Market Watch: September 2022

Global financial markets plummeted in September as economic conditions worsened and central banks pursued aggressive rate hikes worldwide. Excessive inflation and more challenging conditions have become a global problem, with widespread deterioration in the global economy. As the fourth quarter approaches, there is an increasing risk that the world economy will experience a recession. The dual impacts of fiscal stimulus and post-pandemic reopening driving momentum have gone, and severe restraints on economic growth have overtaken them.

The S&P/TSX Total Return Index was down 4.26 percent in September as the Bank of Canada hiked interest rates by 75bps.

Canadian economic output was somewhat higher than projected in July but remained poor throughout the summer, indicating that growth has started to decline. GDP climbed by 0.1 percent in July, exceeding expectations for a 0.1 percent dip. Even with the unexpected upside in July, the numbers point to an economy slowing after a solid start to the year, as a reopening surge loses momentum. Monthly growth has averaged only 0.1 percent since April. The slowdown demonstrates how sensitive Canada’s resource-heavy economy, which benefited from the recent rise in oil prices, is to world economic hurdles and increased borrowing rates, which threaten to halt booms in most big developed economies.

Moreover, employment in Canada surprisingly declined for the third month in a row in August, and the unemployment rate rose, potentially indicating that interest-rate rises have begun to temper the labor market. The economy lost 39,700 jobs last month, an unexpected negative figure compared to the 15,000 gain predicted by analysts. The unemployment rate jumped to 5.4 percent from 4.9 percent in June and July, the highest level since severe COVID restrictions were adopted in January. The decline in employment and the higher unemployment rate may indicate that the country’s workforce is adjusting as the Bank of Canada’s aggressive rate rises begin to temper economic growth and limit demand.

Thus far this year, the Canadian dollar has fallen around 8.5% versus the US equivalent, and it is presently trading at around US$0.725, its lowest level in more than two years. The loonie’s depreciation has happened in the context of broad-based US dollar appreciation. Aggressive Fed interest rate rises and investors seeking protection from increased market uncertainty have supported the greenback.

On monetary policy, the BoC lifted its benchmark rate by 75bps to 3.25%, as predicted. This follows an unexpected 100bp increase in July, bringing the total rate increase since February to 300bp. Despite recent lower inflation, which fell to 7.6% last month, and second-quarter GDP growth of 3.3%, the BoC remains concerned about excess demand and high inflationary pressures, which, if they persist, raise the likelihood that excessive inflation will become sticky. As a result, the BoC believes that the target interest rate should be increased further. More rises are on the way, although at a slower pace, with the interest rates expected to reach 4% by the end of the year.

The S&P 500 Total Return index was down 9.21 percent in September after the Fed hiked interest rates by another 75bps to control inflation.

The US GDP contracted at a 0.6% annualized rate in the second quarter, unchanged from the prior figure, due to higher consumer prices and interest rates. One of the unofficial signals of a recession was the second straight quarter of GDP decline. Due to the strength of the US job market, many economists believe the world’s biggest economy isn’t quite there yet. Still, many worry it will be when the Federal Reserve raises interest rates to combat inflation. The first report on the economy’s growth from July-September will be released on October 27. Economists predict GDP will expand at a 1.5% annualized rate in the third quarter.

However, employers in the United States recruited more people than expected in August. Still, weak salary growth and an increase in the unemployment rate to 3.7% indicated that the labor market was starting to tighten. Nonfarm payrolls grew by 315,000 jobs last month, above economists’ expectations of a 300,000 increase. This was the 20th consecutive month of job gain. As previously reported, the data for July was slightly changed, with payrolls increasing by 526,000 rather than 528,000.

On monetary policy, the Fed raised the Fed benchmark rate by 75bps for the third time in a row last month. A solid job market and high inflation in the year’s first half pushed the Fed to take a significantly more hawkish stance, pursuing hikes of 0.25% and 0.50% in March and May, respectively. This brings the key interest rate to a level of 3.00%-3.25%. Interest rate forecasts anticipate further hikes of 1.25% this year and 0.25% next year, bringing the interest rate to a range of 4.25%-4.50% by the end of 2022 and 4.50%-4.75% by the end of 2023. Nevertheless, the Fed’s vast bond holdings are reduced to $95 billion monthly. Interestingly, the Fed expects inflation to decline toward its 2% objective in the coming years. According to the projections, annual PCE inflation is expected to decline to 4.5% in 2022, 3.1% in 2023, and 2.3% in 2024.

The MSCI ACWI Ex-US Total Return Index was down 9.94 percent in September after the ECB and the Bank of England hiked their interest rates.

The OECD has revised its earlier global growth predictions downward due to war-related inflation and oil supply disruption. Annual GDP growth in the United States is expected to decrease to roughly 0.5% in 2023 and 0.25% in the eurozone, with the danger of steeper reductions in certain European nations over the winter season. China’s economy has also been affected and is forecast to fall to 3.2% in 2022. Except for the 2020 pandemic, China’s growth rate will be the slowest since the 1970s. In most G20 nations, inflation is expected to progressively decline through 2023 as the monetary tightening stance takes effect and the global economy drops. In the G20 countries, headline inflation is expected to decrease from 8.2% this year to 6.6% in 2023.

Economic activity in Europe and the United Kingdom has slowed due to increasing energy costs and commodities shortages caused by the Ukraine conflict. Central banks have also taken more hawkish policy measures to confront steep inflation. The ECB’s and Bank of England’s main policy rates were -0.50% and +0.25%, respectively, at the start of the year. Despite economic worries, they have already climbed to 0.75% and 2.25%, respectively, and are likely to rise further in the coming months.

The fiscal strategy of the UK government also had a significant impact on the pound, which plummeted to a record low of $1.04 GBPUSD before rebounding to approximately $1.08 GBPUSD. Despite rising interest rates, the sterling has weakened, prompting some market players to compare it to an emerging economy currency with a rising risk premium.

The Portfolio Management Team