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This week with Sadiq

Interest Rates, Bond Opportunities, Canadian Banks

September 19 to 23, 2022

Interest Rates, Bond Opportunities, Canadian Banks

September 19 to 23, 2022

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Market Recap

  • Equity markets slid this week, with core inflation momentum likely to force another outsized Fed rate hike next week.
  • The S&P 500 gave back 4.8%, with deep declines across all sectors, including 6%-plus drops in technology, industrials, telecom and materials.
  • Meantime, the TSX fell 2.0%, helped by shallower declines in energy and banks.

Interest Rates

The U.S. Federal Reserve’s next interest rate decision will come this week, and the big questions are—how big will the increase be, and will it cause another equity sell-off? The recent U.S. inflation number came out hot, which was something of a surprise. Investors were expecting it to be lower because energy prices have come down. But other elements of inflation—food, rent, autos, etc.—remained quite high. This likely means that the Fed will remain aggressive in its rate hike decision. A 50-basis-point hike was the expectation for this meeting, but recent inflation reports increase the chances of a 75-point or 100-point hike. It’s that shift in the opposite direction of the market’s original expectations that prompted the massive sell-off last week. These developments validate our more conservative thesis, which was that inflation would not come down as quickly as some investors were expecting and there would be more rate increases as a result. The silver lining is that we may avoid another big sell-off after the next rate hike announcement because the market has already priced in much of the pessimism. A smaller dip is possible, but likely not to the extent we saw last week.

Bottom Line: A 75-basis-point rate hike is likely and will reiterate the Fed’s hawkish stance.

Bond Opportunities

Last week, the 2- to 30-Year U.S. Treasury yield curve reached its most inverted level this century. This is typically viewed as a harbinger of a recession, but might it also offer an opportunity to re-enter the bond market? Our evaluation is that the worst is likely behind us for fixed income. We saw a clear demonstration of that last week with the big sell-off—it would have been preferable to own bonds than own equities. Yields could still go higher from here, and while negative returns are still possible, we do think it’s getting close to consider moving some cash back into bonds. And as the bond market moves higher, it’ll be prudent to continue that trade, especially given the possibility of a worsening economy down the road.

Bottom Line: With the worst likely behind us, it may be time to re-enter the bond market.


Financials got hit last week as part of the market sell-off—inverted yield curves are not good for banks. But the question is whether the sector’s performance is going to be significantly worse than the broader market. Our evaluation is that Financials could underperform marginally, but they could marginally outperform as well. Either way, we wouldn’t anticipate a massive disparity relative to the broader market. Part of that is because of banks’ dividend yield component, which provides attractive downside protection. Plus, Canadian banks are still fundamentally strong companies with strong balance sheets. The risk to be aware of is housing, but we don’t expect that to be a major problem in 2022. Yes, housing prices will come off. But when you consider the impact to the consumer of higher mortgage rates, only a portion of that will be felt in 2022, with more pain coming in 2023 and 2024. For now, though, higher rates are only affecting a certain percentage of the population—remember that only one-third of Canadians have a mortgage, and only one-third of them have a variable-rate and variable payment mortgage.

Bottom Line: Pressure on Financials is more likely in 2023 and 2024 than it is this year.


The likelihood of another big interest rate hike from the Fed reinforces our continued underweight positions in equities and bonds, and the benefits of holding some cash. Even before the recent inflation number came out, we also took more risk off the table in our more Conservative and Income ETF Portfolios. We did so by reducing our equity and in particular some of our technology exposures. We still think that the market is overvalued, and that more downside can be expected. The timing of these changes turned out to be excellent, and last week’s sell-off validated that they were the right decisions.


The viewpoints expressed by the Portfolio Manager represents their assessment of the markets at the time of publication. Those views are subject to change without notice at any time without any kind of notice. The information provided herein does not constitute a solicitation of an offer to buy, or an offer to sell securities nor should the information be relied upon as investment advice. Past performance is no guarantee of future results. This communication is intended for informational purposes only.

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