Market Watch: May 2023

Global financial markets were mixed, with varying trends observed across regions. The US demonstrated resilience, with growth in job vacancies and robust labor expansion, contributing to the persistence of inflationary pressures. The S&P 500 TR rallied due to solid earnings from the technology sector, with market leadership increasingly concentrated in the largest stocks. Meanwhile, the Chinese economy underperformed, experiencing weak figures in manufacturing and consumer spending during May. Europe also lagged but still maintained its position as the strongest region throughout the year.

The S&P/TSX Total Return Index was down 4.95 percent in May as the Canadian economy surged with 3.1% growth, the labor market showed strength, and increased inflation concerns.

The Canadian economy experienced robust growth in the first quarter, surpassing the anticipated rate of 2.5% with an annualized rate of 3.1%. Monthly GDP estimates indicate that a significant portion of this growth can be attributed to a substantial rebound in January, as there was little change in output during February and March. The stronger-than-expected GDP data was primarily driven by a 5.7% quarter-on-quarter increase in consumer spending and higher net exports. However, the positive performance in these areas was partially offset by lower inventory accumulation and a decline in residential investment. This rebound in economic momentum following a weak Q4 2022 suggests that Canada’s economy has displayed greater resilience than previously anticipated by the market.

Once again, in April, the Canadian labor market delivered positive surprises. The addition of 41,400 jobs was a notable achievement, despite a decrease of 6,200 in full-time employment. Part-time employment, on the other hand, saw a significant increase of 47,600. Over the past seven months, the Canadian workforce has grown by 412,000 jobs, surpassing the average growth rate observed from 2010 to 2019 by three times. Although April’s unemployment rate remained steady at 5.0% for the fifth consecutive month, there were positive indicators, such as a 0.2% month-on-month increase in total hours worked and a 5.2% year-on-year wage growth.

Headline inflation in Canada experienced a modest increase in April, raising concerns about the persistence of inflationary pressures. In April, the year-on-year Consumer Price Index (CPI) reached 4.4%, above the consensus of 4.1% and rising from 4.3% in March. This increase is caused by the rising cost of shelter, driven by significant rent and mortgage expenses. Despite this unexpected rise, there has been a downward trend in price pressures since the peak observed in June 2022. The lagged impact of the Bank of Canada’s previous rate hike campaign is beginning to affect economic growth, potentially contributing to a decline in inflation in the upcoming months. Economists believe that tighter financial conditions and higher borrowing costs will likely continue to exert downward pressure on consumer activity, alleviating demand-driven inflationary pressures. On monetary policy, economists predict that the Bank of Canada (BoC) will maintain the policy rate at 4.5% in the upcoming week. However, an unexpected interest rate hike is possible due to stronger-than-anticipated consumer price inflation, GDP growth, and a robust labor market. The market currently assigns a 25% probability of a rate increase on June 7th.

The S&P 500 Total Return index was up 0.43 percent in May after Biden signed a new debt ceiling legislation; Q1 GDP growth was revised upward, employment improved, inflation was slightly lower than estimated, and the Fed raised rates to combat inflation.

President Joe Biden has signed legislation lifting the nation’s debt ceiling, ensuring fiscal stability, and preventing a default on the government’s debt. The agreement suspends the debt limit until 2025, imposes spending restrictions, and provides budget targets for the next two years.

The US economy experienced more robust growth than previously estimated in Q1 2023. GDP increased at an annualized rate of 1.3% during this period versus the 1.1% reported last month. The upward revision was driven by an improvement in inventory, indicating that it had less of a negative impact on GDP. Consumer spending and government outlays were the main contributors to the growth, while businesses reduced their spending on equipment. Despite this, there are signs of resilience in the economy, with retail sales rebounding in April and private-sector business activity expanding, particularly in the services sector. On the other hand, the manufacturing sector experienced a decline in May, with manufacturers reporting weaker demand.

US employment experienced a significant increase of 253,000 in April. This surpassed economists’ expectations of 180,000, especially considering that the previous month, March, had the lowest monthly gain since December 2020. The unemployment rate decreased from 3.5% in March to 3.4%, matching the lowest rate recorded in 54 years, which was seen in January. This defied projections that anticipated a slight increase to 3.6%. Wage growth exceeded forecasts, with a year-over-year increase of 4.4%, surpassing the projected 4.2%. Hourly earnings also saw a positive trend, rising by 16 cents to $33.36. However, it’s important to note that the Labor Department revised the data for February and March, revealing that there were 149,000 fewer jobs added than initially reported.

US inflation increased by 0.4% for the month. However, this translates to an annual increase of 4.9%, slightly lower than the estimated 5%, representing the slowest annual pace since April 2021. In March, the annual rate stood at 5%. The core CPI, which excludes volatile food and energy categories, rose by 0.4% in April and 5.5% year-over-year, meeting expectations. These upward pressures were partially offset by declines in fuel oil prices, prices of new cars, and food prices at home.

On monetary policy, the Federal Reserve increased the short-term borrowing rate by an additional 0.25%, marking the central bank’s tenth consecutive rate hike. Nevertheless, Jerome Powell remains steadfast in its commitment to assert tighter price control. While inflation has noticeably declined from its peak in the summer, it still exceeds the Fed’s target of 2%.

The MSCI ACWI Ex-US Total Return Index was down 3.54 percent in May as China underperformed, Eurozone inflation rose to 7%, driven by energy prices, while UK inflation remains high at 8.7%. ECB and BoE both raised their interest rates.

China’s April activity data fell short of expectations but indicated an improving economy. New home prices increased for the third consecutive month. However, the Chinese NBS Manufacturing PMI contracted slightly faster in May, recording a value of 48.8, while the Non-Manufacturing PMI remained comfortably above the neutral 50-mark. Headline inflation slowed to 0.1% year-on-year, and producer price inflation decreased to -3.6%.

The latest inflation figures for the eurozone in April indicated a 0.1% increase in headline inflation, bringing it to 7.0% year on year. This uptick can be attributed to a 3.3% rise in energy prices. However, core inflation experienced a slight decline of 0.1%, reaching 5.6% year on year. This decrease was driven by a reduction in core goods price inflation, which offset the rise in services inflation. Additionally, food price inflation saw a notable drop of 1.9%, reaching 13.5% year on year. This decline marks the first significant decrease in approximately two years. On the other hand, the April inflation report for the United Kingdom received a negative response from investors. Headline Consumer Price Index (CPI) decreased from 10.1% year on year to 8.7%, although it remained significantly higher than the expected 8.2%. More concerning was the acceleration of the core CPI component, which rose from 6.2% yearly to 6.8%. This places core CPI at its highest rate since March 1992. Consequently, market participants adjusted their expectations for interest rates, anticipating a peak rate of 5.5%.

The European Central Bank (ECB) has increased interest rates by 25 basis points, resulting in a deposit rate of 3.25%. The central bank acknowledged the tightening of bank lending standards and the impact of previous rate hikes, which led them to adopt a more cautious approach to future rate increases. To maintain the support of monetary policy advocates, the ECB also announced that it would conclude its Asset Purchase Program reinvestments in July, earlier than initially predicted by the market. Despite a slight decrease to 5.6% in April, core inflation remains persistent, while business surveys indicate an improvement in growth and labor markets, accompanied by solid wage negotiations. Economists predict the final rate will reach 3.75% in the next quarter. The ECB emphasizes flexibility and willingness to adjust its approach based on incoming data.

Similarly, The Bank of England (BoE) implemented a 25-basis point increase in interest rates, bringing the Bank Rate to 4.5%. This move was widely anticipated and represented the twelfth consecutive rate hike, establishing the highest Bank Rate since 2008. Seven of the Monetary Policy Committee (MPC) members voted in favor of the hike, while two dissented, advocating for leaving the rate unchanged. The committee’s forward guidance remains unchanged from March, indicating that if more persistent pressures exist, further tightening of monetary policy may be necessary. This allows the committee flexibility to respond accordingly to new data.

The Portfolio Management Team