Market Watch: June 2023

Global financial markets experienced a notable upswing in June amid varying economic conditions. While the US economy showcased strength with stronger-than-expected GDP growth and robust job numbers, concerns arose in other regions. Canada’s economy exhibited sluggish growth and a weakened labor market, leading to unexpected job declines and a drop in inflation. Meanwhile, international markets faced challenges as Chinese exports declined, indicating weakened global demand, and the eurozone officially entered a recession. Central banks took different approaches to monetary policy, with the Bank of Canada surprising the market by raising interest rates. At the same time, the Federal Reserve in the US kept rates unchanged but hinted at future rate hikes. The European Central Bank and the Bank of England raised rates, driven by inflation concerns.

The S&P/TSX Total Return Index was up 3.35 percent in June as Canada’s economy showed sluggish growth, the labor market weakened, and inflation dropped.

Canada’s economy remained unchanged in April, indicating sluggish growth for the second consecutive month. However, early data for May suggests a potential improvement in economic conditions. While goods-producing industries expanded by about 0.1 percent in April, a flat reading in the service sector offset this. The overall growth was lower than the 0.2 percent forecast by economists. Out of the 20 sub-sectors of the economy, 11 experienced growth, while nine contracted in April

Canada’s labor market experienced an unexpected decline in jobs and an increase in the unemployment rate in May, signaling potential weakness in employment following a recent interest rate hike by the Bank of Canada. The economy lost 17,300 jobs, all in full-time positions, resulting in an unemployment rate of 5.2%. Analysts had anticipated a net gain of 23,200 jobs and a slight increase in the unemployment rate to 5.1%.

The inflation rate in Canada decreased to 3.4% in May, a notable drop from the 4.4% rate observed in April. This deceleration can be attributed primarily to the substantial decrease in gasoline prices. If we exclude the impact of gasoline prices, the inflation rate would remain at 4.4%. The decline in gasoline prices, which were down by over 18% compared to the high prices of the previous year, played a significant role in dragging down the overall inflation rate. However, while the headline inflation rate has slowed, other aspects of the cost of living continue to rise significantly. Grocery prices, for instance, increased by nearly 9%, which is only slightly lower than the 9.1% increase seen in April and almost three times the inflation rate.

On monetary policy, The Bank of Canada (BoC) has resumed its monetary tightening campaign by raising the benchmark overnight interest rate by 25bps to 4.75%. This move surprised the market, as the previous two meetings had not resulted in any policy changes. Several factors influenced the decision, including strong household consumption, tight labor markets, and a rebound in the housing market. Despite providing relatively balanced forward guidance, the BoC may implement additional rate hikes in the near future due to core inflation measures remaining above the central bank’s 2% target. Market expectations suggest at least one more 25 bps hike during this cycle, with the BoC closely monitoring labor market and inflation data leading up to their next meeting in July.

The S&P 500 Total Return index was up 6.61 percent in June as the US economy was stronger than expected in Q1 2023, job growth surpassed forecasts, inflation slowed, Fed kept rates unchanged.

The US economy expanded more in the first quarter than initially estimated. The GDP grew at an annualized rate of 2%, surpassing the previous estimate of 1.3% and exceeding economists’ expectations of a 1.4% rate. The data revealed that Americans spent more on services and less on goods, mainly healthcare services. Consumer spending was revised to 4.2% from 3.8%. The revised trade flows also contributed positively to GDP, as exports were higher than previously thought, while imports were adjusted downwards. Additionally, residential fixed investment had a lesser negative impact on GDP, while nonresidential businesses reduced their spending on equipment.

The US labor market exceeded expectations by adding 339,000 nonfarm payrolls in May, surpassing the forecasted 180,000. This growth was higher than the revised figures for April, which saw an increase from 253,000 to 294,000 jobs created. Despite the positive job numbers, the US unemployment rate rose to 3.7% in May, higher than the anticipated 3.5% and up from April’s rate of 3.4%. The job market has remained strong despite rising interest rates, banking issues, tech layoffs, and debt ceiling negotiations. Various sectors experienced job gains, including professional and business services, with 64,000 jobs added, and leisure and hospitality, 48,000. However, manufacturing lost 2,000 jobs, and the information sector saw a decrease of 9,000 jobs.

May’s inflation rate in the US reached its lowest level in two years, indicating a slowdown in price increases under the Federal Reserve’s rate-hiking policies. The Consumer Price Index grew by 4% annually, the smallest increase since March 2021 and below economists’ expectations of 4.2%. Core inflation, which excludes volatile food and energy prices, dipped to 5.3% from its 5.6% annual rate this year, although it remains well above the Fed’s target of 2%. While certain costs, such as shelter, used cars, restaurant food, and groceries, rose, falling energy prices helped offset the overall inflation. Economists believe that lowering inflation from 9.1% to 4% is more accessible than reducing it from 4% to 3%, and they are optimistic about the trajectory of the service sector’s inflation pressures.

On monetary policy, the Fed has kept interest rates unchanged at 5-5.25%, following a series of ten consecutive rate hikes over the past 15 months. While this outcome was largely expected after the release of the inflation data, which resulted in minimal expectations of rate hikes, the accompanying updated forecasts from the Federal Reserve took a notably hawkish tone. Despite a unanimous decision, some members had expressed the need for further rate increases. The June forecasts indicate an expectation of two more rate hikes before a reversal in 2024, with a reduction of 100 basis points in rates. The Fed has revised its fourth-quarter projections, anticipating an increase in Year-on-Year GDP growth from 0.4% to 1% and a decrease in the unemployment rate forecast from 4.5% to 4.1%.

The MSCI ACWI Ex-US Total Return Index was up 4.54 percent in June. Global economic concerns mounted as Chinese exports declined, the Eurozone entered a recession, and central banks raised interest rates.

Chinese exports fell 7.5% year-on-year to US$284 billion in May, indicating weakened global demand. Exports to major markets, including the US, Japan, Southeast Asia, France, and Italy, saw double-digit declines. Imports dropped by 4.5% to US$218 billion, resulting in a trade surplus of US$66 billion. Due to weakened global electronics demand, China’s reduced purchases from Taiwan and South Korea contributed to the decline in imports. Recent data reflects a weakening economic recovery in China, with manufacturing activity contracting in May and home sales slowing down.

The Eurozone has officially entered a recession as the region reported a revised GDP of -0.1% for the year’s first quarter. Initially, Eurostat had estimated a growth of 0.1% for the same period, but this was adjusted downward after Germany and Ireland lowered their growth figures, with Germany entering a recession. Economists express pessimism for the coming months, expecting further contraction in the euro zone’s economy. Notable euro economies, including Ireland, the Netherlands, Germany, and Greece, reported economic contractions for the year’s first quarter. However, the UK managed to avoid a recession at the beginning of the year, although its economy remains 0.5% smaller than pre-pandemic levels, unlike the eurozone and EU, which are over 2% higher.

The European Central Bank (ECB) has raised interest rates by 25 basis points to 3.5% and announced the end of reinvestments under its Asset Purchase Programme, as anticipated by the markets. The ECB acknowledges that although inflation is slowing down, it is still projected to remain high for an extended period. Inflation forecasts have been revised upwards, indicating potential rate hikes to 4%. The staff projection for core inflation has significantly increased this year and the next, with catch-up adjustments to account for recent unexpected inflation data. Similarly, the Bank of England’s surprise interest rate hike of 50 basis points reflects deep concerns among the voting members of the Monetary Policy Committee. The decision was driven by higher-than-expected inflation and wage data, with inflation consistently exceeding consensus expectations for the past four months.

The Portfolio Management Team