The week in review - Dec. 13th 2023
Duncan Presant - Dec 13, 2023
The Bank of Canada held the overnight rate steady at 5%, amidst an economic slowdown marked by a 1.1% contraction in Q3 GDP, which has helped temper inflation by curbing household spending and business investment.
THIS WEEK’S RECAP:
▪ The Bank of Canada held the overnight rate steady at 5%, amidst an economic slowdown marked by a 1.1% contraction in Q3 GDP, which has helped temper inflation by curbing household spending and business investment. Despite this, the Bank is still wary of current inflation levels and desires more significant and persistent declines in core inflation. The Bank will maintain a mildly hawkish tone until they are confident a 2% target is in fact within reach. Only then will they moderate their tone, and acknowledge a shift in guidance, signaling rate cuts.
▪ The past month has witnessed a significant and positive shift across asset classes and businesses in mature economies, signaling broad market optimism. However, there is a risk that growing expectation for a substantial reduction in borrowing costs in 2024 might lead to a premature economic response, which could in turn delay adjustments in interest rates. Central banks will continue to closely monitor consumption and employment trends as crucial indicators to assess the right timing to implement anticipated rate cuts.
▪ US employment results for November were slightly stronger than expected, with a pullback in the unemployment rate to 3.7% (previously 3.9%) and 199,000 new jobs created. Policymakers will be concerned over the drop in the unemployment rate and the small increase in average hourly wages, up 0.2% for goods-producing jobs and 0.1% in service providing positions.
▪ China's leadership has pledged to enhance fiscal strategies and tailor monetary policy to secure economic stability and achieve its 2024 growth goals. With a focus on development, the Politburo plans to use proactive fiscal stimulus, such as increased infrastructure bonds, to support investment and consumption despite current economic challenges.
▪ The recent surge in gold prices can be attributed to several factors: its status as a traditional hedge against geopolitical uncertainties continues to attract investors. Additionally, the recent weakness in the US dollar makes gold a more attractive holding. Moreover, lower real yields in the US reduce the opportunity cost of holding non-yielding assets like gold. However, we would caution against this thesis as real yields, though lower, are holding above 2%.
ON DECK FOR NEXT WEEK:
▪ For the upcoming week in the US, the Consumer Price Index (CPI) for November will be released on Tuesday, the Federal Open Market Committee (FOMC) will make its rate decision on Wednesday, and insights into consumer behavior will be gathered from November's Retail Sales figures on Thursday.
▪ The European Central Bank (ECB) and the Bank of England are scheduled to announce their rate decisions on Thursday, with both expected to maintain the status quo. In Europe, anticipation for rate reductions by early 2024 is building due to the downshift in inflationary pressures. However, the ECB is expected to temper these expectations in line with the cautious approach shared among other central banks.
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