Too loose for too long, central banks have responded to lagging inflationary pressures in 2022 with the sharpest six-month tightening cycle on record.
The Bank of Canada (BOC) was in the batter’s box this morning and after raising its policy rate to 3% last month from .25 in January, had telegraphed another +.75bps for today. Instead, they undershot with a +50bps and noted that “higher interest rates are beginning to weigh on growth. This is increasingly evident in interest-rate-sensitive parts of the economy, like housing and spending on big-ticket items. But the effects of higher rates will take time to spread through the economy.” At the same time, they lowered Canada’s 2023 GDP growth forecast to less than 1%.
This BOC blink follows a string of historically reliable indicators suggesting a global recession is spreading and Canada’s housing market has entered a period of hard return. While the US and Canadian central banks both say there’s more tightening yet to do, what they’ve already done will slow demand and drive up unemployment for many months. Lest we forget, these are the same folks who last year didn’t see any hikes coming until 2023. Reactionary is the modus operandi.
Stocks and bonds sold off sharply on the rate shock of 2022; bonds by the most in 94 years. Stocks, on the other hand, are, so far, down about half as much as past recessionary bear markets.
Both asset classes have rallied this week on the inking that central banks may be nearing the end of their hiking efforts. It bears noting, however, that while it’s typical that investment-grade bond prices bottom before or with the end of tightening cycles, stock markets do not. Reflex rallies aside, stock bear markets traditionally don’t end when central banks pause or even when they return to cutting. Unless this time different, stocks fall until central banks are nearing the end of their easing efforts. Next year maybe?
