Dec Mullarkey
Managing Director, Investment Strategy
and Asset Allocation
LinkedIn

This week, U.S. Federal Reserve Chairman Jerome Powell showed up at the Brookings Institution and kept his message clear. He highlighted the Fed’s bumper sticker slogan, that “monetary tightening operates with a lag,” but noted that moderating the pace of hikes may happen at the next meeting.

By far the most interesting update was how he dissected inflation. On core goods inflation, he likes where it is trending, and if this continues inflation should significantly drop in the next several months.

Powell also elaborated on housing services inflation, which encapsulates apartment rents and an equivalent estimate for owner-occupied units. This measure tends to be sticky as rents get refreshed when leases turn over. However, when it comes to housing services inflation as a timely economic indicator, Powell emphasized that he pays special attention to new leases. And those rents are coming down at a brisk pace, providing encouragement that aggregate rent inflation may cool in the next year. 

The third category he mused about was core services other than housing. This group is about half of core personal consumption expenditures (PCE), the Fed’s preferred inflation measure. And wages are the largest cost for these services. Powell didn’t sugarcoat this one. He is concerned about the 3.5 million shortfall in workers relative to pre-pandemic trends. About 60% of this is from early retirements, with the balance mainly from fewer immigrants. For now, wage growth shows few signs of cooling, and the Fed is closely watching.   

However, during a Q&A he reiterated that he still believes there is a path to a soft landing. Markets loved the hopeful tone, and stocks shot up and bond yields came down.

Source: U.S. Federal Reserve, Bloomberg, 2022.

Melissa Boulrice
Director, Asset Management,
Public Fixed Income
LinkedIn

The Canadian economy expanded 2.9% in the third quarter on an annualized basis, almost twice as fast as the Bank of Canada forecast of 1.5%. This third quarter expansion mainly came from higher energy and agriculture exports. If you look deeper, however, you will see that the BoC rate hikes this year are starting to impact demand. Household consumption declined 1%, the first drop since Q2 2021, and some growth was attributed to companies building up inventories. Investment in housing experienced a sharp decline of 15.4%, and this decline is expected to continue given rising mortgage costs. Ultimately, this should not alter the BoC’s next rate decision on December 7, but the November employment report on December 2 may still influence whether we see a hike of 25 or 50 basis points.

Source: Statistics Canada, Bloomberg, 2022. 

Market insights are based on individual portfolio manager opinions and market observations. These are observations only and are not intended to provide specific financial, tax, investment, insurance, legal or accounting advice and should not be relied upon and does not  constitute a specific offer to buy and/or sell securities, insurance or investment services. Investors should consult with their professional advisors before acting upon any information posted here.

 

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