Market Watch: August 2022

Global financial markets plummeted in August, marking the worst August performance in seven years, as investors remained concerned about the Federal Reserve’s relentless interest rate hikes. Selloff intensified after Fed Chair Jerome Powell’s words about holding monetary policy restrictive for a more extended period. It has shattered prospects for more modest interest rate rises as global economic uncertainties remain high. This uncertainty is exceptionally high in Europe, where there is no indication of a cease-fire in Ukraine after six months of fighting. This winter, a recession appears highly possible as the region’s energy problem worsens.

The S&P/TSX Total Return Index was down 1.61 percent in August as Canada has agreed on a deal for Germany to import green hydrogen from Canada.

The Canadian economy surged in the second quarter due to rising commodity prices. However, evidence suggests that momentum is fading. Following a 3.1% growth in the first three months of the year, GDP increased at an annualized rate of 3.3%. Higher consumer spending and business inventory expenditure drove growth. The figures give the impression of a thriving economy throughout most of the first half of 2022, even while the US and European countries struggle. However, it is cooling due to decades of high inflation and rising interest rates.

Moreover, The Canadian economy lost a net 30,600 jobs in July as the public sector declined, although the unemployment rate remained at a historically low of 4.9%. Reuters surveyed analysts projected a 20,000-job growth and the unemployment rate to rise to 5.0%. July was the second month in a row with relatively few losses.

On monetary policy, the annual inflation rate fell to 7.6 percent in July, as reduced gas costs relieved some of the strain on consumer expenditures. However, the BoC governor has indicated that the slowing is insufficient to avert future interest rate rises. The drop-in headline inflation follows a nearly 40-year high of 8.1 percent in June. It is also the first decrease in the key inflation rate since June 2020. The BoC is keeping an eye on this new inflation estimate as it prepares to set its next interest rate on September 7, when it is likely to hike it again. Tiff Macklem stated following the inflation data that while inflation appears to have peaked, high prices will remain for some time. He added that the Bank of Canada’s objective is to raise interest rates to make spending less appealing, lowering consumption and driving inflation back down to its two percent benchmark. According to him, continuing global supply chain obstacles and other inflationary pressures remain dominant even as they have lessened, implying that the central bank’s task is not over yet.

The S&P 500 Total Return index was down 4.08 percent in July after Inflation appeared to have peaked, with CPI of 8.5% annually in July, down from 9.1% in June.

The US GDP decreased 0.6 percent in the April-June quarter compared to the previous year’s period. According to the most recent, upwardly updated estimate of US GDP. It is still the second consecutive quarter of economic decline, regarded as an informal sign of a recession. Most analysts, however, deny that the US economy is in or near a recession, citing the domestic employment market’s stability, with robust hiring levels, low unemployment, and many openings.

However, the US economy added 528k jobs in July, contrary to market forecasts of just 250k. The report’s specifics were equally encouraging, revealing that recruitment had increased dramatically across industries, while the unemployment rate had fallen and salaries had risen.

On monetary policy, inflation appears to have peaked, with CPI rising 8.5% year on year in July, down from 9.1% in June. Core inflation, on the other hand, remains over the Fed’s benchmark. When paired with solid wage inflation data, it may drive the Fed to hike interest rates by 75 basis points when its rate-setting committee gathers in September. The Fed appears dedicated to controlling inflation, as indicated by Jerome Powell’s hawkish statement at Jackson Hole’s end of the month. As a result, the federal fund futures market currently has a 75% chance of a 0.75% hike in September. Throughout the month, the Fed’s hawkish attitude supported the US dollar while hurting equities and bond market returns.

The MSCI ACWI Ex-US Total Return Index was down 3.19 percent in August despite the Eurozone’s economy increasing at a faster-than-expected 0.7 percent rate in the second quarter.

The Eurozone’s second-quarter GDP surprised on the positive side, rising 0.7% quarterly, although the figures showed significant disparities across member countries. Those nations benefitting from the post-Covid services bounce, such as Spain, Italy, and France, to a limited extent, did well overall. At the same time, the German economy, which is the most reliant on Russian gas imports, sputtered to a halt. The Eurozone’s economic resiliency in the first half of the year is due to the EU’s budgetary strategies since the outbreak of the war in Ukraine. According to the European Central Bank, these steps would boost the EU’s GDP by 0.4% this year while lowering inflation by the same amount. However, Recession potential remains significant, as seen by the euro’s depreciation to parity with the US dollar and the Eurozone composite PMI, which fell deeper into the recession zone in August to 49.2.

The Bank of England hiked its interest rates by 0.5% to 1.75% in the UK at the start of the month. Even though the UK central bank now anticipates a recession to begin in the 4th quarter, it has warned of more tightening to limit inflation, which it forecasts to increase to 13%. The August CPI data did not alleviate the Bank of England’s fears, which showed that inflation hit 10.1% annually in July, the highest level in forty years. Second-quarter GDP fell less than predicted (-0.1% vs. -0.2% projected), but retail sales resisted the pressure, increasing 2.3% year on year. The August PMI fell 1.2 points but is still in an expansionary zone at 50.9.

The Chinese economy faltered this quarter due to weather-related interruptions. The July economic figures underscored the fragility of consumer consumption and the ongoing difficulty in the housing market. Retail sales fell 0.3% monthly, and growth in the service sector appears to have slowed, with the service production index rising just 0.6% annually, down from 1.3% in June. The Bank of China has loosened monetary policy by cutting its interest rates. Furthermore, China’s State Council proposed further economic stimulus measures totaling one trillion yuan.

The Portfolio Management Team