Blog

It was a push me pull you market this week as investors fretted over the worsening condition in Ukraine, rising inflationary pressure and an inverted yield curve (defined as the 2 year bond yield over taking the 10 year bond yield). Market historians would argue that inverted yield curves generally precede recessions, but the real issue is the lag between the jump in short term interest rates and the start of negative economic growth. Given the 430,000 jobs the US added last month leads us to believe, a recession may not start until 2023 at the earliest. However, a growing gaggle of Fed Presidents are taking a hard stance on interest rates to stem rising inflationary pressures. Back in the 1980’s Wall Street coined the expression “three steps and a stumble” meaning the 4^th interest rate increase generally starts the recession and here is why.

Changing the direction of an economy by altering the money supply is like turning the rudder on a super tanker. The time between Spinning the wheel helm and seeing a directional change can seem like an eternity when trying to avoid a disaster.  It’s the same with an economy. Plus, the lag time associated with an increase in interest rates and a change in consumption patterns can vary, which means it is very difficult for central bankers to get it right. My only fear is that we are reliving a 1970’s style inflationary period that took years to resolve. When you factor in supply disruptions from Covid, the Russian invasion of Ukraine which will disrupt food commodity exports from both countries and sanctions on Russian energy exports could make the 1973 OPEC embargo look like a small hiccup by comparison. And don’t get me started on crypto currencies.

Unfortunately, the Fed is in a box and must take an aggressive stance on interest rates to cool a hot economy. We have a similar problem in Canada, but to a lesser degree because our Federal Government just implemented another increase in carbon taxes. I wish I could say April Fools, but no, even with skyrocketing fuel costs that are severely hurting the average consumer, The Feds hammered Canadians even more. It’s like telling half of Canada, “turn the furnace down, put on two sweaters and use the savings to buy your groceries!”  President Biden, on the other hand, has just released millions of barrels of oil from their Strategic reserves to help consumers in the US.

To make matters more interesting, the Bank of Canada is expected to raise rates on the 13^th. I think half the street is betting on a quarter point increase and the other half are betting it will be 0.5%. In the meantime, investors continue to buy Canadian stocks with high paying dividends leading the charge along with real estate, energy and consumer discretionary like BRP and Dollarama. I mentioned energy stocks in the broadcast going against the direction of falling crude prices but at $99 per barrel, it will be raining money in Alberta.

In the US,  the ISM service index, and the Minutes from last month’s Federal Reserve meeting will dominate the bond markets but this is also the calm before the earnings storm that starts with Big US banks on the 13^th/14^th.

Happy trading and stay safe.

Steve and Michele.

Information contained herein represents the views of the writer and not those of PI Financial Corp., and based on assumptions which the writer believes to be reasonable. The material contained herein is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. This information is intended for distribution in those jurisdictions where PI Financial is registered as an advisor or a dealer in securities. Any distribution or dissemination of this article in any other jurisdiction is strictly prohibited. PI Financial and/or its’ officers, directors, employees and affiliates may, from time to time, acquire, hold or sell a position in the securities mentioned herein.