Market update

The Bank of Canada raised the target for its overnight rate by 50 basis points (bps) to 3.75% this morning, below expectations of an aggressive 75 bps increase, marking it the sixth consecutive rate hike.

August GDP rose by 0.1%, which was slightly better than the advance estimate and the consensus forecast for a flat reading. Meanwhile the advance estimate for September pointed to a matching 0.1% gain. An upward revision earlier in the quarter means that GDP for Q3 as a whole appears to be close to the 1.5% annualized pace predicted by the Bank of Canada in its recent MPR report. 

Canadian factory sales most likely fell 0.5% in September from August, largely driven by decreases in the transportation equipment and petroleum and coal product industries.

U.S. third-quarter GDP grew at a 2.6% annual pace, rebounding from a contraction in the first half of the year. GDP increase was driven by a narrowing trade deficit and increases in non-residential investment and consumer spending.

Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, slowed to a 1.4% rate from the April-June quarter's 2.0% pace. Business spending on equipment rebounded solidly, while government expenditures ended five straight quarters of decline.

The average contract rate on a 30-year fixed-rate mortgage rose by 22 basis points to 7.16% for the week ended Oct. 21 while the MBA's Market Composite Index, a measure of mortgage loan application volume, fell 1.7% from a week earlier. Mortgage application activity is at its slowest pace since 1997.

The European Central Bank raised interest rates again on Thursday and put the reduction of its bloated balance sheet on the agenda but said "substantial" progress had already been made in its bid to fight off a historic surge in inflation.

Eurozone business activity contracted at the fastest pace in nearly two years in October while British businesses in October are suffering their worst month since January 2021.

Data showed France's economy grew slightly in the Q3 but had a sharp jump in inflation and the German economy grew in Q3 by 0.3%, going against expectations.

Chinese economic data that was delayed last week and published this morning showed a mixed recovery, with unemployment rising and retail sales weakening despite a pickup in growth while the Covid-zero campaign continues to be a drag on the economy.

China released trade data which showed that demand for crude remained lackluster in September.

Wuhan locked down one of its central districts following the discovery of Covid cases.

Oil prices rose boosted by record U.S. crude exports and a weaker U.S. dollar but were capped by demand concerns in China. The Canadian Real Estate Association (CREA) reported that September sales were down 3.9% compared with August. Compared with a year ago, home sales in September were down 32.2% and about 12% below the pre-pandemic 10-year average for the month.

 

Weekly change: TSX: 3.2%; DOW: 5.7%; S&P 500: 3.9%; NASDAQ: 2.22%; GOLD: -0.6%; WTI: 3.7%

 

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CIBC Economics Quick Take:  Canadian GDP (Aug, Sep & Q3 Adv) by Andrew Grantham

It may have slowed to a crawl, but the good news is that we still have growth within the Canadian economy. August GDP rose by 0.1%, which was slightly better than the advance estimate and the consensus forecast for a flat reading. Meanwhile the advance estimate for September pointed to a matching 0.1% gain. An upward revision earlier in the quarter means that GDP for Q3 as a whole appears to be close to the 1.5% annualized pace predicted by the Bank of Canada in its recent MPR report.  During August, growth was reasonably broad-based with 14 of 20 sectors posting increases in activity during the month, with the main exceptions being manufacturing, construction and mining (although the latter came after a big increase in the prior month). While growth was fairly modest in Q3, it will probably need to slow further in Q4 and early 2023 to help bring inflation back down to target. This supports the notion that while the Bank of Canada is close to the end of its interest rate hiking cycle, it isn't done quite yet.

 

CIBC Economics Quick Take:  Bank of Canada statement, MPR by Andrew Grantham

The Bank of Canada continued hiking interest rates in an effort to bring inflation back under control, although the 50bp move, to take the overnight rate to 3.75%, was a little less aggressive than the consensus and market had expected (75bp was almost fully priced in). The statement and downgraded growth forecasts within the MPR hint at an economy that is losing momentum maybe a little quicker than previously anticipated. Housing is seen to have retreated "sharply" but there was also reference to consumer and business spending softening, as well as weaker international demand. Growth forecasts of just under 1% next year and 2% in 2024 represent downgrades from where they stood previously and a near brush with recession. However, even with the weaker growth profile, the Bank stated that its preferred measures of inflation are not yet showing meaningful evidence of easing, and as such the statement still suggested that interest rates "will need to rise further".  As such, this may just represent a slightly slower path to the same peak interest rate (4.25%) that we had forecast prior to today's smaller than anticipated 50bp hike.

 

MacroMemo - October 25 - November 7, 2022 by Eric Lascelles Link to Article

UK stabilizes

Prime Minister Liz Truss has been succeeded by Rishi Sunak amid hopes of political stabilization. Truss had proposed a series of stimulative and inflationary policies that caused concern about exacerbating existing problems, all of which have now been fully unwound.

 

China’s National Congress concludes

President Xi’s reappointed next March to a third five-year term is a widely anticipated formality. More generally, there are increasing concerns about China’s medium-term growth prospects. Having once grown at 6 - 10% per year as they became an industrialized economy (a process which occurs only once), estimates are increasingly leaning toward an assumption of sub-4% growth on a steady-state basis going forward. The country’s three long-standing priorities under President Xi are not also conducive to fast economic growth:

• Tightening controls over the domestic population
• Pursuing a more assertive foreign policy
• Reclaiming state control over the economy

This slower growth threatens China’s ability to achieve its societal objectives and the above stated goals may worsen already challenging demographic issues left over from the one-child policy. It could make its leadership more willing to take risks in a geopolitical context to achieve “wins” on other playing fields (for example Taiwan – see link for more details).

 

Ukraine escalation continues

Ukraine continues to make incremental gains on the battlefield, with Russia responding via escalation and a change of tactics:

• Russia has now sabotaged its own (dormant) natural gas pipelines connecting to Europe
• The country is using low quality Iranian drones to target Ukrainian electricity infrastructure
• Russia recently conscripted 300,000 additional soldiers into its military and declared sovereignty over the parts of Ukraine it currently occupies

While Putin enjoys a partial dictatorship, he is likely motivated to achieve what could be considered a strategic victory of some sort in order to justify the engagement and preserve his credibility.

 

Economic developments

RBC Economics continue to anticipate a recession across much of the developed world and have upgraded the likelihood by the end of 2023 from 75% to 80% for North America. The likelihood is more like 90% in the Euro zone and UK.

Their expectation is of a medium severity recession. Indicating a milder recession is a labour market which may fair better than usual through any coming downturn, while central bank policy and unwillingness to budge on rates could spell a deeper recession. In the view of RBC Economics, the two sets of arguments cancel one another out, justifying the historically middling decline of 1.5% to 2.0% that we anticipate.

 

Supply chain improvements

Supply chains have already improved significantly through a series of more obscure supply chain proxies while US warehousing utilization and prices began to turn over the summer.

 

Chip shortage eases

The cost of computer chips has also declined from its worst point. This is a good signal that demand, and supply are returning to alignment. In fact, many analysts are predicting a multi-year chip glut given what now appears to have been over-investment in the industry.

 

Inflation breadth & lags

North American inflation has eased slightly over the past three months overall, while core inflation has not yet slowed. Fortunately, core inflation should eventually turn as all four of the key original drivers of high inflation have become less inflationary:

• Central banks have tightened to an extent that monetary policy is now outright “restrictive” in the view of RBC Economics
• Fiscal policy has become less generous than before
• Supply chains have seen improvement
• The commodity shock has at least partially eased, as evidenced by lower oil, base metal, lumber and raw food prices

The problem is that as central banks wait for this to trickle through, they will feel compelled to continue raising interest rates. The Bank of Canada raised rates by 50 basis points this week, with the Fed likely to hike by 75 basis points in early November. While the pace of tightening may slow, central banks will struggle to stop until they have seen a few months of softer core inflation. That probably won’t be crystal clear until early 2023 at best.

A key unanswered question is the extent to which central banks are willing to gamble on historical lags repeating themselves. For instance, food inflation measures lag movement in food commodity prices by approximately three to six months. So, while we have seen food commodity prices ease, this is not yet reflected in CPI.

 

Global Insights

A first-of-its-kind panel organized by NASA opened a study on Monday of what the government calls "unidentified aerial phenomena," commonly termed UFOs, bringing together experts from scientific fields ranging from physics to astrobiology.

The 16-member panel, convened with little fanfare, will focus its inquiry entirely on unclassified sightings and other data collected from civilian government and commercial sectors, according to NASA.

Reuters

U.S. auto retail sales are expected to rise in October as supply chain snags ease, making more vehicles available at dealerships amid higher demand, an industry report from consultants J.D. Power and LMC Automotive showed on Wednesday.

Reuters

Elon Musk has taken ownership of Twitter Inc with brutal efficiency, firing top executives but providing little clarity over how he will achieve the ambitions he has outlined for the influential social media platform.

Reuters

Factbox: What is Rishi Sunak's solution to Britain's problems? Britain is facing an economically toxic combination of recession and rising interest rates. The Bank of England is trying to tame double-digit inflation while consumers face rising costs and falling real incomes. To balance a budget shortfall made worse by the rising borrowing costs that the crisis caused, the next prime minister will most probably have to oversee spending cuts and tax rises.

Reuters

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