Volume 27, Issue 12
March 20, 2023.

Mar 17

Mar 10


Net Weekly
Change %











S&P 500





S&P/TSX Index






Source: Globe & Mail


Top O' the Maelstrom to Ya

Douglas Porter, CFA

BMO Chief Economist

• mael’strom, n. 1) a powerful often violent whirlpool sucking in all objects within a

given radius. 2) a great confusion.


Markets are still struggling to find their equilibrium a week after regulators took control of SVB, whose woes have sparked intense liquidity concerns among regional banks. A back-and-forth week saw the focus ping-pong across continents, and a wide variety of both official and private support systems were put in place to calm the waters. The late-week news that banks tapped the Fed discount window for a record $152.9 billion in the week to March 15, and the new Bank Term Funding Program (BTFP) for another $11.9 billion, was seen as a sign of high stress, further roiling markets. The large figure also put the $30 billion in fresh deposits from 11 banks for First Republic and the SFr50 billion (US$54 billion) line for Credit Suisse into perspective.

While clearly a fluid situation, the major net market move has been a massive step down in expectations of central bank rates and a secondary hit to oil prices. This combination has sliced bond yields; at one point, U.S. two-year yields were down 130 bps in the space of five trading days, by far the largest such adjustment since October 1987. By Friday morning, they were back below 4%, down 65 bps on the week. Equity markets, while under pressure, have mostly played it cool (aside from bank stocks), with the Nasdaq rising this week and the S&P 500 nudging up. The TSX wasn’t as fortunate, as a $10 drop in oil prices (to $66) and a heavy financial services weighting clipped the index to a 2023 low.

Amid the turbulence, the Fed must now balance the financial instability against still-hot inflation. While this week’s key CPI report was mostly as expected, and the PPI was even on the mild side, the reality is that core inflation simply is not budging. Based on almost any metric of core and almost any time period over the past year, the message is the same—underlying inflation is settling into a range just above 5%. We noted that the 0.45% rise in core CPI in February, which is equivalent to a 5.6% annualized pace, was larger than anything seen in the 25 years prior to the pandemic, but was merely in line with the average of the past year. Certainly, there are plenty of grounds for optimism on the outlook for milder inflation—the steep drop in oil, much improved supply chains, slipping home prices, and business surveys pointing to easing price gains. But the Fed must be unnerved by the stickiness of core prices.

Taking these heavily conflicting factors together, we are holding to our call that the Fed will lift rates 25 bps at next week’s meeting to 4.75%-to-5.00%, assuming no major new news breaks before the meeting. Michael digs into all the details in his Thought, but we are also maintaining the view that they will deliver one final hike in May, and then hold at that 5.00%-to-5.25% range through the second half

of the year. Even amid the violent swings of the past few weeks, this was our original call—which swiftly went from being far below the market, to well above, to almost right in line, in the space of about 10 days. Of course, the crucial point is that the risks to our call have swung violently from the high side to the low side. But the ECB’s icy-veined decision to hike 50 bps this week shows that central banks believe that the inflation fight must proceed, even as they attempt to ringfence the financial risks.

And what about the Bank of Canada? Just one week after stepping to the sidelines —can it only be a week?—market pricing has also adjusted dramatically for the Bank. A pair of strong employment reports to start the year, and a string of other solid indicators for January, had many looking for the Bank to resume rate hikes later this year, at least until last Friday. Now, after the global banking turmoil, markets are priced for at least two rate cuts by the end of 2023. And while the drop in bond yields hasn’t been quite as ferocious as stateside, GoC 2-year yields have plunged 70 bps in barely a week, with the important 5-year falling almost the same to below 3%.

Despite the aggressive market pricing, the bar for rate cuts is very high. After all, the combination of a deep drop in bond yields, a weak currency, and broadly flat equities means that financial market conditions have loosened. There are even signs that the humbled housing sector is picking itself off the mat. While sales were down 40% y/y in February, and prices off 16% from the record high a year ago, a dearth of new listings has improved the market balance. And, the BoC’s pause, combined with the sharp drop in longer-term yields, will give borrowers some confidence that the worst is over for rates. We don’t look for a quick turn in the sector—not with household debt at 180% of income, butting up against 425 bps of rate hikes in the past year—but it may soon stop dragging heavily on growth.

Canada’s inflation rate is one of the lowest in the industrialized world, but it’s still running more than double the BoC’s target. Tuesday’s CPI report should largely echo the U.S. result, although a small seasonally adjusted rise could clip the headline rate to 5.3% (versus 8.5% in the Euro Area, and 6.0% for the U.S.). Gasoline prices have vanished as an inflation driver, dropping 12% from year-ago levels in recent days, but core has stepped into the void. We look for most core metrics to hold close to 5% in February, not far from U.S. and Euro Area trends.

Besides the ongoing battle with inflation, central banks will also need to determine to what extent the economic outlook has been hit by the financial squall. In a very early sign, the University of Michigan’s survey found consumer sentiment pulled back more than expected in March, but it’s still well above last summer’s lows. The drop in gasoline prices has likely played a big role there, as 1-year inflation expectations of 3.8% are at their lowest since early 2021. Even the five-year inflation outlook has dipped to 2.8%—recall, a jump in this metric above 3% last summer was a key reason the Fed accelerated the pace of rate hikes to 75 bps a clip.

More broadly, the inevitable tightening in credit conditions that will emerge from the turmoil will dampen economic growth. Full disclosure, up until the past week, our call for a shallow recession in North America was looking dubious, especially given the relentless strength in employment and incomes. Unfortunately, the call now looks all too realistic. Pronounced softness in regional manufacturing surveys in March suggests that growth may finally be succumbing to the barrage of rate hikes. And while sub-200k initial jobless claims show the job market hasn’t buckled, the mounting layoff wave (Meta this week) points to a cooling ahead. Even with the surprisingly resilient start to the year, we look for GDP growth to average just 0.7% in both the U.S. and Canada for 2023—only four of the past 40 years have been slower.


Frank & Mark.

Source: Globe & Mail, BMO Capital Markets, Bank of Canada, Bloomberg.



Canadian equities posted a 2% weekly decline (following a nearly 4% drop the other week) with the TSX now having erased all 2023 YTD gains.  Most sectors lower with industrial, energy, financial, real estate, health care and consumer discretionary the big decliners. Materials the big upside standout boosted by precious metal miners, with utilities and communication services modest gainers.

YTD, the TSX is flat on the year, and the benchmark 10-year yield ended the week to yield 2.78%.


U.S. & Global

Equity markets endured a volatile week amid ongoing trouble in the bank sector. The S&P 500 finished up 1.4%, as sharp rallies in technology and telecom services outweighed another slide in financials. Lower bond yields fueled higher-beta stocks despite trouble elsewhere. Bank failures of Silvergate and Silicon Valley Bank spread to others like First Republic, but actions by the FDIC, Federal Reserve and a liquidity infusion from a group of large banks helped stem more widespread fallout.

The real action last week was in the Treasury market, with some massive swings in yields coming alongside a reassessment of expected interest rate moves, a flight to safety and probably some short covering. U.S. two-year yields have plunged roughly 120 bps in just over a week, while the 10-year yield is down about 60 bps. The market has quickly gone from pricing in steady further tightening by the Fed this year, to now a sharp dose of easing in the second half, after another 25 bps of tightening next week (still the consensus move). That would follow the ECB’s 50 bp rate hike this week, which came despite the stress in the bank sector.

YTD, the DJIA is down 3.88%, the NASDAQ is up 11.12%, and the S&P 500 is up 3.01%.  The 10-year Treasury yield ended the week to yield 3.44%.


Source: BMO Capital Markets


The Good: Existing Home Sales +2.3% (Feb.); Housing Starts +12.7% to 243,959 a.r. (Feb.); Household Debt-to-Income Ratio -3.9 ppts to 180.5% (Q4); Manufacturing Sales Volumes +3.8% (Jan.); Wholesale Trade Volumes +2.0% (Jan.); Construction Investment +1.5% (Jan.); Industrial Product Prices slowed to +1.4% y/y; Raw Materials Prices -5.2% y/y (Feb.).


The Bad: MLS Home Prices -1.1% (Feb.); Global Investors bought $4.2 bln in Canadian securities (Jan.)—much lower than the prior month.


The Good: Consumer Prices eased to +0.4% (Feb.)—but supercore ticked up to +0.5%; Producer Prices -0.1%; Import Prices -0.1% (Feb.); Housing Starts +9.8% to 1.450 mln a.r. (Feb.); Building Permits +13.8% to 1.524 mln a.r. (Feb.); NAHB Housing Market Index +2 pts to 44 (Mar.); Jobless Claims -20k to 192k (March 11 week); NFIB Small Business Optimism +0.6 pts to 90.9 (Feb.).


The Bad: Retail Sales -0.4% (Feb.); Industrial Production unch (Feb.)—and Capacity Utilization steady at 78.0%; U of M Consumer Sentiment -3.6 pts to 63.4 (Mar. P)—first decline in four months; Empire State Manufacturing Survey -3.8 pts to 44.5; Philly Fed Index -9.2 to 39.4 (Mar.)—both ISM-adjusted; Global Investors bought a net $31.7 bln in U.S. securities (Feb.)—vs. $103.3 bln in the prior month; Leading Index -0.3% (Feb.).



It's possible alien motherships have already visited: Pentagon officials

Pentagon officials theorize that aliens could be visiting our solar system and releasing small probes, comparing the idea to the missions conducted by NASA when it studies other planets.

According to Fox News, it’s all in a draft research paper written by Sean Kirkpatrick, the director of the Pentagon’s All-Domain Anomaly Resolution Office (AARO) and Dr. Abraham Loeb, chairman of Harvard University’s astronomy department.

The AARO investigates unidentified aerial phenomenon.

WDTN in Ohio reports that Loeb says there’s a possibility humans aren’t the only civilization in the universe. Loeb’s work explores the possibility that extraterrestrial civilizations exist and he has published several books on the subject.

The AARO was established last year and is tasked with tracking objects in the sky or underwater; in 2005, congress had asked NASA to keep track of all objects near the earth that are larger than 140 meters, which, according to the report, is why we have Pan-STARRS telescopes.

In their report, the two men says it is possible alien ships have already visited our solar system.

In fact, Loeb thinks the first interstellar object spotted passing through our solar system in 2017 could have been an extraterrestrial mothership.

That year, an unusual interstellar object was detected. It was named Oumuamua, which means Scout in the Hawaiian language.

The object was cigar-shaped and moved away from the sun without showing a comet tail. This led scientists to believe it was artificial.

Loeb said that object didn’t have the characteristics found in meteors or other known space objects.

If it was a mothership, he says it could have released smaller ships, or probes, to study our solar system.

Loeb doesn’t believe there was life on this so-called mothership but said he believes Artificial Intelligence (AI) could have been operating it.

(Six months earlier, an object of similar shape and speed, described as, “a meter-sized interstellar meteor, IM2,” crashed on earth.)

As the report notes, “An artificial interstellar object could potentially be a parent craft that releases many small probes during its close passage to Earth, an operational construct not too dissimilar from NASA missions.

 “These ‘dandelion seeds’ could be separated from the parent craft,” the report said, “by the tidal gravitational force of the Sun or by a maneuvering capability.”

The tiny probes would then reach other planets (and earth) for investigation purposes,  after the parent craft, “passes by within a fraction of the Earth-Sun separation — just like ‘Oumuamua’ did,” the authors wrote.

Survey telescopes would not necessarily capture the “spray” of mini probes, so astronomers would not be notice the phenomena.

The comparison to NASA missions suggests that the public is being prepared for more detailed alien investigation reports in the near future.