Volume 26, Issue 47
Nov. 21, 2022.

Nov 18

Nov 11


Net Weekly
Change %


33,745.69 33,747.86




11,146.06 11,323.33



S&P 500





S&P/TSX Index






Source: Globe & Mail


A Ways to Go


Michael Gregory, CFA


BMO Deputy Chief Economist


“We’ve still got a ways to go. This isn’t ending in the next meeting or two.”


On Monday, that was Fed Governor Waller’s assessment of the current inflation fight and message to the market after it went to town in the wake of last week’s lowerthan-expected core CPI reading (which arrived against the background of the unfolding demise of FTX). The same-day 30 bp rally in 10-year Treasury yields and 5.5% gain in the S&P 500 highlighted the market’s initial optimism.


October’s 0.3% increase in the core CPI compared to the 0.5% consensus call and pulled down the annual change to 6.3% from a 40-year high of 6.6%. This stoked market expectations about September marking the peak in core inflation and the subsequent climbdown proving to be less stubborn than previously presumed. And, consequently, the Fed reining-in rate hikes more quickly (could it be ‘one and done’?) and thus running with a lower level of policy rates next year before easing earlier.  These transformed inflation and Fed expectations kindled rallies in stocks and bonds.


We are sympathetic with the peak inflation narrative. The next four monthly changes in the core CPI will compare to the run of 0.5s and 0.6s a year ago. It will take a run of 0.6s and 0.7s to push the annual change past September’s peak. Although such an outcome is possible (we had a taste of it earlier this year), the continued ebbing of core goods inflation, owing to the sustained unsnarling of domestic and

global supply chains, suggests it's improbable. However, we’re skeptical about the prospects for more flexible disinflation.


Firstly, we’ll trot out the adage about one month not making a trend. Indeed, after we had a 0.3% print in July when 0.5% was similarly expected, it was followed by a pair of 0.6s. And, after we had a 0.3% reading in March when, again, a 0.5% result was expected, it was also followed by a pair of 0.6s and then a single 0.7%. It should be noted that over the eight-month period capturing this trifecta of 0.3% surprises, core inflation has run at a 6.1% annualized rate.


Secondly, an underlying core clip of at least around 6% is looking sticky. In addition to total CPI inflation of 7.7% and the above-mentioned 6.3% excluding food and energy, the mean CPI increased 0.4%, which lowered the annual change by threetenths to 7.0%. The weighted median CPI increased 0.5% in October, keeping the annual change also at 7.0%. Meanwhile, the shorter-term core CPI inflation trends

were 5.8% annualized over three months and 6.3% over six.


October’s core surprise reflected a 0.3% fall in goods prices (27% of the index). This slowed their annual change to 5.1%, less than half the pace from seven months ago. Along with the above-mentioned unsnarling of supply chains, goods prices are dropping due to an array of factors including retailer discounting owing to: elevated inventories; restrained spending, particularly on big-ticket items owing to rising borrowing costs; and, dampened import prices amid a record strengthening in the U.S. dollar. Disinflationary pressures are also cascading from further up the production pipeline. For producer prices (released this week), core intermediate goods were up 5.3% y/y in October, after topping a 46-year high of 24% late last year. Core crude goods prices were down 4.7% y/y.


Core services prices were up 0.5% m/m, keeping their annual change at a 40-year high of 6.7%. The monthly move was flattered by a record-matching 0.6% drop in medical services costs related to insurance premiums. And it was pumped again by the tandem of increasing shelter costs and the ripple effect of elevated wage gains. Tenant and owners’ equivalent rents (40% of the index) are still being influenced by the lagged effect of record-high home price inflation, which peaked earlier this year for the repeat-sales metrics. However, home price inflation is poised to decelerate sharply with the monthly changes turning negative as of July. We suspect this could expedite the disinflationary influence over rents.


If all the Fed had to worry about was core goods prices and rents, we would be more sympathetic with the market’s quicker inflation climbdown narrative as well. But the ubiquitous inflationary influence of strong wage gains is the Fed’s most pressing problem. The annual changes in the major wage metrics have rolled over, but they remain uncomfortably high. For example, average hourly earnings were up 4.7% y/y in October or 5.5% for production and nonsupervisory employees. The Atlanta Fed Wage Growth Tracker was up 6.3% (unsmoothed). On a quarterly basis, the Employment Cost Index increased 5.1% y/y in Q3, with nonfarm business’ compensation per hour up 4.7% y/y and their productivity-adjusted unit labour costs up 6.1%. On balance, these wage growth measures remain in, or close to, an unacceptably rapid 5%-to-6% range.


We judge the Fed’s current tightening cycle is only going to permanently stop once wage growth has slowed enough (say, to well under 4%) and labour markets have softened enough to convince the Fed such subdued wage gains can continue. However, payroll employment expanded by a sturdy 261k in October with labour demand (payrolls + openings) hitting a cycle high in September. The unemployment rate has been running in a historically low 3.5%-to-3.7% range since March.


At the November meeting, the Fed signalled smaller rate hikes ahead, in acknowledging “the lags with which monetary policy affects economic activity and inflation” and the “significant uncertainty” surrounding how restrictive policy rates must be to get the job done. Following four consecutive 75 bp rate hikes, our call has been for a 50 bp move on December 14 followed by 25 bp actions in each of the first two meetings of 2023 (Feb. 1, Mar. 22), lifting the fed funds target range to 4.75%-to-5.00%. This puts us on the same page as Waller in terms of actionable meetings and gets us close to St. Louis President Bullard’s “minimum” 5.00%-to-5.25% range (also mentioned this week). However, despite an unfolding mild recession, we see the net risks lying on the side of larger increments or more moves. The Fed knows all too well how to break a wage-price spiral; it’s simply trying to do so this time by inflicting the least amount of economic “pain” (Powell’s word). We’ll see.


Frank & Mark.

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



The TSX was down 0.6% after running right into its 200-day moving average.  YTD the TSX is down 5.85% and the benchmark 10-year yield ended the week to yield 3.12%.


U.S. & Global

Equity markets slipped last week, giving back some momentum after last week’s post-CPI surge. The S&P 500 fell 0.7%, as consumer discretionary, banks and energy lagged.

Economic data were mixed this week, with a soft underlying tone overall. Here’s a quick rundown:


Retail sales: A solid 1.3% gain in October came in ahead of expectations. From a year ago, sales were up a hefty 8.3%, but keep in mind that goods inflation over that period clocked in at 8.6%, so real purchasing power has ground to a halt at the retail level.


Industrial production: Softer than expected, down 0.1% in October, though declines in mining and utilities weighed on the headline. Capacity utilization is holding steady around the 80% level, both broadly and in the manufacturing sector.


Housing data: Pretty much bad across the board as the market is fully in correction mode now. Existing home sales fell 5.9% in October, or 28.4% from a year ago.


That just about matches the worst of the year-over-year slide seen in late-2007 and, outside of the pandemic freeze, is the weakest level of activity in over a decade. Homebuilder confidence is similarly plunging alongside a sharp reduction in buyer traffic. As a result, building permits and new starts are trending lower, with both down in October. What’s behind all this? Mortgage rates (30-yr fixed) surged by roughly 400 bps on the year at one point in recent weeks, to above 7%. While they've backed off from their highs alongside the treasury rally, it’s little consolation. S&P 500 homebuilders are off almost 30% from their late-2021 high.

Source: BMO Capital Markets


The Good: Consumer Prices steady at +6.9% y/y (Oct.)—still high but better than expected; Existing Home Sales +1.3% m/m (Oct.); MLS Home Prices -0.8% y/y (Oct.); Mortgage Credit eased slightly to +8.5% y/y (Sep.); Province of Ontario is projecting a $12.9 bln deficit (FY22/23)—better than expected.


The Bad: Manufacturing Sales Volumes -0.2% (Sep.); Wholesale Trade Volumes -0.2% (Sep.); Housing Starts -10.6% to 267,055 a.r. (Oct.); Construction Investment -0.6% (Sep.); New Motor Vehicle Sales -4.6% y/y (Sep.); Industrial Product Prices +10.1 y/y; Raw Materials Prices +9.0% y/y (Oct.); Global Investors sold a net $22.3 bln in Canadian securities (Sep.).

The Good: Retail Sales +1.3% (Oct.)—and control measure +0.7%; Producer Prices slowed to +8.0% y/y; Import Prices +4.2% y/y (Oct.); Initial Claims -4k to 222k (Nov. 12 week); Global Investors bought a net $93.8 bln in U.S. securities (Sep.); Empire State Manufacturing Survey +2.2 pts to an ISM-adjusted 53.7 (Nov.).


The Bad:  Existing Home Sales -5.9% to 4.43 mln a.r. (Oct.); Housing Starts -4.2% to 1.425 mln a.r.; Building Permits -2.4% to 1.526 mln a.r. (Oct.); Industrial Production -0.1% (Oct.)—and Capacity Utilization -0.2 ppts to 79.9%; NAHB Housing Market Index -5 to 33 (Nov.); Leading Indicator -0.8% (Oct.); Philly Fed Index -0.8 pts to an ISM-adjusted 48.1 (Nov.).



That's scary: Cockroach infestation spoils Halloween on Detroit street

WYANDOTTE, Mich. — Trick-or-treating is off limits in a suburban Detroit neighbourhood: There’s nothing sweet about bringing home a cockroach.


Officials in Wyandotte said a cockroach infestation has been confirmed at a vacant home after a tip from a trash hauler. The pests have been moving to other homes.

Sidewalks will be closed Monday night on a portion of 20th Street. City engineer Greg Mayhew said a Halloween ban will prevent “further roach migration.” Officials don’t want the bugs hitching a ride on costumes, the Detroit Free Press reported.

The city is trying to exterminate the roaches but “it will take some time,” Mayhew said.

Walking the street could help kill the cockroaches, but their eggs still could spread and survive, City Council member Todd Hanna said.