The global expansion has downshifted to a slower pace but remains resilient. We remain in the most aggressive and synchronized monetary tightening cycle in 40 years. Underlying inflation persists at multiple %age points above targets and central banks remain in tightening mode. In response to the U.S. CPI update for October, the 10-year-2-year yield spread inversion is now the most severe since the early 1980s. Minutes from the Fed’s November policy meeting suggest that although most officials were in favour of slowing the pace of rate hikes at upcoming meetings, there was no consensus on how high the peak in rates would ultimately need to be, or how long the restrictive stance would be maintained for. In November we maintained our twelve-month forward outlook for the U.S. economy of six months of Recession followed by six months of Stagnation.
Exports from China edged 0.3% lower year over year in October 2022. This was the first decline in shipments since May 2020, amid poor overseas demand, as cost pressures grew globally and supply disruptions lingered.1 China’s annual inflation dropped to 2.1% year over year in October 2022, due to a slowdown in cost of both food and non-food.2 The Eurozone economy expanded 2.1% year-on-year in the three months to September of 2022.3 Consumer price inflation was revised slightly down to 10.6% year-on-year in October 2022.4 The unemployment rate in the Euro Area fell to a record low of 6.6% in September of 2022. It compares with a much higher jobless rate of 7.3% in the corresponding period of 2021, as ample stimulus and growth-oriented policy supported the labor market’s recovery from the pandemic. Among the largest economies, the unemployment rate fell in France (7.1%) and remained steady in Germany (at 3%) and Italy (at 7.9%).5
The U.S. economy grew an annualized 2.6% on quarter in Q3 2022, rebounding from a contraction in the first half of the year. The biggest positive contribution came from net trade. Imports sank 6.9% while exports were up 14.4%, led by petroleum products, nonautomotive capital goods, and financial services.6 The annual inflation rate in the U.S. slowed to 7.7% in October.7 The unemployment rate in the U.S. increased to 3.7% in October 2022. While there were some conflicting signals coming from the October jobs report, the main message is one of continued strength in labor demand. The trend in productivity has been weak, as the recent strength in the labor market has not been matched by strength in output.8 The FOMC hiked rates 75 basis points at the November meeting with the target range now at 3.75%-4.0%. It marks a sixth consecutive rate hike and the fourth straight three-quarter point increase, pushing borrowing costs to a new high since 2008. Ongoing increases in the target range will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments, when deciding on the size of further increases.9 Canada’s annual inflation rate was at 6.9% in October of 2022.10 The unemployment rate in Canada was at 5.2% in October of 2022, signaling that the Canadian labor market remains tight.11 Canada’s trade surplus rose to CAD 1.1 billion in September of 2022.12
Expectations for a slowing pace of U.S. rate hikes helped the S&P 500 to its best month since July, with a total return of 8.1%, while the S&P Mid Cap 400 and S&P SmallCap 600 were up 10.5% and 12.4%, respectively. Canadian equities rebounded in October. The S&P/TSX Composite rose by 5.6%. The S&P Europe 350 clocked up a 6.2% gain in October, with all its constituent countries ending the month up. France and the U.K. were the biggest contributors to the pan-European benchmark’s gains. The S&P Pan Asia BMI shed 1.5% in October. While 9 out of its 14 regional components gained, China’s negative 2.7% contribution offset those gains.
In November, our optimization process was unable to identify portfolio solutions for any of our Model Risk Thresholds. With this guidance, we maintained our asset allocation, including the twenty percent cash position across all models.
The Fed aims to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2%. With inflation elevated to forty-year highs, and with supply and demand imbalances in the economy persisting, the Fed’s assessment of the ultimate level of the federal funds rate that would be necessary to achieve this goal is higher than had previously expected. We are currently positioned for a recession in the U.S. in the next two quarters. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.
Deborah Frame, President and CIO
1 Trading Economics. China Trade. October 24, 2022.
2 Trading Economics. China Inflation. November 9, 2022.
3 Trading Economics. Europe GDP Growth. November 15, 2022.
4 Trading Economics. Europe Inflation. November 17, 2022.
5 Trading Economics. Europe Unemployment Rate: Eurostat. November 13, 2022.
6 Trading Economics. U.S. GDP Growth. October 27, 2022.
7 Trading Economics. U.S. Inflation. November 10, 2022.
8 Trading Economics. U.S. Unemployment: U.S. Bureau of Labor Statistics. November 4, 2022.
9 Trading Economics. U.S. FOMC. November 23, 2022.
10 Trading Economics. Canada Inflation. November 16, 2022.
11 Trading Economics. Canada Unemployment: Statistics Canada. November 6, 2022.
12 Trading Economics. Canada Trade: Statistics Canada. November 3, 2022.
Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. October 31, 2022. Index performance is based on total returns and expressed in the local currency of the index.