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CA-EN Institutional

Have Interest Rates Finally Peaked?

October 31 to November 4, 2022


Have Interest Rates Finally Peaked?

October 31 to November 4, 2022

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Weekly Commentary

Market Recap

  • Equity markets rallied again this week, with a drop in long-term bond yields helping against very mixed earnings results.
  • The S&P 500 jumped 4.0%, led by a mix of industrials, consumer staples and financials, while all remaining groups but telecom managed to post gains.
  • The TSX rose 3.2%, with technology jumping more than 8% on the week.

Rate Hikes

Last week, the Bank of Canada raised interest rates by 50 basis point—a smaller-than-expected hike, but one that we thought was within the range of possibilities. We’re not convinced this represents a true turning point, but it is an interesting moment. The Bank of Canada has to be a bit more careful than the U.S. Federal Reserve because of the weakening Canadian consumer, housing prices, and household debt levels. This move doesn’t mean that interest rate hikes are over—it means that the Bank of Canada has already raised rates more than other economies and are giving those moves a chance to have an impact. We’ll have a better sense of the Bank’s outlook after their next rate decision. If they go with a 25-basis-point hike, that will tell us that they’re confident about inflation declining. But if it’s another 50-point hike, that means they’re still concerned. In the U.S, inflation has been a bit stickier, so it’s likely that the Fed will maintain a more aggressive rate hike schedule.

Bottom Line: Rate hikes are likely to continue, and the next one will tell us a great deal about what the future holds.

Tech Outlook

We’ve been right on the money in expecting some weakness in tech earnings—that’s exactly what we saw recently from big names like Google, Microsoft, Amazon and Meta. What we haven’t seen yet is a bigger pullback in equity prices. Normally, when companies of that stature announce disappointing earnings or cautious forecasts, you’d expect broad declines of 4-5% on the NASDAQ, indicating that pessimism has set in. But in this instance, the market seems to believe that this is more of a one-off rather than the beginning of future earnings declines. The question now becomes—will the market eventually catch up to where the outlook is? Or will the market rally based on a belief that the Fed’s interest rate hikes have peaked? If investors believe that the peak has been reached, then markets will move up. But if it’s earnings that have peaked, they could still move another leg lower.

Bottom Line: Based on earnings reports, we would’ve expected a much steeper decline in equity markets—and that decline may still happen.

Chinese Equities

Following a short-lived rally in Chinese equities last week, the re-election of President Xi Jinping by his party prompted concern from investors and massive declines in Chinese stocks. But does this affect our long-term evaluation of China as a source of investment returns? The way the political situation played out wasn’t a surprise—Xi was widely expected to remain president. But what it underscores is that policies and attitudes we’ve seen over the past several years are likely to continue. China’s zero-COVID policy is unlikely to change materially, which will restrict growth, and tech companies that have been in the government’s crosshairs will also remain under pressure. One of Xi’s stated goals is to increase the Chinese middle class. That is accomplished by raising taxes on higher income earners and capital gains, which will further squeeze tech companies and other growth sectors. But it’s important to remember that we can’t control the political situation. All we can ask is—are these good, solid companies? And what discount do we require to account for the higher political risk? Though uncertainties to exist, we believe these companies are fundamentally strong and valuations do look attractive.

Bottom Line: Xi’s re-election was no surprise, but it does raise important questions about Chinese equities.


The conversations we’ve been having have focused on a few big questions. First—has the market’s reaction to recent developments been overly positive? We would argue yes, because of weakness on the earnings side. But if that is the case, do we take more risk off the table? We were right to go underweight international markets and overweight Energy, and our overweight to health care and Canada have also worked out well. If we do think that a potential economic decline isn’t fully priced in, we should indeed take more off the table. But to do that, first we need to understand what triggers will send the market back down. That’s what we’re examining right now. Rather than changing our equity and bond weight, the answer may be reallocation amongst geographies—for instance, rotating from the U.S. to Emerging Markets. But there is still uncertainty—have interest rates peaked, or are we at the beginning of an earnings decline? If the situation can still go either way, we may be justified in staying the course with our current positioning. Stay tuned in the coming weeks for an update. 


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