Market Watch: March 2022

Global financial markets retreated in February on fears of Russia’s attack against Ukraine. The future of the Russia-Ukraine confrontation is yet unknown. Strong saGlobal financial markets saw a resurgence in March, following a significant drop in the first two months of 2022. As Russia’s incursion on Ukraine intensified, inflation surged, and the Federal Reserve raised interest rates for the first time since 2018. The recovery occurred when investors recognized that their biggest concerns about the economy had not come true. The outbreak of hostilities by Russia on Ukraine and the ensuing commodities supply disruption have put central banks in a conundrum, forcing them to choose between controlling inflation and supporting growth. While noting the geopolitical landscape’s uncertainty and its economic repercussions, central banks have indicated that inflation is the more critical issue to address until the economic expansion degrades significantly. Analysts are concerned that a more aggressive strategy to raising interest rates may cause the economy to enter a downturn by significantly decreasing consumer consumption.

Canada
The S&P/TSX Total Return Index was up 3.62 percent in March as the Canadian economy managed to reap modest gains at the start of 2022.

The Canadian economy gained notable momentum, expanding for the ninth straight month after a January rise. In February, real GDP increased by 0.8 percent, led by gains in manufacturing and commodities. The economy grew by 0.2 percent in January, according to economist predictions. With February’s growth, Canada’s GDP is 1.2 percent higher than before the pandemic. This strength will put more weight on the Bank of Canada to act quickly on rate rises in mid-April.

Moreover, Canada recorded massive jobs increase in February, significantly above estimates and more than canceling out January’s loss, while the unemployment rate fell below its pre-pandemic level for the first time. The economy gained a net 336,600 jobs, more than nearly twice the 160,000 projected by economists. As Canada loosened severe Omicron restrictions, the unemployment rate decreased to 5.5 percent, its lowest level since May 2019, when it was 5.4 percent.

On monetary policy, The BoC lifted its benchmark interest rate to 0.5 percent for the first time in more than three years, the first of what is anticipated to be several small rates rises this year to cool inflationary pressures, which have reached their highest level in years and are expected to go up even more as a result of the war in Ukraine. As a result of the commodities surge spurred by Russia’s incursion of Ukraine, Canadian inflation is expected to remain high. The headline rate is now expected to climb at or above 6%, pushing the central bank to hike interest rates further. Canada’s inflation rate has risen considerably beyond the 5.1 percent projection by the Bank of Canada, indicating the difficult path ahead to return inflation to the 2 percent objective. The BoC is expected to raise rates four to five times in 2022, raising its interest rate to 1.5 percent or 1.75 percent by the end of the year.

US
The S&P 500 Total Return Index was up 3.96 percent in March as the Fed hikes interest rates by a quarter-point for the first time since 2018.

The US economy concluded 2021 by increasing at a robust 6.9 percent annual rate for the fourth quarter, slightly dropping from prior projections. Previously, the projected growth in the fourth quarter of last year was 7%. The minor decline reflected a lesser growth in consumer spending and fewer exports. Growth is expected to decline considerably this year, especially in the first quarter of 2022. Analysts estimate that growth will be as low as 0.5 percent in the first three months and may go below zero. The Federal Reserve predicts that the US economy will grow at a 2.8 percent annual rate this year, which is substantially slower than in 2021 but still at a reasonable level.

Moreover, the job market in the US is surging back, gaining 431,000 jobs in March and lowering the unemployment rate to a new pandemic-era low of 3.6 percent. The unemployment rate was 3.5 percent before the pandemic, reflecting a near 50-year low first established in 2019. While job growth was fewer than predicted, it still capped off a successful first quarter for the US labor market, with a monthly average increase of more than 500,000 jobs. March was the 15th consecutive month of solid job growth. The economy is currently only 1.6 million jobs behind about where it was before the pandemic began in February 2020.

On monetary policy, The Fed lifted its base rate by 0.25 percent to around 0.375 percent, up from almost zero since the outbreak hit two years ago. Policymakers expect to hike the rate at least six more times to about 2 percent this year. However, Powell’s comments imply it may go higher, especially if inflation does not moderate in the following months. Sharply increasing interest rates might stifle growth and reduce hiring. The Fed seeks to achieve a soft landing, in which inflation returns to the central bank’s 2% objective without causing the economy to enter a recession. However, many analysts are concerned that increasing interest rates may lead to a recession.

International
The MSCI ACWI Ex-US Total Return Index increased 0.25 percent in March as Russia’s war on Ukraine intensified.

Europe is a major consumer of Russian oil and natural gas, exposing the region to the Russia-Ukraine war. A significant economic slowdown due to a lengthy period of high energy costs might occur in the area. However, it might be offset by the large surplus reserves collected during lockdowns, solid labor market gains, and stimulus spending.

The ECB said that the tapering of the pandemic emergency purchase program (PEPP) will stop in June and that the asset purchase program (APP) will progressively stop throughout the third quarter of this year, subject to customary conditions and data dependencies. President Christine Lagarde left the possibility open to a first-rate rise this year, which might come sometime after the completion of asset purchases.

Following a 0.25 percent boost in December, the Bank of England hiked the interest rates twice in the first quarter, reaching 0.75 percent. At its March meeting, the bank stated that geopolitical uncertainties had heightened its previous projections for sluggish growth and rising inflation this year. “Monetary policy will ensure that longer-term inflation expectations remain firmly anchored,” the bank noted.

The Portfolio Management Team

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