Market update

The U.S. Fed slowed the pace of rate hikes as expected, taking the fed funds rate 50bps higher, to leave the ceiling at 4.5%. The updated median projections now show the fed funds rate at 5.1% at the end of 2023.

U.S. consumer prices barely rose in November, raising hopes that inflation has peaked. The U.S. consumer price index (CPI) slowed for a fifth straight month to 7.1% in November, down from 7.7% and lower than the forecast of 7.3%. Excluding food and energy prices, core CPI rose 0.2% on the month and 6% on an annual basis, compared with respective estimates of 0.3% and 6.1%.

The cost of U.S. imported goods fell 0.6% vs. the expected 0.5% in November. It's down for the fifth month in a row, helping to ease inflationary pressures. Falling oil prices have been a big contributor to the lower cost of imports, but even with fuel excluded, prices dropped 0.4% in November. Export prices dipped by 0.3%, following the trends in imported goods.

U.S. retail sales were weaker than expected in November, declining by 0.6% versus the forecast of a 0.1% decline. High inflation and interest rates affected consumer spending.

U.S. Initial jobless claims decreased to 211,000 vs the estimated 230,000.

The European Central Bank moved its key interest rate from 1.5% to 2% on Thursday and said there would likely be more 50-basis-point rate hikes for some time and that the central bank was not pivoting yet.

The ECB will also announce new quarterly economic projections, used by investors to work out how many more hikes may be on the cards. The new projections will put inflation comfortably above 2% in 2024 and just above it in 2025, said the source, who spoke on condition of anonymity because the forecasts are not yet public.

Data showed euro zone business activity in December shrank at the slowest pace in four months, but remained in contraction.

U.K. inflation fell from a 41-year high in November, raising the possibility that the worst of the cost-of-living squeeze is over.

The Bank of England raised interest rates by 50 basis points to 3.5% and has signaled more tightening ahead to combat inflation.

Britain's jobless rate rose to 3.7% from 3.6%, and was in line with expectations.

British manufacturers expect output to fall by 3.2% next year after a 4.4% decline in 2022 while the U.K. economy grew by 0.5% month-on-month in October versus 0.4% expected.

The German consumer price index (CPI) rose by 10% year over year in November, falling by 0.5% from the previous month, which was in line with forecasts. Forecasts are also predicting that Germany’s expected winter recession will be milder than previously anticipated.

Japan joined the Netherlands in tightening controls over the export of advanced chipmaking equipment to China.

China is scheduled to issue special sovereign bonds to refinance an old debt, with more discussions of such bonds will be needed for fiscal stimulus in 2023.

China has launched a trade dispute at the World Trade Organization against the United States over its chip export control measures.

Morgan Stanley raised its 2023 outlook for China’s economy, by lifting its GDP growth forecast to 5.4% from 5%.

West Texas Intermediate crude was choppy but up for the week after OPEC and the International Energy Agency (IEA) both forecast a rebound in demand over the course of next year.

Weekly change: TSX: -2.5%; DOW: -1.7%; S&P 500: -2.1%; NASDAQ: -2.7%; GOLD: -0.4%; WTI: 4.1%;

 

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CIBC Economics Quick Take: US CPI (Nov) by Katherine Judge

There was some good news on the inflation front in the US in November, as prices decelerated by more than expected. The 0.1% monthly advance in total prices (vs. 0.3% expected) reflected a drop in energy prices that helped to offset an increase in food prices, while core prices also decelerated, to 0.2% on the month (vs. 0.3% expected). However, the softer core reading was driven by an easing in core goods prices, specifically used cars, reflecting supply chain improvements, and drops in medical care and transportation services. That masked price pressures in core services, with the shelter sub-index continuing to increase strongly, although the pace of monthly shelter increases subsided. That left total annual inflation slower at 7.1%, and core at 6.0%. Although the downside surprise is a welcome development, the Fed remains on track to hike by 50bps tomorrow given that the downside was concentrated in a few components, and the labor market remains tight.

 

CIBC Economics Quick Take: FOMC Announcement by Katherine Judge

The FOMC slowed the pace of rate hikes as expected, taking the fed funds rate 50bps higher, to leave the ceiling at 4.5%. The updated median projections now show the fed funds rate at 5.1% at the end of 2023 (up from 4.6% previously), and falling to 4.1% at the end of 2024, and 3.1% at the end of 2025 (both 25bps above prior projections), while rates are still seen at 2.5% in the long run. The dots are skewed to the upside, and the higher interest rate projections meant that the unemployment rate forecast was upgraded by a couple of ticks, and is expected to end next year at 4.6%, and stay there through 2024. In line with this, GDP growth will be slower than previously thought next year (at 0.5%, from 1.2% in the previous projections), with an acceleration to 1.6% in 2024 (from 1.7% previously). However, PCE inflation isn't expected to get to target until 2025 still, with the projection showing both core and headline at 2.1%. The inflation forecast was upgraded for 2023-24, so any good news on the inflation front ahead could cause policymakers to hike by less than shown in these projections. The statement reiterated the need to take into account the lags with monetary policy works as well (the speed at which policy changes take effect in the economy), and we expect to see enough progress in cooling activity to require only one additional 50bps rate hike ahead, which would bring the ceiling on the fed funds rate to 5.0%; slightly below the median projection.

 

What Caused Last Week’s Stock Market Dip? By Sadiq S. Adatia, Chief Investment Officer, BMO Link to Article

Stock Market Dip

Last week, after a several-weeks-long rally, stock prices dipped somewhat.

The U.S. Federal Reserve’s most recent statement being more dovish than expected combined with declining inflation numbers provided investors with a little more clarity and markets reacted optimistically.

Now, attention is turning to the earnings picture. Last quarter, companies that had announced poor results—like Meta, Alphabet, and Amazon—saw their prices dip, but there was no contagion in the markets. Attention will be turned to next quarter’s earnings and if another poor showing will cause a much broader impact on markets.

Bottom Line: Markets have been digesting the negative earnings outlook for early 2023—that, along with some tax-related selling, is likely what caused last week’s dip.

Oil Prices

Recently, oil prices have stubbornly remained lower than expected despite some positive signs, like China’s reopening. BMO Global Asset Management believes that prices could still head higher, which would be good news for the Canadian economy.

There are a few factors that bode well for a surge. As China reopens more fully, demand will rise. OPEC does not appear inclined to increase supply. We’re getting into the colder months in the northern hemisphere, which increases energy usage. And Russia doesn’t seem likely to do anything to help the oil situation.

But it’s important to understand that even if energy prices stay around current levels, the Energy companies are still profitable—we don’t necessarily need to see massive price movement in order for Energy stocks to outperform.

Bottom Line: We’re still bullish on Energy, with multiple indicators pointing to higher prices.

 

Global Insights

Germany is bleeding cash to keep the lights on. Almost half a trillion dollars, and counting, since the Ukraine war jolted it into an energy crisis nine months ago.

That's the cumulative scale of the bailouts and schemes the Berlin government has launched to prop up the country's energy system since prices rocketed and it lost access to gas from main supplier Russia, according to Reuters calculations.

Reuters

China is working on a more than 1 trillion yuan ($143 billion) support package for its semiconductor industry, three sources said, in a major step towards self-sufficiency in chips and to counter U.S. moves aimed at slowing its technological advances.

Beijing plans to roll out what will be one of its biggest fiscal incentive packages over five years, mainly as subsidies and tax credits to bolster semiconductor production and research activities at home, said the sources.

Reuters

The European Central Bank will increase scrutiny over how banks manage credit risk and diversify funding, it said on Monday while outlining its 2023 priorities as the euro zone heads into a likely recession and faces soaring borrowing costs.

The 19-country currency bloc is facing the double whammy of sky-high inflation and a sharp economic downturn, largely a fallout of Russia's war in Ukraine, which has forced the ECB to tighten financing conditions even as it exacerbates economic pain.

Reuters

U.S. consumers will fall behind on their personal loan and credit card payments next year at the highest rates since 2010, according to forecasts from TransUnion, a major consumer credit rating agency.

Surging loan delinquencies will follow a year in which consumers loaded up on credit, TransUnion said in a study Wednesday. Americans took out a record 87.5 million in new credit cards and 22.1 million in personal loans in 2022, the report showed.

Reuters

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