On Wednesday, the Bank of Canada increased its benchmark interest rate by 50 basis points to 4.25%, a move that economists anticipated. This marks the seventh time the bank has raised its rate this year as it attempts to bring inflation under control. The increase takes the bank’s interest rate to its highest since 2008.
The central bank in the meeting also set a different tone regarding the future of these rate hikes as they now plan on a more neutral approach whereby they will wait and monitor the impact of the current interest rate level. The economy has been operating with excess demand, and the third quarter saw stronger-than-expected GDP growth. The labour market is tight, with unemployment near historic lows, but there are signs that tighter monetary policy is starting to impact domestic demand. Consumption has slowed in the third quarter, and the housing market continues to decline. Overall, the data suggest that economic growth will slow through the end of this year and the first half of next year, in line with the Bank of Canada’s outlook.
Data released last Friday show employers hired more workers than expected in November. Wages have also seen growth last, brushing off worries of a recession, but at the same time, this data makes it difficult for the Feds to justify ending its current policy of raising rates to slow inflation. In October, Canada’s CPI inflation stayed at 6.9%, with prices for everyday goods and services increasing significantly. Core inflation measures are around 5%, and three-month changes in core inflation have decreased, indicating that price pressures may be easing. However, inflation is still too high, and short-term inflation expectations remains elevated.
Labour Market Remains Robust
The U.S. unemployment rate for November remained flat at 3.7%, while around 186,000 people left the workforce. Nonfarm payrolls increased by 263,000 instead of the 200,00 expected, bringing the average monthly job growth for the year to 392,000 compared to 562,000 in 2021, which marks the 23rd month in a row with at least 200,000 jobs. This is far above the 100,000 estimates Fed chair Jerome Powell cited as consistent with population growth.
The Canadian economy added 10,000 jobs last month, which is in line with market expectations. The finance, insurance and real estate sector saw the most increase, with 21,000 new jobs, despite the downturn in the housing market. Annual wage growth is up 5.1% from 4.9% in the U.S. while it remained steady at 5.6% in Canada, making November the sixth month where the rate has been above 5%, which could be stemming from the constrained supply of labour we had been witnessing the past couple of months.
The initial claims for unemployment benefits in the U.S. increased by 4,000, bringing the seasonally adjusted claims for the week ending December 3 to 230,000, which is in line with the economists’ expectations, and below the 270,000 threshold. The increase in claims around this time of the year is expected as companies temporarily close or slow hiring before the holidays. We expect the initial and continuing claims to gradually rise as layoffs continue, especially within the technology sector, where firms are ‘right-sizing’ after a series of over-hiring during the pandemic.
The labour market continues to be a key indicator for the Federal Reserve as they hope for a slowdown in the labour market to cool inflation. However, the current wage pressures within the market are unlikely to slow enough over the coming months for the Feds to reconsider their rate hike cycles.
Market Stats
| Index | Week Open | Week Close | % Change |
| S&P 500 | 3,911.74 | 4,071.70 | -3.37% |
| S&P/TSX Composite | 20,485.66 | 19,947.07 | -2.63% |
| Nasdaq | 11,461.50 | 11,004.62 | -3.99% |
| Dow Jones Industrial | 34,429.88 | 33,476.46 | -2.77% |
- The major indexes fell around 3% to 4% last week as investors digested the mixed inflation data could hamper the Federal Reserve’s plans to slow the interest rate hikes
- U.S. crude oil had one of its worst weeks after falling almost 11% to less than $72 per barrel, pushing oil prices into the negative on a year-to-date basis
- The CBOE volatility index was up around 19% last week as investors’ expectation of volatility within the short-term U.S. stock market rose
We are heading into a busy economic week as the key inflation data, the Consumer Price Index (CPI) releases on Tuesday, followed by the seventh and final interest rate announcement by the Federal Reserve on Wednesday.
