An Economy on Thin Ice

October 10 to 13, 2023


An Economy on Thin Ice

October 10 to 13, 2023


Market Recap

  • Equity markets were mixed this week alongside still-rising yields and a rock-solid U.S. payrolls report.
  • The S&P 500 added 0.5% with gains in communication services and technology offset by deeper declines in energy, utilities and consumer staples. Ten-year Treasury yields pushed to 4.8% to end the week, the highest since 2007, with the weekly selloff capped by a juicy 336k increase in U.S. payrolls in September.
  • The TSX was down 1.5% on the week, and continues to struggle more under the weight of higher yields.

Labour Disputes

Last week, in addition to the ongoing United Auto Workers (UAW strike), 75,000 health care workers from Kaiser Permanente walked off the job. This is an interesting situation. The auto workers strike was significant because of the increasing impact it could have on the economy the longer it lasts, and this new job action only add fuel to the fire. The UAW strike is a tone-setter in that labour groups in other sectors, including the Kaiser workers, may see what kinds of concessions they’re able to gain and add them to their own demands. For the health care workers, it’s a potentially sympathetic environment: we’re just coming off of COVID, when they were overworked, and the winter months are just around the corner, including a possible resurgence in cases. Overall, these are important disputes, especially given the economic environment as we approach the end of the year; if unions are seeking compensation that is tied to a particular inflation level, and inflation is starting to drop, then their negotiating position will weaken over time (not that these are their only demands). The longer these strikes last, the more it will impact the economy as business slows and workers curtail their spending. Though recent U.S. employment numbers have been strong, this could be the catalyst to push the economy over a tipping point. There’s no question that the ice is cracking—it just remains to be seen how deep and solid it really is.

Bottom Line: The longer these strikes last, the more of a negative impact they will have on the broader economy.

Fixed Income

Recently, long-term U.S. Treasury bond yields have flirted with record highs. Is this evidence that investors’ inflation expectations have been revised upwards? In our view, there are two reasons that yields have risen. First, it’s a reaction to the most recent U.S. Federal Reserve (Fed) meeting, which pointed toward a higher terminal rate than initially expected and the likelihood that rates will stay higher for longer, including fewer rate cuts next year. Second is the inflation picture. If higher interest rates have pushed Treasury yields upward, then it’s inflation concern that has kept them there. 5% yield no longer seems out of the question, which tells us that investors do not believe that 2% inflation is in the cards any time soon; if it was, then a pause from the Fed and rate cuts in the near future would be the expectation. Instead, the consensus is for a longer period of high rates, which means that inflation is expected to be stickier than the Fed had thought. When a pause is finally announced, that’s likely to provide a small reprieve. But yields aren’t likely to come down meaningfully until the Fed begins to cut rates, which may not happen until late next year.

Bottom Line: Higher long-term Treasury yields indicate that the Fed’s 2% inflation target is unlikely to be reached in 2023.


We’re neutral on the Canadian dollar (CAD) versus the U.S. dollar (USD), meaning that we remain unhedged. The currency question, however, has been taking up more and more time in our discussions. Currency is a diversifier; we need a negative opinion on a currency to hedge against it on the equity side. (On the bonds side, everything is hedged.) When you invest in the U.S. market, there are two considerations. One is our evaluation of the market itself. The other is what we think of the currency versus the CAD; this sort of calculus applies to International (EAFE) and Emerging Markets (EM) as well. The USD has been relatively strong recently, and though we are seeing higher volatility and cracks starting to appear in the U.S. economy, that doesn’t necessarily mean that the USD will weaken (something that you might expect if rate cuts were around the corner). In that kind of environment, we don’t want to be making a big currency call. We do expect oil prices to move up, which means that the CAD should have a bit more upside from here and is likely undervalued. But again, that doesn’t necessarily indicate that it will appreciate in the immediate future. In our view, a catalyst in the form of a change in risk sentiment will be required for the CAD to move higher.

Bottom Line: Before making a bigger bet on the CAD, we’d like to see a change in risk sentiment, and we don’t see that happening in the near future.


In our most recent meeting, the question was not so much whether to shift to a more defensive stance, but rather how defensive we should be. With some defensive pieces added to our portfolios, we can still do fairly well on the upside while being better protected in case of a downturn. Some of our portfolios naturally have a somewhat higher beta, which is another reason to bring down some of our more volatile exposures. The next three months could be a bit more challenging for markets, so we want to be ready and have strategies in place in case that comes to pass.


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