(source: Bloomberg https://www.bloomberg.com/markets, MSCI https://www.msci.com/end-of-day-data-search and ARG Inc. analysis)

What happened last week?

• For two consecutive weeks, monetary policy announcements influenced North American equity markets.  On December 7th the Bank of Canada increased its overnight rate by ½% (50 basis points), and on December 14th the U.S. Federal Reserve increased its benchmark rate, the federal funds rate, by the same amount.  The central banks of both countries have increased interest rates at their last seven consecutive opportunities.  Also, both institutions have raised their rates by 4¼% since March 2022. 

• At least one important difference has emerged.  The Bank of Canada has said that future interest rate increases may not be necessary, while the Federal Reserve is anticipating additional increases to control inflation which is well above both of their targets of 2%. The Bank of Canada stated, “. . . Governing Council will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target”, while the Fed said, “The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.” (BoC statement, Fed Statement)

• On December 15th, the European Central Bank (ECB) raised its rates with an identical 50 basis point increase.  The ECB’s equivalent to the Canadian overnight and the American federal funds rate is the deposit facility rate and is now 2.0%, less than half the comparable rates in North America. (Source)

• The fear of a recession caused by rising rates that slow economic growth sufficiently to shrink inflation is the major concern for markets.  Equity markets dropped immediately following the Fed’s announcement and accompanying commentary, and on the following day more than 90% of S&P 500 stocks dropped as the overall index fell more than 1%. (Source)

What’s ahead for this week?

• In Canada, no major economic announcements are scheduled.

• In the U.S., consumer inflation data will be released on Tuesday, and may provide an indication of the Federal Reserve’s monetary policy actions scheduled for this coming Wednesday. 

• Globally, on Thursday the European Central Bank will release their interest rate decision, and the Eurozone will publicly announce consumer inflation on Friday. 

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