The week in the markets -
January 20, 2023

Year of the rabbit: China reopens as it rings in a new year

As China reopens its economy nearly a year after most developed countries, the investment market has not yet fully integrated this good news story. We believe there is much more upside to the second largest economy opening up, even when battling a high number of COVID-19 infections and preparing for their own version of a rapid reopen.

We have seen some initial data showing an increase in tourism and domestic travel. This weekend marks the Chinese lunar new year and almost three years of a strict government policy to restrict movement within its borders. Now, with the policy unwinding, there is potential for some added capacity in their labour market, along with a reset in available labour pools.

In Canada and around the globe, there has been much talk about inflation and the cost of goods and services becoming increasingly expensive. This week, the Canadian Consumer Price Index (CPI) for December was released and rose by 6.3% from a year ago. However, this is its sixth month of declines since its peak in June, and is considerably lower than November’s 6.8% increase.

The majority of the decline was attributed to lower gasoline prices, which led a pullback in December’s headline inflation rate. Slower price growth was offset by increases in mortgage interest costs, clothing and personal care supplies. Shelter was again among major contributors to price gains, with mortgage interest and rent up 18% and 5.8% from a year ago, respectively. Consumers paid 13.1% less at gasoline pumps in December compared with a month earlier. Global energy price declines are great for reducing prices at the pumps and that excess cash flow for consumers could help offset the other costs in home ownership and rents.

Widespread layoffs in the technology sector sound ominous when these announcements dominate the headlines, especially when considering the influence of tech companies on equities indices. However, this is not an accurate reflection of the overall labour market. Payroll and wage data from the U.S. government’s Department of Labor and Statistics indicate that less than 3% of all jobs in the U.S. are technology related. Furthermore, tech workers who’ve lost their jobs have a high likelihood of securing a new job fairly soon, even in other industries, such as agriculture or finance.

We expect the Bank of Canada to raise rates by another quarter of a percentage point at its next meeting, but also think they will signal a pause afterwards. Markets are still expecting the same increase from the Fed, however there are growing rumours that a 0.5% increase is a possibility.