Market Watch: May 2022

Global financial markets rose in May, following a significant decline in the first four months of 2022. At the beginning of May, the Federal Reserve raised interest rates by 50bps to cool high inflation. Investors were concerned that this tightening measure may cause an economic downturn. Disappointing quarterly results revealed that inflation affected consumers and reduced corporate earnings. The Russian incursion of Ukraine, China’s COVID-related lockdowns, and persistent supply chain problems impact the global economy and drive up inflation. The war has exacerbated uncertainty and pushed up petroleum and agricultural goods costs. However, stocks posted their biggest weekly gains since November 2020, following a decline in US inflation in April. The Fed hinted in the minutes of its most recent policy meeting that if the economy and inflation slow enough, the central bank will reduce the pace of rate hikes. Markets had a relief rally, but overall uncertainty remains.

The S&P/TSX Total Return Index was down 0.06 percent in May as the Bank of Canada raised interest rates by 50bps and maintained quantitative tightening.

Canada’s GDP rose at a 3.1 percent annualized pace in the first quarter. Analysts expected higher growth, anticipating a 5.5 percent annualized increase. On the other hand, the GDP figure was in line with the Bank of Canada’s expected 3.0 percent growth from January to March. GDP climbed 6.6 percent annually in the fourth quarter, slightly lower than the prior estimate of 6.7 percent.

Moreover, the unemployment rate fell to a new low in April, despite a slowing pace of job growth. The unemployment rate decreased to 5.2 percent in April as the economy added 15,300 jobs, less than half of the 40,000 predicted by analysts. The tiny gain ended a two-month boom that saw Canada add around 410,000 jobs.

Furthermore, inflation increased by 6.8% annualized in April, the highest level since January 1991, and up from 6.7 percent in March. Food and housing prices were the primary drivers of the increase in April. The acceleration of almost all items in the Consumer Price Index (CPI) in April was moderated by the slower rise in gas prices in April compared to March.

On monetary policy, the Bank of Canada increased its overnight interest rate by 0.5 percent for the second time, emphasizing that it may move more strongly to combat inflation. The central bank upped the overnight rate to 1.5 percent and issued a hawkish statement in which it expressed concerns about inflationary pressures increasing and becoming stuck at high levels. While the 0.5 percent increase was anticipated, the message will drive speculation that officials led by Governor Tiff Macklem are considering tightening at a quicker rate than previously suggested. Markets anticipate another half-point hike at the July 13 meeting before decreasing the pace of tightening in the second half of the year. The central bank is expected to halt at roughly 3%.

The S&P 500 Total Return Index was up 0.18 percent in May as inflation hit 8.3% in April but slowed from a 40-year high.

The United States’ economy dropped more than projected in the first quarter reason for the shrinkage was a wider trade gap: the country spent more on imports than it did on exports. The GDP fell by 1.5 percent in the first quarter on an annual basis, which was worse than the 1.3 percent forecast. Economists anticipate the United States to recover in the second quarter as some of the reasons that slowed growth earlier this year fade away. A rise in the omicron variant hampered activity, and the Russian invasion of Ukraine exacerbated supply chain problems that had contributed to inflation reaching a 40-year high. According to a survey of economists, the median projection for growth in the second quarter is 3.3 percent, while the Atlanta Fed’s tracker predicts a 1.8 percent rebound.

Moreover, The US economy gained 428,000 jobs in April, above analysts’ expectations of 390,000 jobs, maintaining a record of brisk employment increases amid ongoing labor shortages and the crisis in Ukraine. The unemployment rate remained at 3.6 percent.

On monetary policy, The Fed raised rates by 0.5 percent in May after signaling its intention to combat inflation aggressively. After being forewarned in April, this move was in line with market expectations. The market is now pricing in two further 0.5 percent increases in June and July. Inflation came in above predictions but decreased slightly to 8.3 percent on an annual basis. Growth risks have risen during the last month. As the month ended, the committee’s messaging grew ambiguous. In the minutes of its most recent policy meeting, the Fed hinted that if the economy and inflation decrease enough, the central bank may reduce the pace of rate hikes.

The MSCI ACWI Ex-US Total Return Index was up 0.8 percent in May as the Shanghai opening might ease the Supply Chain problems.

Shanghai’s harsh lockdown, which lasted more than two months and devastated manufacturing, may finally end as the city attempts to recover from its worst-ever COVID breakout in June. Because China is home to half of the world’s 20 major ports, lifting restrictions would be good news for the world economy.

The conflict in Ukraine is still going on with no end in sight. While demands for a diplomatic solution have been made, both parties’ red lines appear irreconcilable. Europe has opted to impose a seaborne oil embargo on Russia, raising the possibility that Russia may react by cutting off gas supplies to Europe. Gas futures prices remained relatively stable at high levels.

Consumer confidence in Europe increased in May, even though it remained low. This should give the ECB more comfort in hiking interest rates in the wake of high inflation of 8.1 percent. President Lagarde reflected the bank’s position, stating that a first-rate hike is probable in July, with asset purchases ending early in Q3 2022 and negative rates ending by quarter-end.

The Portfolio Management Team