Investment update

Weekly insight into the marketplace.

March 6 to 10, 2023

The Fed chair sent markets spiralling

On Tuesday, in testimony to the U.S. Senate Committee on Banking, Federal Reserve (the Fed) Chair Jerome Powell signalled that policymakers are ready to accelerate the pace of monetary-policy tightening and raise interest-rates higher than forecast – if inflation remains elevated. His comments shook markets. The S&P 500 fell 1.5% to below the 4,000-point level, the Dow dropped 575 points (or 1.7%), and the tech-heavy Nasdaq Composite closed down 1.3%. Bond yields surged, with the 2-year Treasury yield rising to almost 5% (its highest level since 2007), exceeding the 10-year yield by a full percentage point for the first time since 1981. Yield-curve inversions (including this current one, dating back to July 2022) indicate that markets expect economic activity to cool as rates rise, and have historically preceded economic downturns by 12 to 18 months. Equity markets continued to struggle through the rest of the week. Stronger-than-expected Canadian and U.S. monthly employment data, released on Friday, added to concerns that the North American economies continue to run hot, and that further policy tightening will be required. News of the collapse of Silicon Valley Bank – the largest bank failure since the financial crisis – sparked further volatility and sent the equity benchmarks tumbling to close the week with heavy losses.

The Bank of Canada held interest rates steady

On Wednesday, as expected, the Bank of Canada announced that it would keep its policy interest rate unchanged for the first time in nine meetings, holding it at 4.5%, as promised in January. Policymakers also noted that the central bank is prepared to raise rates again if its economic forecast changes. The move makes the Bank of Canada the first among the world’s major central banks (including, the Fed) to pause tightening – suggesting policymakers are confident that their aggressive tightening over the past year will continue to slow economic growth and bring inflation down to target. Some economists have raised concerns that the Bank of Canada’s slower pace of tightening, compared to the Fed’s response, could further weaken the value of the Canadian dollar (which is down over 3% from its high in February) and add to inflation. During a speech in Winnipeg on Thursday, Senior Deputy Governor of the Bank of Canada Carolyn Rogers acknowledged this concern but reinforced that the pause on rate hikes is conditional, and that the central bank will be ready to act, if necessary. “We’ll need to see more evidence to fully assess whether monetary policy is restrictive enough to return inflation to 2%,” Rogers said.

Data showed that credit-card balances rose 15% at the end of 2022

A pause in interest-rate hikes should be welcome news for Canadians, as high inflation and the rising costs of borrowing are taking a toll. According to a report released on Thursday by credit-monitoring agency Equifax Canada, Canadians’ credit-card balances were up 15.3% year-over-year, and crossed $100 billion for the first time ever, at the end of 2022. The report also showed that mortgage debt accounts for 75% of all consumer debt in Canada, even though the Canadian housing market saw a significant drop in new mortgages during the fourth quarter of 2022. “As more mortgages come up for renewal, future payment shocks for homeowners are a real concern,” said Rebecca Oakes, Vice-President of Advanced Analytics at Equifax Canada. “There are thousands of fixed-rate mortgages expected to be renewed in the next 12 months and this will likely lead to either an increase in the monthly mortgage payments for these consumers or a need to extend mortgage terms to maintain existing payment levels.”

The stock and bond market
Index Close Week YTD
S&P/TSX Composite 19,774.92 -3.92% 2.01%
Dow Jones Industrial Average 31,909.64 -4.44% -3.73%
S&P 500 Index 3,861.59 -4.55% 0.58%
NASDAQ Composite 11,138.89 -4.71% 6.42%
10-year Canadian Bond Yield 3.00% -0.34% -0.29%
10year US Treasury Yield 3.70% -0.27% -0.14%
WTI Crude Oil US$/barrel $76.68 -3.97% -4.76%
Canadian Dollar US$0.7230 -1.70% -2.01%
Bank of Canada Prime Rate 6.70%

*Weekly performance ending March 10, 2023. Source: Refinitiv.

Key take-away

The value of financial advice. Working with a knowledgeable and experienced Co-operators financial representative means that you’ll get honest, straightforward answers to your investment questions. Looking at the big picture, and how your goals fit within it, they can help you design a financial roadmap that keeps you motivated and on track. Talk to us today to review – or get started on – your personalized plan.

What’s ahead

U.S. inflation data (March 14): Data for January showed that the annual inflation rate in the U.S. slowed to 6.4%, down from 6.5% in the previous month. The reading was higher than expected, but marked the seventh-straight monthly decline and was the lowest level reported since October 2021. February’s inflation numbers, due tomorrow (Tuesday), will be analyzed closely by policymakers and investors before next week’s interest-rate update from the Fed.

Circle these dates

March 21 to 22 U.S. Federal Reserve interest-rate decision

April 7 North American markets closed for Good Friday

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