Week of April 10, 2023
Dec Mullarkey, CFA , Managing Director, Investment Strategy and Asset Allocation
Understandably, markets take a lot of their cues from inflation. And this week brought an encouraging reading as the March tally showed a significant drop in the headline U.S. Consumer Price Index. But the biggest relief was in the details, as shelter costs – a quirky combination of enforced rents and estimated homeowners’ equivalents – showed real signs of slowing. And with market rents coming down, average shelter costs should keep cooling.
However, one overlooked statistic from the week was the availability of credit for small companies. And the news is not good. Based on small company surveys, the three-month deterioration in available credit is the worst in over a decade. As the risk of deposit flight spooks regional banks, that caution is driving tighter lending standards. Constraining credit will tame growth and small company surveys are already reflecting that, with plans for expansion near historic lows and hiring expectations dialed way back.
While the U.S. Federal Reserve pays a lot of attention to its inflation fight, stress from tighter lending standards will likely become the next prominent item on its dashboard.
Source: National Federation of Independent Business Research, Bloomberg, 2023.
Melissa Boulrice , Senior Director, Asset Management, Public Fixed Income, and Trevor Forbes CFA MFin , Managing Director, Public Fixed Income – Total Returns Portfolio
The Bank of Canada (BoC) left interest rates unchanged for the second straight meeting, to little surprise. The central bank stated recent data are reinforcing its confidence that inflation will continue to slow. However, the BoC’s followup commentary signaled that it is retaining its hawkish tilt and is willing to keep rates higher for longer, as Governor Tiff Macklem said that BoC officials discussed “rates remaining elevated for a prolonged period.”??
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The BoC still sees inflation returning to near its target by the end of 2024, but in its own words added that “getting inflation the rest of the way back to 2% could prove to be more difficult because inflation expectations are coming down slowly, service price inflation and wage growth remain elevated, and corporate pricing behavior has yet to normalize.” Pushing back against the idea of rate cuts later this year that the market has priced in, Macklem said cuts this year are not the most likely scenario.
Overall, the Bank of Canada seems quite happy to hold rates steady as inflation has been slowing in line with its expectations. But with the low hanging fruit of supply chains becoming unclogged and thus moving inflation from 8% to 5% territory, the harder work still remains of moving inflation from 5% to around 2%, as wage increases still continue to remain elevated.
Source: Bank of Canada, 2023.
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