Hello and welcome to our video #MacroMemo. Lots to discuss on the economic front as usual. And we'll start with the pandemic actually, which we haven't spent a lot of time on in recent months. And so we'll just take a peek in that direction. We'll, of course, spend some time on what the economy has been up to and perhaps where it is going. That leads naturally enough into recession talk and timing of particular interest this go round, but also just what the latest business cycle assessment is telling us about the likelihood of recession.

And then of course, we'll spend some time with inflation, which is still the most pressing macro issue of the day. We'll take a look at what central banks are up to. And interestingly, no longer all singing precisely from the same hymn book. And so some interesting things there, I think, and we'll finish this with a quick talk on the climate change front with the COP 27 meetings as our excuse to go in that direction.

Okay, let's jump our way in. We'll start with the pandemic and so, of course, the pandemic technically continues even as it has ceased to have such a significant effect on most countries’ economies. And it's worth spending some time just paying attention to broadly what's going on there. I guess maybe the biggest news is just that there is a new batch of variants that are mounting an attack.

And so for a long, long time, the BA.5-sub variant of Omicron has been the dominant entity and it is still quite significant. But it's in retreat, unfortunately because other sub variants are replacing it. And so there is an alphabet soup of names and technically apparently several hundred Omicron sub variants, but the two that seem to be gaining the most clout are the BQ .1.1 sub variant and the XBB sub variant, which is more prevalent in Asia right now.

And so these are as you would think, to the extent they're taking over, more contagious than the prior round of viruses, not obviously more deadly. And so that's quite a good thing. And I guess maybe the big takeaway is just you have to assume additional waves of COVID do come down the pipe, likely with fewer health consequences, likely with fewer economic consequences.

But it does seem as though we have another wave brewing just in time, at least in the northern hemisphere, for a colder winter, when these sorts of things do seem to circulate more easily. And so I suppose that's maybe the big COVID development for the moment. The other one would just be in the context of China, which has been the just about the only remaining zero tolerance country in terms of not allowing the pandemic really to spread at all and suffering significant economic damage as a result, there have been some rumors that China could be on the cusp of some significant easing of those restrictions.

Indeed, it does seem fairly likely that China will slightly ease the quarantining rules for people coming into the country. However, upon a closer second examination, it seems more likely that any big changes in terms of really radically easing the restrictions seems more likely to be next spring. And so we're not budgeting for a big bounce in the Chinese economy until approximately then.

Okay, the economy. So let's talk the economy. We had quite strong job numbers both in the U.S. and Canada. So North America looking fine from a labour market perspective, at least through October, exceeding expectations. Several hundred thousand jobs created in the U.S., more than 100,000 in Canada, which is a big number for a country that's one ninth of the U.S. size.

And not to say that trend can continue, in fact I'm profoundly skeptical that it can. But it is to say that North America isn't in a recession right now. It's clearly not in a recession right now. We can see some activity metrics beginning to weaken. For instance, the U.S. ISM numbers have both decelerated across the month of October.

We can see a measure of global weakness out there. Case in point – Chinese exports just fell over the last year, which says something about Chinese production capacity, but also something about global demand, particularly for goods. And we can see intentions continuing to retreat. And so, for instance, in a Canadian context, I can say that real time spending measures are beginning to show less keenness for consumers to spend, and surveys in Canada are showing a significant decline in the desire to buy discretionary items and luxuries. Things that you don't have to buy, people are planning on buying less of.

In the U.S., I can say that the demand for consumer loans seems to be falling off a cliff, at least according to the Senior Loan Officer survey. It's the sharpest decline into the lowest level that we've seen, including in 2008 and 2009. So economic weakness is still coming, I think, just not quite showing up in the labour market yet at a minimum.

Now recession talk, let's segue naturally in that direction. When the economy is seemingly weakening, that is perhaps a logical endpoint. And again, we're not there right now, at least in North America. You could argue perhaps they are on the cusp of there in Europe and the UK. We do still think North America gets to a recession.

Unfortunately, our business cycle work for the U.S. continues to say it's an end of cycle moment, so very close to the end of the cycle and indeed some of the recession counterclaims in our model have even strengthened. So it's end of cycle and continuing to advance. Now it's fair to say that the labour market in particular has some resilience to it and that's something we've been flagging for a while, just in the sense that companies struggled so much to find workers.

They’re going to be reluctant, we think, to lay them off later. So makes sense that the labour market is holding together. However, the spending side should weaken significantly nevertheless. In terms of timing of recession, we've said for a while the first half of 2023 is the most likely time. I still think that's probably right, but I think it is worth nevertheless acknowledging there is a different scenario here in a recession, which is maybe the recession manifests a little bit later than that.

It's possible that a recession doesn't happen until the second half of next year. I personally think it's the less likely scenario, but it's a conceivable scenario. It's not one we really talked about before. So I just want to put that on the table. The logic behind it, by the way, is really fairly simple, which is just that when central banks raise rates, which they are most certainly doing, the effect of those rate hikes, the full effect of those rate hikes, isn't felt for about 18 months.

And so if you think of all the rate hiking happening over 2022, that's a story for you could argue the second half of 2023 if not 2024. And so that's really where the argument is coming from. I would flag that 18 month lag is just for the full effect. You get quite a significant initial effect immediately and within the first six months and within the first year.

So I'm not fully convinced it needs to take that long. I also am quite aware that there's been so much anticipation about this recession that some of the recessionary blows could come sooner than they normally would, just because people have been girding for that for quite a while. But nevertheless, recession no longer a 2022 discussion. First half 2023, certainly a viable one, maybe the second half of 2023. Worth keeping in mind at least.

All right, on to inflation. And so inflation, of course, still much too high. Some of the – in fact, all of the theoretical drivers of high inflation, we think have turned in the sense that monetary stimulus is restraint and fiscal stimulus is now restraint and supply chains are getting better and commodity shocks are at least partially unwinding.

So that all holds together fairly well. October inflation, though, which comes out within a few days of me recording this at least, is not looking likely to cooperate. We had gas prices spike a little higher and so that's going to likely result in a fairly lofty inflation print. So I don't think we're going to see a capitulation necessarily in the October numbers.

And the European inflation numbers for October have already come out, also didn't show much capitulation. So we're still waiting on that. I will say this, though – if you stop and tally some of the measures that are turning, some of the important inflation drivers that are turning, it is a pretty good list. It's not just those four theoretical themes that I mentioned earlier.

It's also overall CPI is lower than it was in June, and the Fed has an underlying inflation gauge which it views as being better at identifying turning points for inflation. That's turned fairly profoundly. The ISM’s Prices Paid measure – so manufacturers’ concern about inflation – has diminished quite a bit. Small business’ concern about inflation has diminished a little bit.

The number of businesses or the fraction of businesses planning on raising their prices has diminished a lot in recent months. The extent to which inflation is surprising to the upside has diminished quite significantly recently. The real time inflation metrics we look at which trawl the Internet for prices, those have turned to some extent down as well. Inflation expectations are lower than they were, and of course, a range of commodity prices have also fallen to some extent.

And so none of this guarantees that we're going to see a quick and fast and snappy return to 2% inflation. I'm resigned to the idea it's going to be a slow and choppy process, but a lot of very important drivers have turned. And so we're waiting on core inflation to move. We're waiting on the breadth of inflation to narrow. But theoretically and indeed, some of the first movers have already begun to turn. I think that's quite heartening. I'm happy to predict inflation will be quite a lot lower in a year's time.

Now, central banks have a lot to say about that. So central banks remain busy. They're still raising rates. That's a common theme. And so in recent weeks, the Bank of Canada raised its policy rate by 50 basis points. Bank of England and the Federal Reserve in the U.S. went up by 75. So still big chunky moves. However, a little bit less homogeneity between central banks than we saw before. So for the longest time, central banks would all raise rates by a lot and they'd say, surprise, there's even more than you expected coming down the road.

And now the message is starting to evolve a little bit. The Fed did stick with that theme, so the Fed still said, we think there's more rate hiking than the market imagines. So the markets had to price in a bit more hiking up just north of 5% now. But the Bank of Canada seems to be suggesting it's getting closer to the finish line.

It doesn't seem to complain about what the market's assuming. The Bank of England – a similar message – and indeed indicated that it thinks the market is priced in too much rate hiking relative to what will actually be delivered. So increasingly, somewhat different plans for these central banks, no longer necessarily only one winning bet in terms of the amount of tightening or the extent to which tightening continues to serially exceed expectations.

And so I guess maybe the big point here is we are getting closer to the finish line, even in the Fed, which is saying there's a fair amount more of tightening. They’ve raised rates four percentage points. They think there's one and a quarter left to go. They're three quarters done, loosely speaking. And so there's still a lot of pain from that, obviously. But this is not an endless policy of raising rates at this point. And some central banks getting rather close, perhaps, to the finish line.

Let me finish just with a nod toward climate change in the context of COP 27, which is the latest annual meeting of global nations with regard to climate change initiatives. It's happening in Egypt this year. Unfortunately, it appears as though that 1.5 degree increase limit that had long been targeted is – it's been out of reach for a while, I think, but nevertheless – might formally be recognized as being out of reach. And realistically, we're hoping to see the temperature increase by just two degrees. But there are scenarios in which it goes up by even more.

In fact, I'm assuming it goes up by about two and a half percent in my own work, just to the extent that there's likely to be slippage relative to some of the commitments being made. And of course, climate change has such huge implications for the planet, first and foremost, maybe secondarily for humans, a tertiary effect is on the economy and markets.

But of course, that's what I'm paid to think about. And so acknowledging there's a lot of uncertainty as to the implications at that level, it does seem fairly clear that at the global level, climate change is a net negative for the economy. It adds likely something to inflation, which is undesirable, but the biggest effects are at the sector level.

So of course very challenging for fossil fuel companies, quite an opportunity for green tech companies and in the middle, sectors required to make big adjustments, including utilities and carmakers and energy intensive manufacturers. And so plenty of implications to come from this. We'll hear more about countries making stronger commitments against climate change. But the scale of the commitment just isn't enough, unfortunately, to keep that climate change to just 1.5 degrees at this point.

Okay, that's it for me. Thanks for sticking with me. Hopefully you've found some of this useful and check in again next time.