive monetary policy tightening push for the foreseeable future. However, the 0.2-point drop in the unemployment rate from 3.7% in August was partly due to people quitting the workforce. Amid the Fed’s aggressive interest rate rises, the labor market remains resilient. The economy gained 263,000 jobs last month (vs. 250,000 expected), following an unrevised 315,000 increase in August. The unemployment rate is expected to remain constant at 3.7%.

On monetary policy, the Fed is largely anticipated to raise interest rates by 75 basis points at the end of its next two policy meetings. Still, speculators will look for indications that the Fed may consider slowing upcoming rate increases. Wishes that the Fed may ease its aggressive interest rate raise policies buoyed the market last month. Following the monetary decision, remarks from Fed officials and job market figures later this week will reshape market views for upcoming raises.

The MSCI ACWI Ex-US Total Return Index was up 3.00 percent in October after Members of Parliament chose Rishi Sunak, a former UK finance minister, as Prime Minister.

The selection of Rishi Sunak as Prime Minister of the United Kingdom was met with delight in money markets. Even the news that Chancellor Jeremy Hunt’s debt-cutting plan will be postponed by two weeks was dismissed. Gilt rates on 10- and 30-year sovereign bonds returned to levels comparable to those seen shortly before the former government’s disastrous mini-budget proposal. This shows that the current market upheaval was caused by former Prime Minister Liz Truss’ faulty economic plan rather than just high national debt levels.

According to preliminary estimates, Germany’s economy increased surprisingly in the third quarter, but growth in France and Spain stagnated. German GDP expanded by 0.3% sequentially, seasonally adjusted, compared to 0.1% in the preceding quarter. In France, GDP increased by 0.2%, compared to 0.5% in the previous quarter. Spain’s GDP grew by 0.2% in the third quarter, a dramatic deceleration from the 1.5% growth recorded in the last three months. According to preliminary data, the inflation in Germany, France, Spain, and Italy was more than predicted in October.

The ECB hiked its benchmark interest rates by 0.75 percent for the second time in a row and suggested it may have to increase rates more to combat inflation, which is still much too high. The deposit rate is at 1.5%, its highest level since 2009. Investors, though, lowered their expectations on higher rates, and the euro slipped below parity versus the US dollar in response to suggestions in the policy statement that the ECB’s strategy may have started to alter and that the following increase may be less in magnitude. The central bank also stated that significant work had already been achieved in eliminating monetary policy support. In contrast, ECB President Christine Lagarde noted that a recession possibility was considerably more likely.

The Portfolio Management Team