Market Watch: October 2023

Global markets faced a downturn in October due to higher bond yields and geopolitical tensions. The Israel-Palestine conflict escalated, causing a slight rise in oil prices. Investors focused on global interest rates and inflation, while further conflict escalation remained a concern.

The S&P/TSX Total Return Index was down 3.21 percent in October as the Bank of Canada held rates steady at 5.0% amidst economic slowdown and inflation decline.

The Canadian economy stalled in August, hinting at a potential shallow recession in the third quarter, likely due to 10 interest rate hikes by the Bank of Canada in the past year. August’s performance fell slightly short of analyst projections, with July’s GDP revised to show marginal negative growth. A flash estimate suggests the economy likely remained stagnant in September, indicating a second consecutive quarter of negative growth after a 0.2% decrease in the previous quarter.

Canada’s jobs report exceeded expectations in September, showing a gain of 64,000 jobs. However, much of this increase was in the education sector, which can be volatile due to the school year cycle. The rise was mainly in part-time positions, leading to a decrease in overall hours worked. Job vacancies continued to decrease, but the unemployment rate remained at 5.5% for the second consecutive month, following a half percent increase over the previous three months. Wage growth saw a slight uptick and remains notably higher than levels associated with 2% inflation.

Canadian inflation unexpectedly slowed in September, indicating that previous interest rate increases are achieving their desired impact. The Consumer Price Index (CPI) increased by 3.8% year-on-year, compared to August’s 4.0% year-on-year, with core CPI (excluding food and energy) at 3.2% year-on-year in September, down from 3.6% year-on-year in August.

On monetary policy, the Bank of Canada kept its policy rate at 5.0% in October, as expected by the market. While acknowledging increased inflation risks, the bank hinted at possible future rate hikes. Previous rate increases curbed consumer and business activity, particularly housing and durable goods. Higher borrowing costs and a softer economic outlook are also impacting business investments. Rising immigration is helping ease labor market pressure, leading to moderate wage gains.

The S&P 500 Total Return index was down 2.10 percent in October as the US economy showed resilience with 4.9% GDP growth in Q3 despite inflation and higher borrowing costs.

The US saw a notable 4.9% annualized growth in GDP in Q3, the highest since 2021, driven by strong consumer spending despite higher borrowing costs and inflation. The S&P Global US Composite PMI rose to 51.0 in October from 50.2 in September, surpassing expectations. This data reflects the ongoing resilience of the US economy, leading to optimism that a smooth economic transition can be achieved, even as monetary policy tightens.

US inflation exceeded expectations in September, with the consumer price index rising 3.7 percent yearly, matching the previous month’s pace. Although monthly inflation slowed from 0.6 percent to 0.4 percent, partially due to reduced pressure from energy prices, “core” inflation, which excludes volatile energy and food costs, remained stable at 0.3 percent month on month. On a year-on-year basis, core inflation also saw a slight dip from 4.3 percent to 4.1 percent.

On monetary policy, the Federal Reserve decided to maintain interest rates between 5.25 and 5.5 percent, their highest level in 22 years, marking the second consecutive meeting where they chose not to raise rates. This decision comes as officials aim to gain a clearer understanding of whether current monetary policy is sufficiently restrictive to combat inflation. Strong economic indicators, such as a robust job market and higher-than-anticipated consumer spending leading to accelerated GDP growth in the third quarter, suggest that the central bank may need further action.

The MSCI ACWI Ex-US Total Return Index was down 4.11 percent in October as the Eurozone faced unexpected economic contraction in Q3, and the ECB adopted a cautious stance on growth prospects.

The Eurozone economy unexpectedly shrank in the third quarter. GDP in the region decreased by 0.1% compared to the previous quarter, which grew by 0.1%. This outcome was worse than anticipated, as experts had predicted a stall in GDP. The decline was attributed to a recent contraction in Germany, the only one among the Big Four European economies to experience an economic downturn in the third quarter. Various analysts predict a period of economic stagnation in the Eurozone, with growth only rebounding once real income growth becomes positive enough.

Inflation in the eurozone dropped to 2.9% in October, a significant decrease from 4.3% in September. This marked the lowest level over two years and was primarily driven by an 11.1% decrease in fuel prices. The European Central Bank’s policy of higher interest rates appears to contribute to this welcomed stabilization, bringing inflation closer to its 2% target. With the holiday shopping season approaching, this news is a positive development for consumers and the economy.

The European Central Bank (ECB) has adopted a more cautious stance on the eurozone’s growth prospects, acknowledging that their earlier optimism may have been misplaced. Weakening sentiment indicators and the lingering effects of previous policy rate hikes suggest a further slowdown in the eurozone economy. With inflation expected to decrease, there appears to be little justification for the ECB to pursue additional rate hikes shortly. It is likely that the ECB has already reached the peak of its interest rates and is now entering a phase of prolonged high rates.

The Portfolio Management Team