Market Watch: July 2022

Global financial markets saw a resurgence in July, following the Fed’s additional 75-basis-point rate rise and news that the economy fell at a 0.9 percent annual rate in the second quarter. The market interpreted this negative economic news as a signal that the Fed may halt or stop raising interest rates earlier than predicted. The recovery occurred when investors recognized that their biggest concerns had not come true, with the relatively dovish comments from Federal Reserve Chair Jerome Powell. Markets also were paying great attention to quarterly earnings reports from technological behemoths such as Meta, Apple, Alphabet, and Amazon soared after reporting better-than-expected financial results.

The S&P/TSX Total Return Index was up 4.7 percent in July after the Bank of Canada unexpectedly raised the interest rates by one percentage point.

The Canadian economy expanded at an annualized pace of 4.6 percent (4.1 percent expected by the Bank of Canada forecast) in the second quarter, up from 3.1 percent in the first, raising market expectations of another significant rate hike in September. In May, GDP remained flat from the previous month due to a construction workers’ strike and chip shortages. Analysts predicted that the economy would contract by 0.2 percent.

Moreover, Employment declined by 43,000 last month. It is the first reduction in employment that public health restrictions have not caused since the outbreak began. The decline in employment is mainly attributable to a substantial number of persons aged 55 and older exiting the labor market. As fewer individuals looked for jobs, the unemployment rate fell to a new low of 4.9 percent. The fall in unemployment was caused by fewer persons seeking jobs.

On monetary policy, the BoC surprised investors by raising interest rates by a whole one point, the largest increase since 1998, stating higher and more persistent inflation and the heightened danger of those price rises being permanent. The central bank lifted its policy rate to 2.5 percent from 1.5 percent in a standard rate decision and stated that further increases would be required. The move was stronger than the 75-basis-point rise predicted by analysts and financial markets. The BoC also significantly upped its near-term inflation estimates and expects price increases to accelerate, averaging around 8.3 percent in the third quarter of 2022. In June, Canada’s inflation rate was 8.1 percent, close to a 40-year high. The BoC forecasts that inflation will average 7.2 percent this year, drop to around 3 percent by the end of 2023, and then return to the 2 percent target by the end of 2024.

The S&P 500 Total Return index was up 9.2 percent in July after the Fed raised interest rates by 0.75 percentage point for the second time in a row to combat inflation.

The US economy shrunk for the second quarter, dropping at a 0.9 percent annual rate, prompting concerns that the country is on the verge of a recession. The dip follows a 1.6 percent drop annually in the first quarter. Consecutive quarters of declining GDP are an informal but not conclusive indication of a recession. The data for this second quarter revealed widespread economic weakness. Consumer spending has declined as Americans have purchased fewer products. Business investment has decreased. Inventories fell as firms postponed refilling shelves.

Employers in the United States added more jobs than expected in June. The unemployment rate remained around a five-decade low; nonfarm payrolls increased 372,000 this month, following a revised 384,000 increase in May. The unemployment rate stayed constant at 3.6 percent, as pay growth remained strong.

On monetary policy, The Federal Reserve raised interest rates for the second time in a row by 0.75 percentage points to slow massive inflation. The movements in June and July, which increased the benchmark overnight borrowing rate to a range of 2.25 percent -2.5 percent, constitute the most restrictive successive measures since the Fed started utilizing the overnight fund’s rate as the primary monetary policy instrument in the early 1990s. The rises come amid a year that began with interest rates hovering near zero but has seen inflation run at 9.1 percent per year. The Fed targets inflation of roughly 2%, though it altered that target in 2020 to allow it to be higher for sustainable employment.

The MSCI ACWI Ex-US Total Return Index was up 3.5 percent in July after the eurozone’s economy increased at a faster-than-expected 0.7 percent rate in the second quarter.

The eurozone economy grew more than economists predicted, placing it on a solid foundation as rising prices and a potential Russian oil blockade risk send it into recession. Spain and Italy also reported second-quarter growth of 1% over the preceding three months, boosted by a surge in post-lockdown tourism. The French GDP increased after a surprising decrease at the start of 2022. Despite the positive news, Germany, Europe’s largest economy, declined.

However, A preliminary figure of eurozone inflation came in above estimates, at 8.9 percent in July, up from 8.6 percent in June. Food and energy prices drove the increase in headline inflation. European natural gas prices climbed when Russia curtailed Nord Stream pipeline gas supply to 20% capacity, noting the necessity for maintenance on another turbine. EU energy ministers decided that member countries would reduce their natural gas consumption by 15% in winter.

With its first rate rise in over a decade, the ECB lifted interest rates by 50 basis points, thereby ending the period of negative interest rates. The central bank justified the hefty hike by citing growing inflation concerns and the euro’s fall versus the US dollar. The ECB Central Committee also discarded prior advance guidance, stating that subsequent changes will be data-dependent and decided monthly. Before the announcement, the market was pricing in a total of 170 basis points of policy tightening this year. Still, estimates soared to a total of 205 basis points after the more hawkish announcement.

The IMF dropped its forecast for eurozone economic growth in 2022 to 2.6 percent from 2.8 percent in April and lowered its forecast for 2023 to 1.2 percent from 2.3 percent. The downgrade reflects the effects of the Ukrainian war, notably increased energy prices and the possibility of tighter economic circumstances as the European Central Bank tightens monetary policy.