Focus on BoC and ECB Monetary Policy Meetings

The Bank of Canada and European Central Bank are gathering this week to set interest rates for the coming period, and as the close of the calendar year is fast approaching, many are curious to know if the banks will choose to hike again this year or hold.

Meanwhile, in a recent address to the Economic Club of New York, Federal Reserve Chair Jay Powell expressed concern that inflation remained too high and signaled the possibility of more interest rate hikes if the economy continued to show unexpected strength or if the labour market cooled slower than expected.

While inflation in the US showed improvement during the summer, Powell suggested that September statistics were considerably less promising, and that the labor market is still robust but is beginning to show some signs of cooling. He also noted that wage growth was trending downward, toward rates that would eventually be in line with inflation of 2%.

Below we’ll take a look at the economic statistics that both the BoC and ECB will be taking into consideration when they meet this week, and see what the experts have to say about the chances of further hikes.

Bank of Canada

Monetary Policy Meeting, Wednesday, 2:00 PM GMT Decision Statement, 3:00 PM GMT Press Conference.

During its most recent meeting in September, the BoC kept its overnight rate on pause at 5%, which was generally expected by the market. The bank pointed to several justifications, including the fact that production unexpectedly dropped 0.2% year over year in the second quarter as consumer credit growth ceased and aggregate demand fell, indicating the beginnings of a downturn in the economy.

The possibility for a longer transmission of tighter monetary policy also caused the Governing Council to evaluate the impact of current borrowing rates on inflation and aggregate demand, justifying a freeze on further hikes. Nonetheless, the Bank said that more rate rises are possible if inflationary trends stay too long above the 2% target.

Since that meeting, a number of data has been released which might cause the BoC to be in favor of another pause in rates.

At the end of September, a preliminary report suggested that in August it was anticipated that the country’s GDP grew by 0.1%, with growth in the wholesale trade, finance, and insurance sectors somewhat offsetting reductions in the retail trade, oil and gas production, and other sectors.

Canada’s unemployment rate stayed at 5.5% in August for the third month in a row, falling short of forecasts of 5.6%. The number indicated a slowdown in the labor market compared to the previous year, although unemployment remained significantly below pre-pandemic levels. The Canadian economy also added 63,800 new jobs in September, surpassing market estimates of a gain of 20,000 jobs by a wide margin.

Canada’s annual inflation rate fell to 3.8% in September from 4% in August, below analysts’ forecasts of holding steady at 4%. Meanwhile, the annual core inflation rate decreased to 2.8% in September from 3.3% in August, the lowest level seen since June 2021.

Despite the fact that the economy has cooled, the central bank feels confident that the country will avoid a deep recession, as the labor market remains strong and inflation begins to cool.

According to a Reuters survey of economists, the BoC has likely finished increasing interest rates and will keep them at 5.00% for at least the next six months. The majority of respondents expected a cut in the second quarter of 2024 as the economy slowed.

29 out of 32 economists surveyed between last week predict no change in the central bank’s 5.00% overnight rate, while the remaining three predict an increase of 25 basis points.

European Central Bank

Monetary Policy Meeting, Thursday, 12:15 PM GMT Decision Statement, 12:45 PM GMT Press Conference.

Last month, the ECB chose to raise rates again by 25 basis points to 4.50% after having passed 9 consecutive hikes already since mid-last year.

The minutes from the most recent meeting revealed that members of the central bank were split on whether or not to increase interest rates and whether or not to suspend the current tightening cycle.

They were worried that stopping for the first time in almost a year would signal the ECB was losing its determination and lead to assumptions that the tightening cycle was ending, which would boost the danger of inflation.

This month, economists believe the cycle of tightening may be over, if the recent data is to be taken into account. The question now seems to be when the bank will be set for its first rate cut.

The Euro Area economy grew 0.5% year on year in the second quarter of 2023, somewhat less than the 0.6% expected in prior estimates and the worst pace since the slowdowns recorded in 2020 and Q1 in 2021. The latest data, anticipated on October 31st, is so far expected to reveal an annualized drop of around 0.3% for the third quarter.

Euro Area inflation was confirmed at 4.3% year-over-year in September, down from 5.2% in August and the lowest since October 2021, as prices for services, non-energy industrial commodities, and food, alcohol, and tobacco rose at a slowing rate. Meanwhile, utility costs decreased further as well. The core inflation rate, which excludes volatile food and energy prices, was also confirmed at 4.5% in September, its lowest level since August 2022.

Lastly, in accordance with market predictions, the seasonally adjusted unemployment rate dropped to 6.4% in August from a revised 6.5% in July. The number of jobless persons fell by 107 thousand from the previous month to 10.856 million.

All 85 economists in a poll by Reuters agreed that the ECB has completed its rate-hiking cycle, but they also feel that it will be at least July next year before the bank starts cutting rates in the face of persistently high inflation.

Why Consumer-linked Companies Face Profit Headwinds This Earnings Season

Last week marked the beginning of another highly anticipated earnings season for the quarter ending in September. Some of the big banks published their results last week, which across the whole, were mainly optimistic. There were some concerns though, and many of the issues affecting the banks negatively will also likely play out in the coming weeks for other industries too.

Investors are understandably worried that rising interest rates will have begun to burden heavily on the economy and nibble away at profits of consumer-based businesses. With less disposable income available to most average people, there will always be some companies that will struggle, and some that will capitalize.

In this article, we’ll take a look at what the expectations are for the next few weeks of earnings and what companies might do well against those that might be tightening their belts for a while.

Watch Out For Profit Warnings

Last week, Bloomberg reported on a survey of traders and portfolio managers regarding the likely negative impact of profit warnings on the S&P 500 this season.

A profit warning is given when a company warns investors and the public that its financial performance will fall short of market expectations before releasing quarterly results. If corporations know their profits will miss analyst expectations, they must tell shareholders and the stock market.

According to the report, rising bond yields and the effects of further tightening financial conditions will be the largest negative factors throughout the results period, with roughly 54% of MLIV Pulse respondents stating as much.

On Tuesday of this week at 12:30 PM GMT, the US will release its retail sales numbers. According to forecasts, growth will continue to decrease, as has been the case for the past six months or so. This supports the idea that some challenging times are coming for businesses that are unprepared.

Luxury goods conglomerate LVMH is one such company feeling the effects of rising interest rates, which have led consumers, especially millennials, to pull back on their spending in recent times.

After adjusting for changes in exchange rates and mergers and acquisitions, LVMH, owner of the Louis Vuitton, Dior, Tiffany, and Bulgari brands, reported revenue of €19.96 billion ($21.16 billion), up 9% year over year, while the company’s annual revenue increase was only up 1%.

The wines and spirits segment saw a 14% drop in quarterly revenue, with the company citing weaker demand for Champagne during the time and Hennessy cognac as a result of the adverse economic situation in the US and a slower-than-expected rebound in China.

Which Consumer Companies Are Likely to Buck the Trend?

Pepsico is one of the bigger consumer based companies to have already reported this season and has done well for the third quarter. The company announced a $3.09 billion, or $2.24 per share, net income for the third quarter, up from $2.7 billion, or $1.95 per share, in the same period last year.

The trouble is, that PepsiCo’s volume, which excludes price and currency fluctuations, decreased again this quarter, which is a worrying sign. Pepsi’s price increases to combat inflation have understandably reduced demand for its goods, and consumers have likely been shopping around for cheaper alternatives.

Pepsi officials told investors on a conference call that the business has also been lowering servings sizes and producing smaller value packs in order to encourage more transactions. This method results in more economical alternatives for customers – as well as reduced sales volume. The company has been clever so far, but it’ll be interesting to see how long this strategy will last.

Demand for consumer staples, healthcare, telecommunications, and utilities tends to remain robust during times of economic uncertainty or downturns, making these industries good bets for investors. Essential and often discounted food and beverage companies, household goods, and personal care products that make up the consumer staples sector are able to weather economic downturns because of their consistent sales.

US Banks Report Positive Earnings So Far

In addition to reporting higher profits, Citigroup, JPMorgan Chase, and Wells Fargo last week all increased their projections for core net interest income this year by a combined total of around $4 billion.

Banks are making significantly more money on their cash and loans, notably credit cards, even if rising rates are driving up lenders’ funding and deposit expenses. In fact, for two of the banks, the difference between the interest rate earned and the rate paid out grew in the third quarter compared to the prior quarter.

Although the larger banks’ profitability exceeded expectations, the industry still faces a number of challenges, including losses on commercial real estate loans and slower-than-anticipated loan growth at higher interest rates.

Last month’s unexpected increase in nonfarm payrolls increased the likelihood that the Federal Reserve will increase interest rates again before the end of the year. This leads many investors to wonder how long the big banks will continue to perform like this when depositors will naturally be pulling back, and expectations are that credit card spending will taper off soon.

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