As mentioned in last month’s commentary, the topic of the U.S. debt ceiling dominated market headlines in May. With uncertainty up to the end of the month, markets in both Canada and the U.S. lost ground during May. And although there was some back and forth with the negotiations, the deadline was ultimately met at the Senate vote in early June.
Political interest is intensifying regarding the U.S debt ceiling, and with it presents a risk to markets and may lead to increased volatility over the next few months. Still, if history is any guide, the US government will reach a deal sometime in the eleventh hour, avoiding an outcome where the Treasury won't have enough funds to pay its obligations. In order to get the votes required to raise the debt ceiling, Democrats are probably going to have to offer modest policy concessions to Republicans. The political pressure to reach a deal will be immense, so even if it goes past the deadline a deal is likely to be reached in time.
The banking sector got a scare in March after US regional, SVB Bank failed following a run on deposits. Elsewhere Swiss bank, Credit Suisse, was purchased at a deep discount by UBS Group due to concerns of its viability after plans to borrow funds to shore up its liquidity fell through. Thus far, the banking sector’s turmoil appears to be contained to the above-mentioned banks with specific issues, and two smaller crypto related banking institutions.
In February, indices gave back some of the gains achieved in January as markets grapple with several risks and concerns at this point of the cycle. Continued geopolitical tension with Russia and China, a debt ceiling showdown coming in the U.S. (although expectations are for some type of agreement – as always – since a U.S. default seems an unlikely outcome), economic and earnings deceleration, and higher-for-longer inflation and interest rates.
Equity markets got off to a good start for the year in January posting strong gains in both Canada and the US. Also joining the party were fixed income investments as both bonds and preferred shares saw positive performance for the month. Helping drive asset values higher in January was continued progress on the inflation front. In Canada, January’s report on CPI figures saw the annualized number fall month-over-month from 6.8% to 6.3%, while in the US there was a similar reduction (from 7.1% to 6.5%). Although inflation is still higher than central banks are targeting, levels have been consistently trending lower since peaking in summer.
The year 2022 was volatile and difficult to navigate with seemingly very few places to hide in either equities or fixed income investments. This created an understandable general feeling of anxiety and pervasive bearishness among investors. With that said, while we expect volatility to remain, economic momentum should pick up (from low levels) as we move through 2023. As we have noted in previous commentaries, securities markets are primarily influenced not by absolute numbers but by the trajectory of key macro variables. On that front, the situation is already improving for inflation – though it may be a slow trek to get back down to the Bank of Canada’s desired 1-3% range. As always, the stock and bond markets will discount and price in these improvements well before we see the evidence in the “real world”.