Global financial markets retreated after suffering its worst month since March 2020. January was loaded with volatility as investors evaluated what the Federal Reserve had in store to deal with high inflation, the pandemic’s grasp on the economy, a tangle of escalating geopolitical tensions, and a global supply chain in distress. Markets are pricing at least five rate hikes as the Fed transitions to a more hawkish stance on monetary policy. Companies have posted strong earnings results and upbeat forecasts amid supply chain bottlenecks, workforce shortages, and other pandemic-related difficulties, which have helped the market recoup some losses in the last days of the month.
The S&P/TSX Total Return Index was down 0.41 percent in January as Canada’s economy recovered to pre-pandemic levels in November.
The Canadian economy rose beyond pre-pandemic levels for the first time in November, strengthening a robust fourth quarter despite the appearance of the Omicron variant in December. According to Statistics Canada, the economy gained 0.6 percent in November compared to the previous month. This is above estimates of a 0.3 percent increase, although growth in December is anticipated to be flat. The agency predicted that annualized GDP would rise by 6.3 percent in the fourth quarter, above the Bank of Canada’s prediction of 5.8 percent.
Also, the economy added double the projected jobs number in December, as the unemployment rate fell to a 22-month low. Economists predict a slowdown in January jobs number due to new limitations imposed to slow the spread of the fast-spreading Omicron form of COVID-19. Statistics Canada reported that Canada gained a net 54,700 jobs, above economists’ projections of a 27,500 increase, while the unemployment rate fell to 5.9 percent from 6.0 percent in November. This was the lowest rate since 5.7 percent in February 2020, right before COVID-19.
Moreover, the Canadian loonie fell about 0.6 percent against the US dollar as the dollar advanced across the board, maintaining multiweek highs supported by the Fed’s more hawkish, inflation-fighting stance.
On monetary policy, The Bank of Canada kept its benchmark interest rate at 0.25 percent while forecasting higher inflation for a more extended period. Governor Tiff Macklem declared that the Bank of Canada would soon begin raising interest rates from record lows to battle inflation, claiming that the economy no longer needs assistance to deal with the impacts of COVID-19. He suggested that the first interest rate increase might come in March 2022. He added that inflation would stay close to 5% in the first half of 2022 before falling to about 3% by year-end. In October, the central bank stated that it expects inflation to return to its objective of 2% by the end of 2022.
The S&P 500 Total Return index was down 3.67 percent in January as the Federal Reserve tightened financial conditions.
Due to increased consumer spending, exports, and private investments, the US economy expanded 6.9% in the fourth quarter, exceeding forecasts. Despite growing inflation, GDP rose 5.7 percent in 2021, the quickest since 1984, following a 3.4 percent drop in 2020, when pandemic closures pushed the country into recession. However, the International Monetary Fund lowered its United States GDP forecast for 2022 from 5.2 percent to 4%. This change is due to a revised assumption that removed the Build Back Better fiscal policy package from the baseline, combined with an earlier reduction of monetary aid and persistent supply constraints.
According to the January job market data, the US economy is near full employment, with a 3.9 percent unemployment rate, significant income increase, and 10.6 million job availability. Since the recession started in 2020, the US job market has recovered at its record pace. The job market was the focus of Fed Chair Jerome Powell’s post-meeting press conference, in which he stated that the US economy is significantly more potent than it was in 2015, just before the last hiking cycle. He said that these discrepancies might substantially impact the proper speed of policy restoration.
On monetary policy, the Federal Reserve is planning to hike interest rates sooner and maybe more than anticipated. Fed Chairman Jerome Powell indicated that the Fed would raise interest rates in March. The central bank attempts to keep persistently high inflation from damaging the US economy. Last year, inflation was up 7 percent, the most significant increase in nearly 40 years.
The MSCI ACWI Ex-US Total Return Index was down 2.55 percent in January as Investors are keeping a close eye on the escalating tensions between Russia and Ukraine.
The UN Security Council is scheduled to meet next week to discuss continuing conflicts between Russia and Ukraine. Russia has positioned troops at the border with Ukraine. As a result of the disputes, Brent oil reached $90 per barrel for the first time since October 2014, pushed by dropping US oil inventories and growing political tensions with Russia.
The European economy gained 0.3 percent in the final quarter of last year, bringing the EU to pre-pandemic output levels. The EU’s fourth-quarter growth rate was in line with analysts’ predictions, down from 2.2 percent in the previous three months, despite a dramatic drop from the last quarter as coronavirus cases reached historic highs. Although at a slower pace, consumer spending continued to rise in many regions while companies restocked stockpiles improved output.
In the eurozone, inflation increased to 5.0 percent In December, mainly owing to higher food and commodities prices. However, oil prices and gas supplies continue to be a significant issue. The ECB indicated at its December meeting that interest rates are unlikely to increase in 2022 but that it will adapt accordingly in its future policies. In the UK, inflation surged to 5.4 percent in December, but the unemployment rate decreased to 4.2 percent. The market expects the Bank of England to raise interest rates five times by the end of the year due to the ongoing inflationary pressures and further tightening in the job market.
The Portfolio Management Team