Market Commentary

Views on the current state of the economy, particularly south of the border, are increasingly being perceived in the eye of the beholders, who are allowing their political views to cloud the objectively quantified ones.

This is the time of year when investment houses take account for the year that was and begin to consider the year that will be. Simply put, these year ahead documents, like the one you are reading, are table stakes for investment firms. This is where investment strategists summarize their thesis for the upcoming year.

A simple extrapolation of the decelerating trend in U.S. job growth suggests declining payrolls should be expected by early next year. Personal disposable income has already begun to decline in real terms after peaking in May.

Most of the leading indicators are flashing red, indication that a recession is likely in the months ahead. But the economy has proved resilient and has not yet weakened into recession as soon as many economists had expected. How should we interpret this?

Fed officials have been quite consistently saying that they don’t expect to cut rates in 2023, but the market has been equally consistent in the expectation that rates will be cut this year. At least three 25 bp cuts are currently priced in for later this year.

The Federal Reserve and other central banks have been hiking rates with the goal of engineering an economic slowdown to ensure that inflation continues to decline. Tightening by the Federal Reserve has taken short term rates above long-term rates resulting in an inverted yield curve. History shows that inverted yield curves are almost always followed by recession and therefore we should expect a recession will begin at some point in 2023.