There is no doubt that recession fears and central bank tightening are driving the current market volatility. It is our view that inflation has now peaked. If we are right, then the pace that the Federal Reserve is increasing rates at will start to decelerate and potentially switch back to cutting. The chart below shows the current expectations for the Federal Reserve rate. As you can see below, the market expects the Federal Reserve rate to peak at 3.6% at the end of the year and then then decrease in the first half of 2023. Yes, you read that right, the market expects a rate cut in early 2023!

 

 

Other clues that inflation may have peaked:

• US 10-year treasury yield has dropped from 3.5% to 2.8%.
• Shipping container rates are falling.
• Housing prices, new home construction and sales have all dropped month over month.
• Commodity prices [chart below] have dropped significantly from their highs earlier in the year.

 

If inflation has peaked, where do we invest?

If inflation has peaked, then theoretically you want to lighten up on the cyclicals and commodity related sectors and increase your exposure in growth and technology. Technically speaking the US is currently in a recession as a result of 2 consecutive quarters of negative GDP growth. Given it is uncertain how long and deep this recession will be, it is likely that the growth and technology companies will come out with lower and more cautious earnings guidance when they release their quarterly reports. This is while energy companies will most likely report the best earnings they've ever seen. As you can see, not exactly black-and-white!

 

Having said all this, we did cut our base metal exposure and slightly reduced our energy exposure last week.

 

I also included a piece from our CIBC Economics team entitled " America's noncession".

 

As always if you have any questions, please feel free to give us a call at any time.

 

Have a great weekend and for those in Calgary enjoy the Stampede!

 

Milan