When Goldilocks Can’t Get Comfortable
Markets enter 2024 with most economic readings in decent shape: inflation is coming down; credit conditions appear to be holding up; and unemployment remains at multi-year lows. Even so, markets can't seem to get comfortable with where things stand.
As we enter the fourth quarter of 2023, the global economy is now well into the second-order effects of the inflation cycle, triggered by wage pressures, rising input costs, and higher interest rates as central banks try to contain price increases. On balance, the more time passes at higher inflation and borrowing rates, the more stress it puts on consumers and the economy. In this update, we review our YTD performance, consider the health of the U.S. and Canadian consumer, and outline how we are navigating current market risks.
Tracking the Tides
Looking ahead, labour markets remain tight, consumer spending is healthy and inflation is decelerating. As encouraging as the economic data may be, we see signs that the global economy is struggling to adjust to cost pressures and higher interest rates.
A Tech Rally but What’s Next?
Hopes for an end to the current cycle of rate hikes spurred a strong start to equity markets in 2023. Much of the rally was due to a resurgent Information Technology sector which contributed more than two thirds of the first quarter index move in the S&P 500 and roughly one third of the return for the S&P/TSX.
Inflation and the Inversion
With the U.S. 10-year Treasury yield currently 80+ basis points below the U.S. 2-year yield, 2022 has seen the yield curve steepen to a level not seen since the Fall of 1981, at the height of the Volcker inflation-fighting regime in the United States.
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