Inflation Is Proving Consistent

Inflation persists

At the close of business last Friday,  global equities were sharply lower on the week. Market confidence was undermined by inflationary pressures and the expectation of central bank tightening to combat it. The yield on the US 10-year Treasury note continued to rise, reaching 3.15% from 2.95% a week ago while the price of a barrel of West Texas Intermediate crude oil rose $3.25 to $120.50. Volatility, as measured by the Cboe Volatility Index (VIX), rose to 27.8 from 25.6 last Friday.



Markets can no longer be seen as expensive

Global equity markets appear to be fairly valued and we believe it’s important to not underestimate the market’s tendency to produce above-average returns. Investors are always rewarded by buying when the market sells off. As Warren Buffett has often stated, “When others are fearful, be greedy.”

US economic growth and others around the world likely peaked in the summer of 2021 and are now growing at a much slower pace. Recession risks in certain areas of the world have increased because of the war in Ukraine and government shut-downs in China because of increased cases of covid and their “zero-covid” policy. However, the probability of a near-term recession in North America remains low. It is an environment akin to “two steps forward, one step back.” Healthy savings rates, strong corporate balance sheets, and a solid jobs market continue to support a positive economic environment. Market volatility year to date has resulted in current valuation levels, indicating much of the risk is already priced in. While the Federal Reserve in the US and the central bank of Canada have ended their asset purchase program and are now aggressively raising interest rates, we believe the markets are overly aggressive in future interest rate hike expectations.

There are usually leading indicators of a recession; the most well-known is an inverted yield curve. Currently, we only have one of the typical signs of recession. Despite some others appearing weaker, we continue to believe recessionary risks in 2022 remain low. Most bear markets coincide with recessions and therefore we do not expect any near-term market volatility to result in a bear market.

We are in the mid-stages of this economic cycle. Global economic activity, as measured by the purchasing managers’ index {PMI} remains strong. We believe corporate earnings will continue to support equity markets in 2022.



We expect the loonie to have a trading range of between .81 and .83 cents to the US dollar over the next six months. Historically, earnings growth of the Canadian equity market has correlated with the price of a barrel of oil. The Canadian market has a tailwind, and we expect equity returns in Canada to remain attractive in 2022. Canadian companies best described as dividend growers are expected to outperform the broader market in the second half of 2022.



The unemployment rate in the US has reached its lowest rate since the late 1960s. US manufacturing growth remains resilient and employment numbers would show little to no chance of a recession in the US in 2022, despite what you hear in the headlines. I also think it’s important to never underestimate the US consumer’s ability to spend.

US inflation sets new peak
The US Consumer Price Index rose 8.6% year over year in May, a new four-decade high. Prices increased 1% from April. The inflationary pressures were broad: Energy prices rose nearly 4% from the prior month while airfares vaulted 12.6%. Housing costs, which make up over 40% of the index, rose a strong 0.8% from the month before. The data put additional pressure on the US Federal Reserve to tighten policy at a faster pace. In the report’s wake, futures markets priced in a terminal federal funds rate of 3.5%, a new high.

Upturn in US jobless claims flashes warning sign
Since bottoming at 166,000 in mid-March, weekly US initial jobless claims have trended higher, with the most recent print coming in at 229,000, above the pre-pandemic 2019 average of 218,000. Economists use the claims data as an early recession warning since, historically, once the number of claims bottoms out, recessions tend to follow within nine to eighteen months. Lately, the waters have been muddied. However, despite the uptick in initial claims, continuing claims continue to trend lower. Even so, the data bears scrutiny. As stated above, we see the risk of a recession in 2022 as very low, but we expect to see signs of a normal recession in late 2023 or 2024.



ECB opens door to half-point rate hike in September
While the European Central Bank did not raise rates at its meeting on Thursday, it said it intends to raise rates 25 basis points in July with the potential for a 50 basis point hike in September. The rate hikes would be the first since 2011. The bank’s statement said that gradual but sustained hikes after September will be appropriate. The ECB also announced that its asset purchase program will end on July 1st.



Exports from China surged nearly 17% in May as COVID restrictions were eased, potentially moderating some of the supply chain bottlenecks that have contributed to global inflation. We expect the Chinese economy to improve in the second half of 2022.



In the mind of Lexus Whitmee—Mike Tsuboi’s assistant here at Dream Harbour—there are no problems, only solutions.

This is just part of what makes her a perfect fit for our team, living out one of our key values: There is always a solution. This, and our belief that clients should always understand what they are invested in—and why—make Lexus’ empathy shine both when at work and in her personal life.

“It is your money. It is your retirement. It is fair for you to be concerned about it. And that’s the bottom line of why I like to work at Dream Harbour: Here your dreams really are safe.”

Read more about Lexus’ journey from LA to Dream Harbour, here.











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