Fed Chair Powell's press conference comments put a quick kibosh on markets brief rally after the statement was released on Wednesday. The Fed raised the fed funds rate a further 75 basis points as expected but the statement was viewed to have a hint of the Fed pivoting towards a less steep increase trajectory in interest rate hikes. Chair Powell was clear in the press conference that the Fed is focused on bringing inflation down to 2% and gave no indication of a let-up in future increases through next year, and he added the peak of the tightening cycle will probably be higher than currently expected. According to the CME FedWatch Tool, the market is currently split between a 75bps (52.8% probability) hike and a 50bps (47.2% probability) rate hike at the December 13-14 meeting. Our Baseline forecast calls for a 50bps increase (published in our Market Monitor report).
Bank of Canada
The Bank of Canada (BoC) was the first to blink and hiked rates by only 50bps on October 26 after most analysts expected a 75bps increase. Capitalight Research correctly predicted a 50bps increase. This latest increase raised the BoC’s target rate to 3.75%. Our forecast calls for a further 50bps at its December 7 meeting before holding. The BoC (like the Fed and other central banks) was slow to increase rates when inflation rose sharply last year, and it is now behind the curve in reacting to signs of economic weakness. The BoC’s misjudgment of inflation last year and now the growing probability of a recession has brought increased scrutiny of the BoC’s decisions, bringing into question its independence. This will likely continue to be a hot topic for central banks over the foreseeable future.
Recession on the Horizon
Both the US and Canada are contending with decades-high inflation, falling bond prices and equity markets, declining house prices, and mounting geopolitical tensions. Bloomberg Economics forecast model predicts a 100% probability of U.S. recession in the coming year. Although most other projections are not as certain, most are pointing to recession. The inverted yield curve is also a signal of a pending recession. An inverted yield curve occurs when short-term interest rates, in this case the 3-month U.S. Treasury yield climbed above the 10-year U.S. Treasury yield. Since World War II this type of inversion has been a reliable signal of a pending recession in the following 6 to 18 months. Immediately prior to and during recessions, financial risks increase, including the risk of default, business failure, and bankruptcy. In Canada, the CMHC (Canada Mortgage and Housing Corporation) predicts the Canadian economy will enter a modest recession by the end of 2022 and start recovering in the second half of 2023.
Global Economy Falters
Global economic activity is also experiencing a broad-based and sharper-than-expected
slowdown, with higher inflation affecting almost every nation. With the cost-of-living crisis (households trying to stretch budgets in the face of rising prices for basic goods and services), and tightening financial conditions in most regions, global growth is forecast to slow from 6.0% in 2021 to 3.2% in 2022 and 2.7% in 2023. This is the weakest growth prediction since 2001, except for the global financial crisis and the severe phase of the COVID-19 pandemic. Global inflation is forecast to rise to 8.8% in 2022 (up from 4.7% in 2021) but then decline to 6.5% in 2023 and 4.1% by 2024. The main risks to the global economy are the war in Ukraine, high inflation, tighter global financial conditions (the surge in the U.S. dollar has created global liquidity issues), renewed COVID-19 outbreaks (especially in China), rising food and energy prices, catastrophic climate changes, and geopolitical fragmentation.
Lithium & Electric Vehicles
Lithium prices have surged by more than 125% in 2022, with questions about how supply can meet the expected soar in the demand over the coming decades. The world will need more than twenty times the amount of lithium than was mined last year to meet demand by mid-century, according to Benchmark Mineral Intelligence. The EV (Electric Vehicle) industry is the main lithium demand driver, propelled by global clean energy goals. Global electric car sales so far in 2022 have exceeded more than 5.7 million new passenger plug-in electric cars. EV sales totaled 4.2 million units in 2021 up by 108% versus 2020 and by 198% versus 2019. In assessing what drives lithium prices today, it is important to recognize that China’s dominance of the world’s ‘lithium-ion supply chain’ remains huge and China largely sets prices. Despite OEMs (original equipment manufacturers), the United States, Canada, and Europe are all focused on developing alternative ‘critical mineral’ and battery supply chains for electric vehicles and renewable energy, China will remain a force to contend with through 2031. The debate and discussion about climate goals, commodity resources and the future of energy are becoming increasingly fierce.
U.S. Midterm Elections Looming
Higher prices at the gas pump and grocery store coupled with the growing fear of recession are voters top concerns as they head to the polls on November 8 in the U.S. Recent polls show that Democrats who once had comfortable leads in some Senate races are now very concerned as toss-up seats between the two parties are now leaning Republican. The Republicans are now estimated to control the Senate holding 55 seats out of 100. The House of Representatives, which is currently controlled by the Democrats with 220 seats vs 212 for the Republicans and 3 vacancies, also looks poised to swing in favour of the Republicans. Some forecasts have put the Republicans winning up to 247 seats. Losing control of one or both houses of Congress will profoundly shape the next two years of Joe Biden's presidency, with Republicans expected to block legislation. Some Republicans have already pledged to flex their muscles in the House by proposing cuts to Biden priorities such as military aid to Ukraine and environmental initiatives. To accomplish this the Republicans will likely use tactics such as partial government agency shutdowns or refusing to raise the debt ceiling. The worst-case scenario for Biden would be for his agenda to be completely frozen for the next two years, and a Republican focus on unwinding legislation already passed. However, Biden has the power of the presidential veto to block legislation and attempts to roll back his agenda. The Republicans are unlikely to have the two-thirds majority in the House and the Senate to block these vetoes.
Gold & Silver are holding their own quite well during this time of rate hikes. When interest rates stop going up gold & silver should have a dramatic move upward. In the meantime, Newmont Corporation (NEM on the NYSE) is paying over 5% yield, and its stock price is down 50%. (Upside Potential.)
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