HE’S BA-A-ACK!

Patrick O’Toole, Adam Ditkofsky and Pablo Martinez - 11/18/2022

Economic data

After a couple of years of reprieve (sort of), Donald Trump is back in the limelight after declaring he wants to be the Republican nominee in 2024. Markets aren’t going to pay much attention to this sideshow for a while, though, as the Fed’s path remains the main focus.

And this week’s economic data did little to dissuade investors of the notion that the Fed will hike by 0.5% at its December 2 meeting, a lesser amount than recent meetings. That’s despite the news that the consumer continues to spend, as seen in the higher than expected retail sales report figures that were supposedly boosted by early discounting as inventories are too high. That came as a bit of a surprise, given the plunge in the savings rate in recent months. Consumers have been tapping into their home equity lines of credit and also tapping their credit cards with fervour to maintain their lifestyles these past few months. While that’s usually a warning that tougher times may be coming, there hasn’t been a notable rise in arrears. That, of course, would change if job losses pick up in coming months. The housing market continues to reflect the stresses from higher interest rates, with new starts slipping for the second straight month, and down 8.8% year over year. On the business side of the economy, industrial production disappointed with a month-over-month dip in October, providing a signal that activity is slowing.

In Canada, housing starts moved lower, and while still up 11.5% year over year, they are at a 6-month low. And although this week’s report from the Canadian Real Estate Association (CREA) showed that the moderation in housing activity has slowed (a positive), that’s likely a reprieve in what will likely be a continuation of recent months, where activity slows and house prices decline. Let’s remember that rate increases from central banks take 12-18 months to fully work their way through the economy, so we have some ways to go to see the full impact. Home sales did increase in October by 1.3%, but sales are still down 36% year over year and off 45% from the March 2021 peak. And the price index dipped for the 8th straight month and is 10% below its February peak, and down on a year-over-year basis for the first time since 2019. We also saw that inflation was a bit softer than expected, held up by food and energy prices. Without those volatile categories, it has moved off the peak, now at 5.3% year over year. The total CPI, at 6.9% year over year, and the Bank of Canada’s alternative measures of inflation remain too high for a pause in its rate hike campaign, however. So we still expect another hike at the Bank’s December 7 meeting.

Bond market reaction

The Fed is in no mood to pivot. Every time we see the bond market post a reasonable rally, Fed governors hit the tape to remind us that they are steadfast in their goal to beat inflation down, and that more rate hikes are coming, and higher short-term rates for longer is what we should be expecting. Yields on short-term bonds increased in response, although long-term yields moved lower for the second consecutive week. That is likely a reflection of an expectation that a recession is coming (the 30-year Treasury yield is now below the 3-month T-bill yield) and central banks will be cutting rates later next year. There has been a notable trend to tighter credit spreads in the U.S. and elsewhere in recent weeks, although Canadian credit spreads have lagged the move. That’s not unusual, and could mean we see some improvement in coming weeks. High yield spreads have also moved lower as the sector remains resilient in the face of rising recession risks.

Stock market reaction

Brother-in-laws, dentists and cab drivers aren’t as chatty about their brilliant crypto investment this week after the FTX crypto exchange debacle. At least the collapse of this exchange doesn’t seem to be material enough to be bringing down more legitimate institutions. Perhaps just some bruised egos and the realization that Sam Bankman-Fried isn’t the next Warren Buffet. Broader equity markets were dragged down by commodities, with both oil and copper about 4-5% lower week over week. The big winner on the TSX was Restaurant Brands International, as the owner of Tim Hortons, Burger King and Popeyes tapped Patrick Doyle as their new Executive Chairperson. Doyle was instrumental in Domino’s Pizza’s success as their CEO from 2010 to 2018, a period that saw its stock price rise by over 3000%. Next week is a quiet one on the earnings front, with Alimentation Couche-Tard being the only company left to report earnings before the big banks begin their earnings parade the following week.

What to watch next week

Canada’s September retail sales report is on the schedule, along with house prices, and a survey of business conditions. The U.S. sees the release of housing data, durable goods, consumer confidence and minutes from the last Fed meeting.

Disclaimer

Patrick O’Toole is Senior Portfolio Manager, Global Fixed Income; Adam Ditkofsky is Senior Portfolio Manager, Global Fixed Income; and Pablo Martinez is Portfolio Manager, Global Fixed Income.

The views expressed in this document are the views of CIBC Asset Management Inc. and are subject to change at any time. CIBC Asset Management Inc. does not undertake any obligation or responsibility to update such opinions. Certain information that we have provided to you may constitute “forward-looking” statements. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results or achievements to be materially different than the results, performance or achievements expressed or implied in the forward-looking statements. This document is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this article should consult with his or her advisor. All opinions and estimates expressed in this document are as of the date of publication unless otherwise indicated, and are subject to change with the exception of bond data, which is as of end of day the previous Wednesday, and equity data, which is as of mid-day Thursday. CIBC Asset Management and the CIBC logo are trademarks of Canadian Imperial Bank of Commerce, used under license. The material and/or its contents may not be reproduced without the express written consent of CIBC Asset Management Inc.