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The week in the markets -
March 24, 2023
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The Spotlight Effect
All eyes were on the U.S. Federal Reserve and its Chair, Jerome Powell, this week, as they grappled with sticky inflation and a coinciding crisis of confidence in the U.S. banking sector. The Fed’s decision to increase its key lending rate by 25 basis points took into consideration the higher inflation of 6.0% reported for February, which continues to trend downward from its peak in June last summer.
The Fed has increased rates in an effort to slow spending by consumers and businesses. Coupled with tighter lending standards for banks, we believe higher rates will also put pressure on credit creation in the short term, allowing the Fed to monitor the effects over the coming months. A hiccup in the banking sector is most certainly a catalyst for lower inflation.
Powell emphasized the U.S. banking system is sound and resilient, reiterating the Federal Open Market Committee (FOMC) will use all its tools to maintain stability. He also acknowledged recent banking turmoil is “likely to result in tighter credit conditions for households and businesses, which would in turn affect economic outcomes.” But he added, “It’s too soon to tell how monetary policy should respond.”
Powell also said the Fed considered a pause in its interest-rate increases due to recent banking turmoil, but the consensus for the increase was strong, citing recent data showing “inflation pressures continue to run high.”
In Europe, we watched as Credit Suisse was taken over by UBS Group last weekend. The deal was brokered by the Swiss National Bank for $3.25 billion (USD). Recent scandals, legal issues and management upheaval had undermined investor confidence in Credit Suisse. The forced deal was supported by the Swiss government, which provided more than $9 billion (USD) to backstop losses that UBS may incur in the takeover. The Swiss National Bank also provided more than $100 billion (USD) of liquidity to UBS to facilitate the deal. Swiss authorities were under pressure to make the deal happen, as the alternative would have been a protracted regulator-led wind down of Credit Suisse.
Canada inflation: Going forward, is the path for inflation higher or lower?
In Canada, we believe the Bank of Canada has done well in bringing inflation down from its peak of 8.1% last June, to 5.2% in February. Our analysis of the data on a six-month annualized basis shows inflation has fallen from 12.7% in June 2022, to its current 2.5%.
Based on the trend in money supply growth, we would argue inflation will continue to remain at this lower range on an annualized basis, with the year-over-year inflation index reaching between 2-3% by this time next year. As such, we believe the Bank of Canada may have reached the end of its tightening cycle.
This week's market closing value - week ending March 24, 2023
(As of 4:00 PM ET.*)
| EQUITY INDICES | Level | Change | 1-week | YTD | 1-year | 5-year |
| CAD | CAD | CAD | CAD | |||
| S&P/TSX | 19,486.91 | 84.88 | 0.44% | 0.60% | -11.17% | 5.06% |
| S&P 500 | 3,963.75 | 48.31 | 1.24% | 5.10% | -3.85% | 10.28% |
| DJIA | 32,237.53 | 378.64 | 1.20% | -1.34% | 1.85% | 7.85% |
| FTSE 100 | 7,405.45 | 70.05 | 1.43% | 1.95% | 0.82% | -0.29% |
| CAC 40 | 7,015.10 | 89.70 | 2.24% | 10.48% | 14.80% | 5.02% |
| DAX | 14,957.23 | 189.03 | 2.22% | 9.52% | 12.42% | 3.15% |
| Nikkei | 27,385.25 | 51.46 | 1.13% | 6.88% | -0.04% | 2.53% |
| Hang Seng | 19,915.68 | 397.09 | 2.05% | 1.56% | -0.83% | -6.90% |
| CURRENCY RETURNS | CAD | Change | 1-week | YTD | 1-year | 5-year |
|---|---|---|---|---|---|---|
| USD | 1.3735 | 0.0001 | 0.01% | 1.45% | 9.65% | 1.27% |
| Euro | 1.4779 | 0.0136 | 0.93% | 1.95% | 7.29% | -1.49% |
| Yen | 0.0105 | 0.0001 | 0.94% | 1.84% | 2.61% | -3.13% |
| CANADIAN TREASURIES | Yield | Change | COMMODITIES | USD | Change |
|---|---|---|---|---|---|
| 3-month | 4.32 | -0.05 | Oil | $69.18 | $2.89 |
| 5-year | 2.78 | -0.11 | Gold | $1,976.56 | $0.39 |
| 10-year | 2.75 | -0.03 | Natural Gas | $2.18 | -$0.18 |
| CANADIAN PRIME RATE |
|---|
| 6.70% |
*The data contained in the charts above is provided by Bloomberg as of 4:00 PM ET. Please note that the final closing market values may vary due to data delays and market settlement.
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