Global financial markets took a hit in April as investors grappled with increasing interest rates and weakening global growth. The market had its worst start to a year in decades. The sharpest decrease in April contributed to the bearish sentiment, with high volatility and devastating losses in popular technology stocks. Markets are falling amid a series of concerns and an uncertain outlook; with the US GDP contracting at a 1.4 percent annual rate in the first quarter, hampered by supply-chain obstacles and a growing trade imbalance; however, household and corporate expenditure were glimmers of hope. Russia’s war on Ukraine has heightened concerns over the condition of the world economy while continuing fights with COVID-19 remain to hinder sections of the world, most notably China. High inflation, combined with a Fed trying to fight it out with increasing interest rates, has resulted in dramatic price fluctuations.
The S&P/TSX Total Return Index was down 5.0 percent in April after the Bank of Canada increased the interest rate.
The Canadian economy expanded by 5.6 percent on an annualized basis in the first quarter, as growth in February was above forecasts, and the real GDP increased again in March. The economy expanded by 1.1 percent in February, above economist expectations of 0.8 percent, on broad-based gains as pandemic restrictions were relaxed. The GDP likely expanded by 0.5 percent in March, marking the tenth consecutive monthly gain. The robust February data and the first-quarter forecast will certainly bolster expectations that the Bank of Canada will proceed with another rate hike in June. Earlier this month, it made a notable 50 basis point hike.
Moreover, Canada’s unemployment rate fell to a historic low of 5.3 percent In March, the lowest percentage since records began in 1976. The economy gained 73,000 jobs, a 0.4 percent increase over February’s figures. Economists believe that there is still room for the unemployment rate to fall further, given that some sectors of the economy, such as oil-producing areas, remain underutilized.
On monetary policy, BoC raised its benchmark interest rate by half a percentage point, raising it to 1.0 percent in its latest step to reign in rising inflation. It is largely expected to increase rates again at its next meeting on June the first to combat rampant inflation. Governor Tiff Macklem stated that Canada’s economy was overheating and that higher interest rates were required to curb inflation. Markets expect a 0.75 percent rate hike from the BoC after Governor Tiff Macklem recognized the possibility of rapid increases in the interest rates to combat three-decade high inflation. A rise of this magnitude would return Canada’s policy interest rate to 1.75 percent before the Covid-19 outbreak.
The S&P 500 Total Return index was down 8.7 percent in April after the US economy contracted for the first time since early in the pandemic.
The US economy declined as logistic disruptions impacted GDP in the first quarter, but household and corporate expenditure strength indicated that growth would rebound shortly. The 1.4 percent annual fall in US GDP constituted a significant shift from the fourth quarter’s 6.9 percent annual growth rate. The first quarter was the worst since spring 2020 when the Covid-19 outbreak and subsequent closures sent the United States into a brief recession. However, the economy’s engine, household spending, increased at a 2.7 percent annual rate in the first quarter, a slight uptick from the end of last year. Companies also increased their investments in machinery and R&D, resulting in a 9.2 percent increase in expenditures. Many analysts believe that the economy can endure rising interest rates and return to moderate growth in the second quarter and beyond, partly owing to increased spending by households and companies.
Moreover, the US economy added 431,000 jobs In March, bringing the unemployment rate down to a new pandemic-era low of 3.6 percent. Before the pandemic, the unemployment rate was 3.5 percent, a near 50-year low first achieved in 2019. Despite job growth being lower than expected, it rounded off a solid first quarter for the US labor market, with a monthly average rise of more than 500,000 jobs. March was the 15th month in a row of solid employment growth. The economy is presently only 1.6 million jobs behind where it was before the pandemic’s onset in February 2020.
On monetary policy, Markets anticipate that the Fed will opt to raise the federal funds rate by 0.5 percent, raising the target range from 0.25-0.5 percent to 0.75-1 percent ahead of the FOMC meeting. This is consistent with remarks made by Fed Chair Jerome Powell. He stated that a rate rise of “50 basis points will be on the table at the May meeting”. The rate increase is the second of six increases expected by the Fed this year, which will need to act quickly to combat inflation, which is still near 40-year highs. Fed Chair Jay Powell also stated that tightening monetary policy should be “moving a little more quickly.” market expects interest rates, which are presently between 0.25 and 0.5 percent, to rise to 3 percent by the end of the year.
The MSCI ACWI Ex-US Total Return Index was down 6.2 percent in April as worries about slowing economic growth, soaring inflation, and tighter monetary policy weighed.
Market concerns about the economic impact of China’s zero-COVID policy on the coronavirus remained as authorities tightened quarantine efforts and expanded mass testing. Due to the restrictions, many companies with operations in China have been warned of supply chain delays and a blurred business picture. Shanghai’s month-long shutdown reverberated as many foreign residents left and businesses struggled to reopen; however, officials have begun to allow people to leave their homes in a growing number of residential neighborhoods.
The eurozone economy grew by 0.2 percent in the first quarter, as rising commodities prices and obstacles caused by Russia’s invasion of Ukraine slowed growth. This number was lower than the 0.3 percent predicted by the European Commission just before the conflict began. Germany’s GDP increased by 0.2 percent in the first quarter, while France’s economy remained stagnant. Italy’s GDP shrank by 0.2 percent. At the same time, inflation rose to 7.5 percent in April, the highest level since the euro’s adoption.
The ECB remained committed to its previously announced objectives to decrease quantitative easing measures progressively. Official interest rates were maintained, while statements from ECB President Christine Lagarde indicated that a steady adjustment approach would be continued. The Bank’s asset acquisition program will expire in the third quarter. Interest rate hikes are expected to follow but at a more modest pace.
The Portfolio Management Team