The week in the markets -
February 10, 2023

To pause or not to pause? That is the question

Equity markets were mixed this week, giving up some of the gains made in January. Investors were somewhat indecisive, as they sought direction from last week’s Fed announcement, economic data and the continuation of earnings season. Two-thirds of companies in the S&P 500 Index have now reported Q4 results. Despite more than 70% of companies announcing positive earnings surprises, overall quarterly earnings are trending lower (-2.7% year-over-year).

There is good news regarding potentially lower prices, as inflation continues to trend lower. Since September, there has been excess transportation capacity. Transport companies have said goodbye to surge pricing due to waning demand and more capacity has come online, which have driven utilization rates and costs lower.

Jobless claims in the U.S. were released Thursday, showing a slight increase in initial and continuing unemployment claims. Nonetheless, the U.S. labour market has remained resilient in the face of economic pressure. Job gains for the month of January were reported at 517,000, along with the lowest unemployment rate since 1969, of 3.4%. The Canadian labour report for January showed a gain of 150,000 jobs, with the unemployment rate at 5.0%.

Full employment in Canada and the U.S. is a good problem to have. Despite the strong labour gains, wage inflation in the U.S. has been easing, which is another positive indicator that suggests lower inflation.

The U.S. Federal Reserve Chair Jerome Powell spoke again this week, reinforcing the Fed’s stance that the inflation target of 2% is non-negotiable. The Fed will maintain a higher federal funds rate and could potentially go higher if data shows sticky inflation or an increase in the coming months. The Bank of Canada, on the other hand, has indicated that it’s willing to pause any further increases for the time being. On Tuesday, Bank of Canada Governor Tiff Macklem said Canadians “are more indebted today than they’ve ever been.”

In some cases, while households were able to build up cash reserves during the pandemic, Macklem said, “Extra savings are probably not going to last as long as the higher debt.” He underscored the tone that uncertainty in the short-term with Canada’s housing market and economy is being tested by higher household debt and the highest interest rates in 15 years.

Next week, we will have the January report for the U.S. Consumer Price Index. Expectations are that inflation continued to cool during the first month of the year. Better-than-expected inflation would support the call for the Fed to pause its rate hiking cycle, following its March meeting. We believe we continue to be in a downward trend for inflation through at least the first half of the year, which should lead to the end of the current interest rate hiking cycle.