Bank of Canada surprises markets with smaller-than-expected rate hike

On the latest edition of Market Week in Review, Chief Investment Strategist for North America, Paul Eitelman, and Investment Strategy Analyst BeiChen Lin discussed headlines from China’s National Party Congress, which concluded 22 October. They also chatted about the latest rate increases from the Bank of Canada and the European Central Bank, as well as key themes from third-quarter earnings season.

Could China see less stimulus if Li Qiang becomes the next premier?

Lin opened the conversation with a look back at key takeaways from China’s recently concluded National Party Congress - an influential gathering of party leaders that takes place every five years. He said that one of the main headlines from the meeting was the appointment of four new members to the Politburo Standing Committee, which is comprised of seven members total.

“One of the new members that joined the committee was Li Qiang. This is important because many are speculating that Li Qiang will ultimately replace Li Keqiang as premier of China,” Lin said, adding that an announcement on the country’s new premier won’t take place until 2023. It does appear highly likely, however, that Li Qiang will become China’s next premier, he observed.

“This is important for markets, because if Li Qiang is named premier, it could mean that China won’t see as much in the way of stimulus as it might if someone else was appointed to the position,” Lin said.

Bank of Canada, European Central Bank hint at slower pace of rate hikes

Switching to the latest updates from global central banks, Eitelman said that while both the Bank of Canada (BoC) and the European Central Bank (ECB) raised interest rates again the week of 24 October, they also hinted at a slower pace of rate hikes moving forward.

The BoC surprised markets by only hiking rates by 50 basis points (bps) at its 26 October meeting, he noted, versus expectations for a 75-bps increase. “Historically, a 50-bps rate hike is a big move, but the BoC raised rates by 100 bps in July and 75 bps in September, so it’s clear that the central bank is definitely stepping down the pace of rate increases a little bit,” Eitelman said.

The likely reason why is that BoC leaders are becoming worried about potentially overtightening monetary policy, he explained, noting that the Canadian economy certainly appears to be slowing down. For instance, home prices in Canada have now fallen roughly 10% from their peak - a drop that Eitelman characterized as fairly notable. In addition, the nation’s labor market is quite a bit weaker than in the U.S., he added, with job losses reported in three of the last four employment surveys. “I think these types of slowdowns are really becoming a concern for BoC leaders,” he remarked.

Meanwhile, in the eurozone, the European Central Bank (ECB) announced a 75-bps rate hike on 27 October, which Eitelman said was in line with consensus expectations. However, he noted that remarks by ECB President Christine Lagarde at the press conference following the announcement were much softer and more friendly to financial markets, with the ECB head noting that the bank has made “substantial progress” in regard to monetary tightening. 

“In addition, it looks like the ECB is becoming more concerned about the darkening economic outlook for the eurozone,” Eitelman remarked, noting that these worries make sense in light of the ongoing European energy crisis.

He added that, overall, with markets pricing in fewer rate hikes farther out into the future, bond yields have generally fallen in developed markets across the globe.

Key themes from Q3 earnings season

Eitelman and Lin concluded the segment with a look at U.S. third-quarter earnings season, which continued the week of 24 October with several mega-cap technology companies reporting results. Eitelman said that recently, there’s been a wide degree of variance in earnings results among companies, which he noted is generally a positive for active managers.

“Some companies in the Dow Jones Industrial Average have reported strong earnings results lately, including McDonald’s and Caterpillar. However, for many high-flying mega cap tech companies in the Nasdaq Composite Index, the results have been noticeably weaker,” Eitelman stated, explaining that some of these companies saw their stock prices fall by double-digits on the news. Several tech companies have missed on third-quarter revenue and earnings expectations, as well as on forward guidance, he noted.

Broadly speaking, one of the common themes emerging from third-quarter earnings season is that companies exposed to advertising spending are seeing weakness in their results, Eitelman stated. “This makes some sense, as advertising spending tends to be one of the more cyclical and discretionary items for businesses - and against a macroeconomic picture that appears to be slowing down globally, some weakness there isn’t too surprising,” he concluded.

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