The Bank of Canada (BoC) continued its policy of quantitative tightening this week with a 25 basis points (bps) rate hike. This is the eighth increase in a row and brings the overnight rate to 4.5% — the highest it has been since 2007. Meanwhile, the yield on a 10-year Government of Canada bond fell to 2.8%, indicating that the bond market believes that the BoC is or is close to stopping the raising of interest rates, and will likely start to drop rates later this year.

 

Last week I mentioned that the market is technically at the cusp of either breaking out or retreating back to test the October bottoms. This week has not given a clear break out either way, but the S&P 500 is trading at 4,060, just a little above the trend line and a 90 points higher than it was last Friday. It’s a start! Hopefully it continues in that direction.

 

One last piece of information I found interesting this week was the chart below. As you can see, the Canadian banks are trading at a pretty steep discount to the historical P/E average. This can only mean one of two things: the Banks are either cheap or the market is pricing in a recession that is expected to result in lower earnings. We think that the banks are cheap and added to our position a few weeks ago.

 

 

I have also included a piece from our CIBC Economics Team entitled “Is the worst over for financial markets?”.

 

As always if you have any question please reach out at any time.

 

Have a great weekend.

 

Milan