Better-than-expected inflation data and a slightly more dovish tone from the US Federal Reserve was enough to send bond yields down and equities up through November. As prices rose for both bonds and equities, all Compass Portfolios and ATBIS Pools (the funds) saw positive performance for the month.

Below are total returns in Canadian dollar terms for November, and year-to-date respectively:

In the US, October consumer price index (CPI) data released on Nov. 10 came in lower than expected. This is a closely watched measure given its ties to central bank policy. Persistent moderation in inflation can be interpreted as evidence that the rate hikes this year are achieving the desired outcome, and that fewer rate hikes in the future may be needed. All else equal, that would be good news for economic growth. The data release was received favourably, which led to the best day in US equities since 2020—the S&P 500 index rose 5.5%.²

US Federal Reserve Chair Jerome Powell commented on the last day of the month that  rates will still go higher with expectations of a 0.5% hike on Dec. 14, but the time to moderate the pace could come soon. These comments led markets to another strong day; the S&P 500 was up over 3% on Nov. 30. Between the CPI data coming in lower than expected, and Powell’s comments, the 5-year US Treasury bond, as a measure of medium-term rate expectations, came down from 4.4% earlier in the month to 3.74%. A similar size move downward in interest rates was witnessed in Canada. It serves as a reminder that despite the call for further hikes in the coming months, the bond market is forward looking. With the pace of rate hikes expected to moderate, longer-term interest rates have come down already as a result.

With falling bond yields through the month, bonds rallied and increased in value by 2.8%. Within the funds, the fixed-income component in comparison rose by 1.6%, lagging the broader market due to the shorter maturity holdings; this positioning has helped the portfolios reduce downside for the rest of 2022 as rates have increased. The yield to maturity for the fund’s holdings fell for the month to approximately 5.6% compared to 4.04% for the broader Canadian bond market.³

The US dollar (USD) is still regarded as the world’s reserve currency, and thus a safe haven that often appreciates in value during periods of global market volatility. That was the case for much of this year. The USD also likely benefitted this year from the Fed’s more aggressive interest rate path, relative to other countries, where foreign investors have higher demand for comparably higher US yields. Both of these relationships saw a pivot in November. The possibility of a moderating interest rate path by the Federal Reserve, combined with rallying equity markets that dampened global market volatility, led to the biggest monthly USD decline in 2022 of 5%.⁴ The Canadian dollar (CAD) appreciated a couple cents compared to the USD, but overseas currencies including the Euro, British pound, and Japanese yen all saw far larger increases. As a result, from a Canadian investor’s perspective, the MSCI EAFE Index was up 10.6% in November compared to 6.4% in local currency terms—just the currency impact alone added 4.2% to international equities. The return impact from international currency weakness versus the loonie  on international stocks detracted nearly 7.1% on a year-to-date basis through to the end of October, so November’s gain was a welcome turnaround.

Although central bank efforts to bring down inflation may eventually result in a recession, we have yet to see this materialize in Canada or the US. The job market in both countries remains robust, as there are still 1.7 jobs for every unemployed person in the US,⁵ and Canada just added over 108,000 jobs during October versus an expected 10,000.⁶ Employment gains in Canada were widespread across most industries, with manufacturing and construction leading the way and accounting for 48,000 of the jobs created, despite overarching concerns about the housing market. The unemployment rate remains near historic lows in both countries, and jobless claims in the US remain below historical averages. The main ‘conventional’ measurement of a recession–sustained negative GDP growth–has yet to rear its ugly head as well. Annualized third quarter GDP for Canada was released on Nov. 29 at 2.9%, far better than the 1.5% forecast.