Our reports: Economic Impact

The latest financial news made simple. Here’s everything you need to know, thanks to our experts Stéfane Marion and Denis Girouard.

The Federal Reserve finally announces a pause

May 10, 2023        Transcription

In this video: Second quarter results | Inflation deceleration | Canadian population growth | Resilience of the Canadian banking system

The banking sector under pressure

March 30, 2023        Transcription

In this video: U.S. economic situation | Deposit erosion | Risk of spillover into Canada? | Canadian population growth

The market has already factored in a lot of good news

February 20, 2023        Transcription

In this video: The inflation outlook | Whether to expect rate hikes or cuts | The slowdown in the job market

A great start with some major surprises

January 9, 2023        Transcription

In this video: Are forecasters predicting a recession? | Stock markets start the year strong | Global supply chain gains fluidity | Inflation decelerates for several sectors



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Little details that matter

Hello, everyone, and thank you for joining us for this economic impact with our Chief Economist of National Bank, Stefane Marion. Thank you, Stefane, for joining us again this morning.

Thank you, Denis.

Well, you know since the last time there was a few news again in the in the economic environment - a lot of things happening. Some are a bit of the same, but others are different. And today, we will chat a little bit about economic news, but also variables and data that will help you probably understand a little bit more what's going on out there. But first let's see what happened since the last time about the return on the equity across the planet and also in the bond market that as far of so far what we can see is that all the, the, the return on those assets are in the positive sector, but the second quarter was kind of tough and can you explain that please, Stefane?

So, it is true that on the right-hand side of you know the red bars on that chart shows a positive return across the board for financial markets. But you're right to say that the second quarter is a little bit more difficult, a bit more volatile. Uncertainty versus, with respect to the geopolitical backdrop, the banking sector in the US, but note that it's encouraging to see that the Canadian index continues to play a defensive role. The S&P TSX is up almost 3% this quarter and that reflects the fact that it's more defensive index and particularly the gold sector has done relatively well given the current uncertainties. So year to date, positive performance, but it's a bit more complicated in Q2. I think that the second half of the year is going to be volatile. Again, a little bit more complicated, Denis, because we still must deal with the ramification of the interest rate cycle, which is probably coming to an end. But the impact of previous rate hikes has yet to be felt on the economy, both in Canada and the US.

Talking about interest rate, what do we see from the Fed and the Bank of Canada? So far, it seems that we've reached a plateau. What do you think?

I would say that when we look at it, Denis, I mean we've never seen a tightening cycle as impressive as what we've seen over the past year and both sides of the boarder. Good news is that the Fed is now talking about pausing and the Canada has done so since last January. And I think the argument for pausing now, I'm not talking about rate custody that's going to take a while to come, but in terms of pausing it can be justified on the fact that inflation is decelerating quite rapidly on both sides of the border, below 5% in the US. It's close to 4% in Canada. So central banks are justified to take a pause given the inflation backdrop.

Yeah, thank you for that. And you know, we're always looking at the bank sector. I think it's in the newspaper almost every day. How does it look so far? You know, a few weeks passed since the last, you know, impact economic, video that we did. What's happening here? Can you tell us more?

Well, there's still stress, on the regional banks in the US and one way to illustrate this, we had yet another failure at the start of the month with First Republic. So, we have 3 US regional banks that have failed so far this year and the assets that were associated with these failures are roughly $550 billion. Compare that with 2008, 2009, 2011 during the period of the great financial crisis. There were more than 400 bank failures in the US back then, Denis, but the assets that were impacted were at roughly $680 billion. It's just to say that we don't have as many failures this time around, but they've been bigger, so that is clearly a point of contention for the Fed and that's also part of the reason the Fed is saying “I need to pause,  I need to assess the impact on financial markets, on the banking sector of what I've done so far”. So again, these failures will mean that there will be more regulations coming on regional banks in US. More tightening and lending standards, less credit available the second-half this year and probably less economic growth. So again, things are not as bad as what they were back in March, but we are still now out of the woods with respect to the impact of these failures on credit availability for the US economy for the second-half this year.

Thank you, Stefane. That slide is kind of shocking when you compare you know those two periods and you see the numbers of failures versus you know the amount is. it's unbelievable. Another story that now is popping up you know and almost daily is the debt ceiling and once again you know almost every 10 years, we had you know that debt ceiling that is coming back and haunting, and you haunting us. How does it look? People are more concerned than they were in 2011. If you look at the CDS the cost of insuring against the default of the sovereign government, US sovereign government, you can see that you know the price of insuring against the default is much higher than it was in 2011 and that has undermined the US dollar. That is creating some uncertainty for markets. Denis, to be honest this chart looks quite impressive, but nonetheless. The probability associated with a default is at no more than 5%, so I don't think it should be a baseline scenario. This is something that is making markets nervous at this point in time, but I doubt very much I'm going to see a default. A potential D-rating is still possible later during the year, but default, although the fears are greater than they were 2008, and 2011. I think is quite low in terms of probability. So, we put in that 5% at this point in time.

Yeah. Anyway, we're okay. Joe Biden says this morning there will be no default and he must know he's the guy in charge of the country. Then hopefully he's right and and we'll see how it ends up. But usually it's always that you know five before midnight that things are approved and we're good for another 10 year then. We'll see. Back to Canada, I know the banking sector once again, you know a lot of questions around it. You know I think we have a few data to give you and to picture how the banking sector in Canada, sector in Canada looks like, deposit, the name of the game. Is there any change on deposit, Stefane?

Oh, listen, from a Canadian perspective and by the way, then you're absolutely right to say that for a president that's trying to be reelected, defaulting on your debt will be a total nightmare. So I agree with you that they'll find a solution. But in the meantime, in Canada, we haven't seen contagion. To the banking sector, we spoke about this last time, the Canadian environment is much different from the US. It's a system that is less available to outsiders, the payment system is more closed, there's no leakage from money market funds. And at the same time, Denis, what kind of benefits from that other countries are not benefiting from is this continued surge in the working age population, and this is an update and when you consider that 81% of the working age population has a relationship with a financial institution versus only 66% in the US, the population, the demographics will impact the deposit base. So, 81 percent of a rising population, working age, population big impact, Denis, and now I'm going to give you the number on population growth for the first four months of the year: 270, close to 280,000 individuals. So, 81% of that having a relationship with the financial institution is just putting a boost on the deposit base. So this is something that other countries do not benefit from. I understand that surging population growth is having an impact on the availability of absorption when it comes to the housing sector, but from a financial institution backdrop or perspective, this is a main positive to boost the deposit base that is unavailable in other countries. So again this is where demographics has a huge impact on the financial system in Canada.

Yes. And you're truly right and you can see that also when you compare the profits from Canadian bank versus the US bank and I think you have a, you know a bit of data on that and that can give you confidence. Also how strong is the banking sector in Canada?

Well, it's funny, Denis, because when you speak to investors internationally, say where are the Canadian banks finding their deposit base or where, how are they finding new clients? Well that has to do with the surge in population. And at the same time with this surge in population increase in deposit base also allows the economy to have a more, a healthier credit cycle than what we see elsewhere. And that obviously is having a big impact on earnings per share for the financial sector which is. Nearly tripled since 2006 in Canada and while US it's up 40%. So, you can see that this divergence between Canada and US in terms of EPS, it's not because Canadian banks are taking more risks, Denis. It's the net positive coming from this population surge that is increasing the demand for deposits. Lending conditions, household formation and obviously a stronger economy.

Well, thank you Stefane and thank you for those very interesting comments about the first the US economy and the Canadian banking sectors. I think it can give us you know kind of a comfort about what type of environment we are hopefully it's helping you try to take your decisions of investment. For the future. And once again, thank you for joining us for this economic imact. And we'll see you next time. Thank you, Stefane

Bonjour à tous et bienvenue à notre rendez-vous Impact économique du 30 mars 2023. Alors, comme à l'habitude, notre invité Stéfane Marion va aborder un sujet d'actualité comme vous le savez tous, le problème des banques qu'on a connu dans 2 dernières semaines. S'il vous plaît, Stéfane, à toi le micro.

Oui, bonjour Denis. Effectivement un stress bancaire comme on n'avait pas vu depuis longtemps, qui pour le moment est surtout concentrée aux États-Unis, bien que c'est en train de s'apaiser. Vous constatez dans la première diapo, puis Denis, ça nous rappelle des souvenirs de la crise financière, Denis aux premières loges de tout ça à l'époque-là. Le total des actifs sous pression au niveau bancaire a atteint la coquette somme de 320 milliards alors qu'une ou 2 institutions qui étaient touchées alors qu’à l'époque, c'était beaucoup plus généralisé, mais le montant était similaire. Heureusement, la Réserve fédérale, il s'agissait surtout d'un problème d'appariement de certaines banques, avec la forte remontée des taux, mais la Réserve fédérale a répondu avec des mesures ou le déploiement de mesures qui aidaient à faciliter remettre de la liquidité dans le système. Denis, peut-être certaines observations de ta part.

En fait ce qu'il faut vraiment remarquer cette fois-ci, c'est que c'est hyper concentré dans un secteur d'activité très déterminé, donc c'est pas quelque chose qui a pris de l'expansion là. Comme on a vu même dans « Savings and Loans », à l'époque, dans la fin des années 80 où là aussi c'était la cause première qui avait provoqué ces faillites-là c'était les hausses des taux d'intérêt. C'est la seule similitude qu'on peut avoir aujourd'hui. C'est vraiment la hausse des taux d'intérêt. Alors qu'en 2008 c'est vraiment un problème de crédit, donc faut pas comparer la période 2008 à la période 2023 où là, les gens essaient de faire des comparaisons. C'est 2 situations totalement différentes, donc faut faire attention là dans le comparatif. Ça faut revenir très longtemps dans le temps-là, les « Savings and Loans », il y a beaucoup de monde qui n’ont jamais connu ça, mais fin des années 80 où les taux d'intérêt se sont mis à monter beaucoup, c'est là qu'on a vu les « Savings and Loans » aussi qui ont eu des problèmes d'appariement. C'est la même situation là.

Puis je pense que Denis, ça reflète aussi qu'au niveau des banques centrales, lorsqu'on a monté les taux de façon aussi agressive, à un moment donné il faut peut-être prendre un peu de recul, prendre une pause puis voir quel est l'impact capacité d'absorption du système. La bonne nouvelle, et je pense un des éléments déclencheurs de ce qui s'est passé aux États-Unis, c'est l'érosion des dépôts. Puis comme vous pouvez constater, pour la première fois depuis les années 70 en fait, les dépôts étaient en contraction, sont en glissement annuel. Mais remarquez que là-dedans il y a une érosion des dépôts qui est due aussi à un retour à la normale après l'augmentation subite pendant la COVID où plein de compagnies qui avaient des profits déposés au niveau des banques. Donc je pense que cette érosion des dépôts a amené certains problèmes d'appariement au niveau des banques.

C'est là qu'il faut faire très attention dans le comparatif parce que présentement, ce qu'on regarde beaucoup, puis probablement toutes les banques à travers la planète, regardent le comportement des consommateurs envers leurs dépôts. Et puis oui, on peut voir une érosion, mais une érosion qui devrait - semble toute être naturelle, compte tenu que la pandémie est venue totalement changer les datas qu'on a sur les dépôts. Donc ce n’est pas parce qu'il y a une érosion des dépôts, puis souvent ce qu'on va voir, c'est les comptes qu'on appelle « cash » qui s'en vont dans du plus long terme à cause des taux d'intérêt, donc on va voir les balances de dépôt en argent dans les banques diminuer. Ce n’est pas quelque chose de mauvais en soi de présentement, c'est juste un comportement du consommateur. Donc faut faire vraiment attention dans les comparatifs qu'on fait, puis surtout pas tirer de conclusions là. Parce que là on va avoir la tendance à revenir à la normale.

Oui avec l'épargne excédentaire qui se résorbe.


La bonne nouvelle, c'est qu'avec le déploiement des mesures de facilité qui ont été déployés par la Réserve fédérale, vous pouvez remarquer que le marché boursier tend à se replacer et en date d'hier, en fait du 30 mars, on est même revenus en territoire positif. C'est certain qu'il y a un stress sur le secteur bancaire qui demeure pour l'instant parce qu’il y a lieu de penser qu'il y aura un certain resserrement au niveau de la réglementation auprès de plusieurs banques américaines au cours des prochains mois.

Oui, puis cette réglementation-là va surtout être pour les banques régionales, qui avaient eu un assouplissement à l'époque de Monsieur Trump où il avait changé vraiment la réglementation pour ce genre de type de banque-là. Je pense qu'on va revenir à où on était auparavant. Puis en même temps aussi, ce qu'on se rend compte, c'est qu’avec Crédit Suisse, qui est un autre problème totalement à l'écart de ce qu'on a connu aux États-Unis. Mais c'est sûr que tout le secteur de l'équité a souffert dans les dernières semaine-là et surtout le secteur financier par ailleurs.

Mais ça se replace.


Puis plus près de nous, au niveau des banques canadiennes, puis ça c'est important parce que les gens craignaient la contagion. La bonne nouvelle, c'est que les banques américaines demeurent en baisse de 14% depuis le 8 mars, donc l'éclatement de SVB. Remarquez que les banques canadiennes surperforment les autres banques au niveau mondial avec une baisse relativement modeste dans le contexte actuel. Une baisse de 6% qui reflète, je pense Denis, la gestion plus prudente des actifs des banques canadiennes par rapport à ce qu'on voit dans les autres régions du monde.


Meilleure diversification des dépôts, meilleure diversification de la « business » en général, du modèle d'affaires et puis naturellement un régulateur qui est très au fait de ce qui se passe là au quotidien. Donc une surveillance accrue de tous les mouvements, comme on disait tantôt, du consommateur canadien. Même que jusqu'à présent, il ne se passe strictement rien. Ça n'a rien à voir avec ce qu'on a connu aux États-Unis, dans en fait pour le SVB, on n'a rien, rien à avoir avec ça présentement. Donc c'est une situation qui, qui n’est pas plaisante parce qu'on ne veut jamais voir le marché de l'équité perdre de la valeur, mais présentement c'est juste par sympathie que je dirais qu'on suit tout ce qui se passe à travers la planète. Donc pas tant de problèmes que ça quand on est une valeur comparative.

Puis ce qui milite contre une contagion trop dramatique pour les banques canadiennes c'est le fait que la croissance des dépôts est encore au rendez-vous. Et ça, c'est important. J'ai une épargne excédentaire qui demeure plus élevée au Canada qu'ailleurs dans le monde. Puis, comme vous pouvez le constater, les banques canadiennes ne font pas face à une érosion de la base des dépôts, comme on l'a vu aux États-Unis et dans certaines juridictions en Europe. Et je pense que Denis, c'est important de rappeler aux gens pourquoi les banques canadiennes peuvent espérer conserver cette tendance haussière au niveau des dépôts. Puis, on l'oublie souvent, mais la croissance démographique.

Ça été ton cheval de bataille depuis plusieurs années-là, parler de démographie au Canada, donc on le voit vraiment encore une fois, et même encore plus là. Les chiffres sont absolument exceptionnels quand on compare et on se compare même aux Américains. Toutes proportions gardées, c'est absolument incroyable la croissance de la population au Canada. Donc définitivement, encore de l'argent sonnant qui va rentrer dans les banques, donc encore une bonne diversification des dépôts. Donc difficile de penser qu’une situation problématique pourrait survenir dans les prochaines semaines, prochains mois au Canada, compte tenu de la démographie.

Mais en fait ce n’est pas les mêmes facteurs, donc au niveau de la démographie Denis a raison. Pour vous donner des chiffres par rapport à ses propos, on parle d'une croissance de la population canadienne l'année passée de plus d'un 1,000,000 d'individus. C'est sans précédent. Pour vous donner une base de comparaison, la croissance annuelle de la population en France, c'est 100,000 personnes par année. Au Royaume-Uni, c'est 200,000 personnes par année. Le Canada à 1,000,000 excède ces 2 pays-là combinés, une population de 100,000,000 et plus. Donc c'est important parce que ça veut dire que j'ai une croissance de la démographie qui aide les banques canadiennes à pouvoir avoir cette croissance de dépôt à plus long terme qui demeure sur une tendance haussière. Donc c'est la meilleure démographie de tous les pays de l'OCDE, de loin. Donc dans ce contexte-là, encore une fois la contagion du système bancaire canadien elle est plus limité dans un contexte de croissance démographique qui aide à soutenir le cycle du crédit. Puis l'autre chose, c'est que la Banque du Canada, Denis, elle semble être plus pragmatique, a eu la capacité de prendre une pause autour de ces taux d'intérêt dans un contexte où l'inflation diminue, somme toute plus rapidement qu'attendue. Et ça, je pense que c'est une bonne nouvelle pour aider à soutenir le secteur bancaire canadien.

Maintenant, avec toute cette toile de fond là, qu'est-ce qu'on fait? Où mettre notre argent ? Dans quoi on investit ?

Mais Denis, on a parlé que la contagion pour le secteur des financières canadiens est moins propice dans le contexte actuel. Cela étant dit, c'est certain, qu'il y aura moins de disponibilités au niveau du crédit bancaire aux États-Unis dans les prochains mois, ce qui présage d'un ralentissement économique plus important. Donc. Pour le moment, Denis, plus défensif, des encaisses légèrement au-dessus des recommandations normales. Puis aussi, nous avons augmenté notre exposition au niveau du secteur obligataire dans les dernières semaines, encore une fois pour refléter le fait qu'avec moins de crédit disponible il y aura un ralentissement économique. La bonne nouvelle, c'est que l'inflation va baisser et on espère que la Réserve fédérale sera en mesure d'arrêter de monter ses taux au cours des prochaines semaines.

Ou à tout du moins les baisser vers la fin de l'année.

Peut-être même, oui.

Bravo, merci. Alors merci Stéfane, encore une fois pour ces précieux conseils. Merci d'avoir participé à cette capsule économique. Très heureux de cette première avec vous aujourd'hui. En espérant que ça l'a mis un peu en lumière les situations qu'on a connu dans les dernières semaines ont été quand même assez volatiles, donc s'il vous plaît, on reste calme. Et puis le soleil va se lever encore demain matin. Merci beaucoup, à la prochaine.

Hello everyone and welcome to this February 20th Economic Impact video, which will actually be my last one as I will soon be a new retiree from National Bank. But do not worry, the production of these videos will continue with our star, our chief economist, Stéfane Marion. Hello Stéfane.

Hi Martin.

So, Stéfane, we've talked about it, but we are now seeing it, definite deceleration of inflation. As we had expected. What do you think?

Well, some people actually noticed that we see deceleration in inflation Martin, and we're at 6.4% down from 9%, so clearly going in the right direction, we've been claiming this for many months. However, some people thought it would be decelerating faster at this point in the cycle, which has yet to be confirmed. But notwithstanding the fact that central banks continue to say that they might continue to hike interest rates, the bond market doesn't believe it anymore, Martin.

No. And we're watching this very, very carefully, this famous fed fund versus 2 years, what's going on?

Well, the 2-year Treasury yield in the US and same thing in Canada, Martin, is below the overnight rate or the policy rate of the Central bank. So clearly what the market is saying right now, central banks have gone far enough. You could, you might expect even a pivot in the coming months and if we're lucky, perhaps a rate cut by the end of the year.

And what happens when we see this inversion?

It's market expectations. Never forget that the financial markets run on expectations. And once you see this inversion, which has happened last December, December 15th to be more precise, Martin. Historically, the stock market does well during the period where you see the inversion of the curve until the first rate cut. And historically there's a delay of seven months and over those 202 days to be more precise, the stock market tends to deliver positive returns around 8% Martin.

So, we did in about 60 days, what we usually do in about 200 days.

Well, that's the thing, let's not be too greedy at this point in time. What is quite peculiar in this rebound is that we've done it really, really quickly. So, people are expecting the Fed to pivot really quickly, and the Fed has yet to commit to that pivot. So, in my opinion, it is normal to see that the markets are becoming a little bit more nervous until you confirm that the Fed is changing its forecast, which it has yet to do.

And the market is anticipating what kind of earnings?

Positive and that's troubling because if you think you're going to get a significant deceleration of economic growth, you should be bracing yourself for negative profit growth. But at this point in the cycle, and the reason we did so well, is that the market saying we're going to get significant deceleration, but profits are going to remain positive on a year over year basis. However, Martin, we're seeing an erosion of profit margins on both sides of the border and that will be critical with respect to the reaction functions of corporations in the face of an erosion in their profit margins, which means Martin - what will they do on the hiring cycle? That's critical.

So, employment is the key, and we're already in stagnation for full time employment in the States.

Employment is always key in determining whether or not there's going to be a soft landing or recession. And yes, US job market has surprised with its resilience in recent months. But Martin, full-time employment has been stagnating for the past few months, so already you're seeing corporations being a little bit more nervous on the hiring pace. So. In Canada, we've stagnated. We've done really well over the past 2 months. But I do believe that we'll also be stagnating because we're starting to see an erosion in the profit margin. So, at the end of the day, that will determine the shape of the economic cycle.

And Stéfane, what's the relationship between the stock market and recessions?

The stock market is in asymmetric in terms of leading indicator for the economy or stock market. So basically, Martin, the stock market is very good at predicting the end of recession, but it never calls a recession. So, basically the stock market always calls a soft landing. And when they see the first rate cut, they say, hey, wait a minute, why are rates being cut, what's happening here? And then it gets a little bit more volatile. So, this time around, I think the volatile could come even faster just because of the geopolitical backdrop.

Yeah, we're actually in the first year anniversary of the war in Ukraine. So, lots of uncertainty there.

And the uncertainty comes, Martin, from the fact that if there is a very specific infrastructure that are destroyed in the coming weeks related to food production or energy production, you could see global inflation turn a corner and start accelerating again. So again, let's not be too greedy at this point in time. Let's play defense because we have yet to see what happens at the end of the month on the Ukraine-Russia conflict, which is still very important from a global perspective.

Excellent. So, in conclusion, we're remaining prudent. We're going to see the impact of higher rates in the coming months. And we've already priced a lot in the last two months. Lot of good news. Yeah.

Yeah, lots of good news

So, thank you very much, Stéfane. Thank you everybody for having been listening to us for the last couple of years. It was a pleasure to be doing this. We learned a lot in communication. And let's remember Doctor Weiss telling us in October 2020 that we would be back to normal in 2024. So, it's been a great ride. Thank you for listening and there will be more of these short videos. Do not worry. Thank you. Take care. Bye, bye.

Hello, Everyone, and welcome to Economic Impact. Today is January 9 and I want to take the opportunity to give our best wishes to friends and family of National Bank of Canada. Hello, Stéfane.

Happy New Year, Martin.

Same to you. Stéfane, a couple of weeks ago we talked about 2022, and it's important to look at it with the final numbers. And, it was the worst year ever for a balanced portfolio.

Yeah, Martin. I can make easy claim. No one alive has ever seen a bad year like we saw in 2022, with the combination of the stock market being down 22% and the bond market being down roughly 15%, you can see on this chart that it had never been observed on this magnitude. And, Martin, what was stellar also for 2022 or very telling for 2022 is it was the first time since 1958-1959 that the bond market had two consecutive years of drawn down. So, not a good year for fixed-income holders in both 2021 and 2022.

And, Stéfane, if I look quickly at all the dots, the bond market has never been down two years in a row.

No, Martin, and I don't think it will be. And, that's important. And the reason I don't think it will be, is because we are looking at a slowdown in 2023. It is actually the most anticipated recession of all times. Never before have we seen such a large portion of professional forecasters calling for contraction of the U.S. economy this year.

And, Stéfane, despite all of the gloom and doom that we read in the media over the Holiday season, yet the markets are up strong to start the year.

Yeah, so it's a large proportion of forecasters that are calling for a recession, Martin,  but it's around 50-50% as we stand right now. So, it's not surprising if you call a recession that the bond market would do well, start the year relatively firmer. But, what's surprising, Martin, it's been outpaced by riskier assets. So, stock market up everywhere around the world --- emerging markets, commodity producers, the tech sector. Every sector is up this year and that is quite surprising. It's a really great start to the year!

And, Stéfane, to explain that we can look at fresh news on the inflation and specifically on supply chains.

Yeah. I think the expectation we've been, we were trading on inflation all through 2022. I think it's still a story for 2023. And, what the market is seeing right now, if you look at the manufacturing sector, supply delivery times, import prices, new orders are all coming down suggesting a very rapid decline in inflation for goods. Martin, we had already started to see this, it's just being confirmed even more. And, I think that's really important from an inflation perspective. 

And you just said we had already seen this, but not on the service side, which was a real surprise.

Yeah, well, that's the big thing, as we start 2023. The central banks have been saying that it will take probably almost a full year for inflation to come down in the service sector. But what we saw in the latest data, no later than December of 2022, we saw a big drop in activity, economic activity, in the service sector, which is 65% of the economy. And the drop in December, it was the second largest in over a generation. So, Martin, that does suggest less economic activity in services. And, as you know, inflation is a lagging indicator on activity. If activity comes down, then inflation is likely to come down also in the coming months. So, I think that was the key development to encourage markets that inflation would come down probably faster this year.

And, Stéfane, everybody talks about the recession, but the key is the labour market.

Well, there's the thing, Martin. You don't want to overdo it. If economic activity comes down too quickly and then you start to impact the jobs market, then purchasing power is eroded, there is de-leveraging, and not a pleasant outcome for financial markets, particularly for equity markets. So, what we are seeing, Martin, at this time is that the possibility of a soft landing is still there. Yes, total employment was up at the end of last year in the U.S., but we are seeing that full-time jobs are stalling right now, for a few months. So, that does suggest that corporations are being careful, hiring full-time, which means less wage inflation, and which also suggests that the possibility of a soft landing is still there, Martin. I think it's a 50/50% call.

And that's really interesting, Stéfane, cause, at the moment, this tug-of-war going on, we're seeing the markets essentially not believing the Fed.

Yeah, in order to achieve a soft landing, Martin, however, it's important that the Fed stops raising rates. And what we're seeing in recent weeks is that the two-year Treasury yield is actually below the Fed funds right now. Historically, the Fed has never raised the policy rate when the two-year treasury rate was below the Fed funds. So, I think that we're getting near the point where the Fed can stop raising rates. The market has already jumped the gun on that one and saying the Fed is done, maybe 25 basis points. And, that's a lot less aggressive than what the Fed continues to send out in terms of indication guidance to markets right now. So, the bond market no longer believes the Fed that they have to hike aggressively this year.

One of the main themes of 2022 was the strength of the U.S. dollar, and that is starting to the erode, Stéfane.

Well, if you stop the Fed, Martin, you stop the surge in the U.S. dollar, which was the story for 2022, as you say. So, what we're seeing in recent weeks is the U.S. dollar is starting to come down. That's good news for emerging markets that have a lot of debt that is denominated in U.S. dollars. It means debt-servicing is easier. And also for commodity producers, such as Canada, as the U.S. dollar comes down, then it's less downward pressure on commodity prices. So, I think it's a win-win situation for the global economy, if the U.S. dollar weakens. And, I think part of that, Martin, reflects the fact that we're based on divergence in monetary policy this year. And, that a potential offset to U.S. dollar, or U.S. economic weakness, is the fact the Chinese economy is re-opening. And, I think that is the biggest surprise of recent weeks is this announcement by Chinese authorities that lockdowns are behind us and that they are re-opening to the world which will also help bring down inflation, I think.

Stéfane, in conclusion, you know, we are seeing a slowdown in 2023. There's this tug-of-war between those who claim there is going to be a recession and a strong labour market. There are a lot of elements compensating for the fear of slowdown out there. And, what is your take? It's still, it's a real tough scenario, Martin. So, I think it's still the 50/50% chance of soft landing versus recession. I need to confirm the inflation numbers in the coming months. So, I think things are looking, going in the right direction, but we need to confirm also that the central banks will pivot in the coming weeks. So, I would argue that the same conclusion that we gave a few weeks ago to our clients still stands. Let's be careful as we start the year. Yes, it's a great start for equity market. But, let's confirm that these inflation data start to come down, and that that the central banks are done hiking. And, that gives us a greater chance of achieving a soft landing, which will be more constructive for markets.

Excellent. Thank you very much, Stéfane. And, once again, Happy New Year, everybody. Thank you.

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