Market Watch: June 2022

Global equity markets fell more than 20% year-to-date, reflecting the worst first half in over 50 years. Inflation remains a threat, fueled by rising oil and commodity prices, labor shortages, and continuous supply chain bottlenecks. To combat inflation, central banks have generally acted in concert, with most central banks hiking rates. The war in Ukraine has also put extra pressure on food prices and energy costs, which are expected to rise further unless the situation is resolved.

The S&P/TSX Total Return Index was down 8.71 percent in June after the Bank of Canada hiked interest rates by 0.5 percent and continued quantitative tightening.

Following a solid start to the year, Canada’s growth experienced a modest slowdown in May after slowing in April, owing to a decline in oil output. Preliminary figures suggest that gross domestic product fell by 0.2 percent in May, as output fell in the oil and gas, manufacturing, and construction sectors, following robust growth of 0.3 percent in April and 0.7 percent in March.

Moreover, the economy created 40,000 jobs in May, led by an increase in full-time employment as the labor market tightened and earnings rose. The rise occurred while the unemployment rate declined to 5.1 percent, the lowest level since 1976. In April, the unemployment rate was 5.2 percent.

Furthermore, inflation soared at levels not seen since 1983 in May, above economist estimates, due to high fuel costs, putting pressure on the central bank to follow the US Federal Reserve’s lead and raise interest rates significantly. The annual inflation rate in Canada surged to 7.7 percent in May, above April’s 6.8 percent and analyst predictions of 7.4 percent. Inflation is considerably over the Bank of Canada’s April projection of 5.8 percent for this quarter.

On monetary policy, The BoC hiked interest rates to 1.5 percent from 1.0 percent this month, its second half-point rise in a row, and warned it was prepared to move more firmly if necessary. This year’s four-decade-high inflation has pushed the BoC to raise interest rates, with officials lifting their main policy rate by 1.25 percentage points since March. Following May’s record-breaking inflation numbers, JPMorgan strategists expect the BoC to raise interest rates by a percentage point at its next meeting.

The S&P 500 Total Return index was down 8.25 percent in June following the Federal Reserve’s announcement of the most significant interest rate rise since 1994.

The US GDP declined at an annual rate of 1.6 percent in the first quarter, somewhat faster than previously estimated. The dip was a dramatic contrast to the fourth-quarter growth of 6.9 percent. A Federal Reserve tracker of economic growth indicates an increasing likelihood that the US economy has entered a recession.

According to a poll released on June 13 by the Financial Times and the Initiative on Global Markets at the Booth School of Business at the University of Chicago, 38% of participants believe the US economy will enter a recession in the first half of 2023, while 30% think it will occur in the second half of next year. Policymakers drastically reduced their forecast for 2022 economic growth, expecting only a 1.7 percent increase in GDP, down from 2.8 percent in March.

Moreover, the labor market situation in the US improved more than anticipated in May, while the unemployment rate remained unchanged at 3.6 percent. These are indications of a strong labor market, which may put the Federal Reserve’s foot on the brake to moderate demand. Last month, employers added 390,000 new jobs, more than the 325,000 jobs economists predicted.

On monetary policy, The Fed began its most vigorous anti-inflationary operation yet, hiking benchmark interest rates by three-quarters of a percentage point, the most significant rise since 1994. Following weeks of doubt, the Fed raised its benchmark funds rate to 1.50-1.75 percent, the highest level since shortly before the Covid outbreak began in March 2020, as inflation raced to a new 40-year high in May, indicating that inflation forces have become embedded in the economy.

CPI increased to 8.6 percent last month, above the 8.3 percent in April. Inflation increased by 1% from April to May, a significant increase over the 0.3 percent increase from March to April. The majority of the rise was due to much higher gasoline prices. As a result, the Fed’s key rate will likely conclude the year at 3.4 percent. This is a 1.5 percentage point increase above the March projection. The rate is forecast to grow to 3.8 percent in 2023, an entire percentage point more than projected in March.

The MSCI ACWI Ex-US Total Return Index was down 8.56 percent in June as the OECD predicts slower economic growth due to the high cost of the Ukraine war.

The OECD stated that Russia’s incursion in Ukraine would cost the global economy dearly, slashing its 2022 growth projection and forecasting rising inflation. The OECD predicts that global GDP will reach 3 percent in 2022, a 1.5 percent drop from a December forecast. According to the World Bank, it has also negatively influenced global economic prospects. The organization predicted that global GDP would grow by 2.9 percent this year, down from 4.1 percent in January. The OECD also increased its inflation forecast for its members, including the United States, Australia, Japan, and Latin American and European countries, to 8.5 percent, the highest level since 1988.

Inflation in the eurozone hit a record level in June, just before the European Central Bank’s first-rate hike in 11 years. According to preliminary estimates, inflation was 8.6 percent year-over-year last month. Higher than the 8.4 percent predicted by economists. The ECB, which has promised to combat the inflationary pressures, is scheduled to convene in late July to announce interest rate increases. The central bank has stated that it would raise interest rates again in September, implying that the main interest rate may return to positive territory this year; the ECB has maintained negative rates since 2014. Analysts anticipate a recession in the eurozone in 2023, with a 0.8 percent drop in GDP.

The Portfolio Management Team