Milan Cacic
April 24, 2023
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This week the Bank of Canada(BoC) released the new consumer price index inflation numbers. As you can see from the chart below, Canada's inflation is dropping faster than wet socks on a chicken. 3-, 6- and 9-month annualized consumer price inflation is now between 2% and 3%, with the 12-month at 4.37%. If the trend continues, it will not be long before the Bank of Canada will need to begin cutting rates.
Typically, the Bank of Canada will begin to cut rates when we have entered a recession. A recession is defined as two consecutive quarters of negative GDP growth. The fourth quarter of 2022 had negative GDP growth and when the government releases the first quarter 2023 GDP numbers on May 31, we expect it to be negative as well.
Historically, when the economy starts to go into recession cyclicals, or companies that depend on the economy, tend to do poorly, and growth stocks such as technology, start to go up because of the anticipation of lower interest rates. Cyclicals in Canada have had a poor start to the year and technology stocks have had a reasonably good start to the year. It appears that the market is already pricing in some rate cuts.
As I mentioned in a previous note, once the Fed stops raising rates markets tend to go up, at least from a historical perspective. Using the data from the last five interest rate cycles starting in 1989 the average performance of the S&P 500 once the Federal Reserve stops raising rates is 19.02%. We believe Canada has already stop raising rates and the Federal Reserve in the US either had their last rate hike two weeks ago or will be done at their next meeting on May 3. Either way history tells us that it should be a good finish to 2023 if the feds are done raising rates.
I've also included a piece from our CIBC Economics Team entitled "Will higher rates break the consumers back?"
As always, if you have any questions please feel free to give us a call anytime.
Have a great weekend.
Milan
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