Some calm after last week’s market party, but no sign of a major hangover

• The Bank of Canada maintained its interest rate at 5%, acknowledging the impact of rate hikes on slowing consumer spending and business investment, with market expectations suggesting potential cuts in interest rates as early as April 2024.
  
• Moody's downgraded China's credit outlook, due to its real estate downturn and high debt levels.
• Gold reached new all-time highs, supported by strong macroeconomic factors and near-record buying by central banks.

In its latest monetary policy update, the Bank of Canada (BoC) decided to hold its interest rate at 5%, a move that was widely anticipated by market analysts.

The BoC highlighted the effects of its previous rate hikes on the economy: a significant slowdown in consumer spending and stagnant consumption growth in recent quarters. Additionally, business investment was described as volatile and largely unchanged over the past year. These observations suggest that higher interest rates have started to impact economic activities, aligning with the bank's objective of tempering economic overheating. In its assessment of the broader economic landscape, the BoC pointed out the recent contraction in gross domestic product (GDP) during the third quarter and a softening labour market. Notably, the statement omitted previous remarks about the slow progress towards price stability and heightened inflationary risks, signalling a possible change in the bank's inflation outlook.

Despite these developments, the financial markets' reaction was relatively muted. Market participants continue to anticipate approximately 110 basis points of interest rate cuts in 2024, with the first rate cut expected to occur around April. However, guidance on potential rate cuts remains unexpected. BoC Governor Tiff Macklem recently suggested that discussing rate cuts is premature under the current economic circumstances.

Turning to the U.S., the recent speech by Federal Reserve Chair Jerome Powell appeared to have a greater impact on the market than he might have anticipated or desired. The 10-year Treasury yield still declined this week, and so did the Goldman Sachs Financial Conditions Index. Financial conditions have now returned to their late-summer level, effectively undoing the tightening observed in the fall. We will see whether the Federal Reserve will adjust its approach in response to these developments in Jerome Powell's upcoming speech next week.

Internationally, Moody's Investors Service downgraded China's sovereign credit rating outlook from stable to negative, primarily due to concerns over its real estate sector and the overall economic slowdown. China's mounting debt, now exceeding 300% of GDP, is a significant factor in this reassessment. Despite this, Moody's forecasts a steady 4-5% GDP growth for China in the upcoming years. As you can guess, Chinese stocks did not react positively to the news and had another bad week.

In commodity markets, gold prices reached record highs before stabilizing lower. Not only is the current economic backdrop positive for gold prices, but also central bank purchases of gold have been strong, with the World Gold Council reporting significant buying activity in recent quarters. In fact, the third quarter saw world central banks buying 377 tons of gold, the third most ever reported.

Finally, in the U.S. labour market, recent data indicates some cooling. The Job Openings and Labor Turnover Survey (JOLTS) showed a drop in job openings, falling below expectations and reaching the lowest level since early 2021. However, these figures are still strong compared to pre-pandemic levels. Jobless claims data also aligned with expectations, maintaining a consistent trend over recent weeks. Payroll numbers will be reported next week in this column.

Listen to this week’s podcast for further insights.