Global equity markets advanced over the week ended November 25 with hopes that the pace of rate hikes might slow. In the U.S. Federal Reserve Board’s (“Fed”) minutes from its last meeting, it appeared most Fed officials expect the pace to let up. The S&P/TSX Composite Index finished higher, led by the Materials sector. In a shortened week due to the Thanksgiving holiday, the S&P 500 Index also advanced. Oil prices fell as European countries considered a cap on Russian oil prices. Meanwhile, the price of gold moved higher.
Higher rates in Canada could weigh on recent home buyers
In a speech last week, Senior Deputy Governor of the Bank of Canada Carolyn Rogers acknowledged the risks of higher rates on recent home buyers, but believes the financial system will be able to withstand them.
Rogers noted that approximately 670,000 new mortgages since the beginning of the pandemic have a variable rate mortgage. With rates rising as quickly as they are, it could put financial stress on those Canadian households.
With that said, Rogers suggests many Canadian households might be able to take on higher borrowing costs given the high stress tests involved in qualifying for a mortgage.
The Senior Deputy Governor believes that the Canadian financial system could face elevated risks in response to rising rates. However, the reforms implemented during the Financial Crisis in 2008 and 2009, including capital and liquidity buffers, should allow the financial system to withstand the negative impact of those risks.
Canada’s retail sales fall, but likely to rebound
Retail sales in Canada dropped by 0.5% in September, matching economists’ expectations and the preliminary estimate from Statistics Canada (“StatsCan”).
It was the second drop in the past three months.
The decline in sales was largely broad-based, falling in seven of 11 categories tracked. Sales dropped at food and beverage stores and at gasoline stations, partly due to lower gas prices.
However, StatsCan’s preliminary estimate for October showed a 1.5% surge in retail sales, suggesting Canadian consumers remain relatively resilient despite tightening financial conditions.
Slower rate hikes in the U.S. may be on the way
The Fed released the minutes to the last meeting it held at the beginning of November.
The minutes showed most Fed officials believe the Fed may soon need to begin slowing the pace of its interest rate increases.
While officials expressed concern that raising rates too quickly could harm the U.S. economy, they expect rates to reach a level higher than originally expected.
Slower rate hikes appear to be ahead for the Fed, which boosted investor sentiment toward risk assets after the minutes were released.
At its November meeting, the Fed raised its federal funds rate by 75 basis points to a target range of 3.75% – 4.00%.
OECD expects slower global economic growth
The Organization for Economic Co-operation and Development (“OECD”) estimates that the global economy will slow in 2022 and 2023 after stagnating in the third quarter of 2022.
The OECD projects the global economy to expand by 3.1% this year and to moderate to 2.2% in 2023. According to the OECD, the global economy expanded by 5.9% in 2021.
The economic organization noted it is not predicting a global recession but rather a slowdown in global economic activity.
The OECD believes geopolitical tensions, inflation and tightening monetary policy will all restrict global economic growth in the year ahead.
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