There was some significant evidence this week that inflation is finally starting to slow down. Decreases in used car prices, gasoline prices, food prices, and rent are starting to bring inflation back in line. Meanwhile, China actually reported deflation in July and October.

 

Most economists agree that it takes approximately 18 months to see the full effect of monetary policy changes. The US and Canada started tightening 12 months ago so it's likely we will see more declines over the next six months.

 

You may ask "why is this important?". It's important because the Federal Reserve will stop raising rates once they are comfortable with inflation levels. As I've stated in previous notes, investing in the market in a rising interest rate environment is like swimming against the stream. What's even more important is the next logical step in the normal cycle of events – the Federal Reserve will start cutting rates when inflation and the economy slow down enough. Once the Federal Reserve starts cutting rates, the markets tend to do very well.

 

As you can see from the chart below, global monetary policy has finally shifted. The blue bars show the net number of countries with rate increases or decreases every month for the past four years. The chart is based on 74 of the largest economies in the world. Each month, countries decide whether to raise, maintain, or decrease their key interest rate. For example: if 50 countries were to raise rates while 10 were to decrease (with the remaining 14 countries leaving rates unchanged), it would be a net increase of 40. A positive number demonstrates that, generally, more countries are raising rates than leaving them stable or decreasing. As you can see, countries have been consistently increasing rates since mid-2021 and just last month have finally had a net decrease. If the global economy is starting to cut their rates, then it won't be long before North America follows suit.

 

Source : Dynamic Funds

 

I've also included a piece from our CIBC Economics team entitled "Tackle, not touch (The Week Ahead)".

 

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

 

Have a great weekend.

 

Milan