3rd Quarter: Looking Robust
At the close of business last Friday, global equities fell further on the week—an occurrence that marked the worst first half of a year for global equities since 1970. As equities extended their slide, US Treasuries rallied, sending the yield on the 10-year note to 2.87% from 3.09% a week ago. The price of a barrel of West Texas Intermediate crude oil rose $2.25 to $107.75. Volatility, as measured by the Cboe Volatility Index (VIX), was little changed at 28.4.
Inflation, Growth & Equities
Persistent inflation and a faster-than-expected rise in interest rates by our central banks in North America have marked the first six months of this year. Markets have clearly priced in a recession, which our data shows as highly unlikely in 2022. This has created a generational buying opportunity for your fund managers. Moderating inflation expectations on the back of the slide in commodity prices has been helpful in forming a bottom, but it is important to keep in mind that markets are looking for inflation relief without a deep sacrifice to economic and corporate earnings growth. Fixed-income investors have priced the US Federal Reserve funds rate to peak at 3.6% by March 2023 from its current level of 1.625%. Rate cuts are now expected to begin in 2023. A sustained upturn in the equity market will probably require a dovish turn in the central banks’ message, a bottom in the economic outlook, or both.
We have noted that in the past couple of months, your fund managers have been very active buyers of stock in the financial and technology sectors. They tell us that many of the stocks they purchased were trading well below their bear case valuations, making them very attractive buys.
Every summer in the northern hemisphere, global central bankers gather first in Sintra, Portugal for a forum sponsored by the European Central Bank, then toward the end of the season in Jackson Hole, Wyoming for a meeting organised by the Federal Reserve Bank of Kansas City. At Sintra this week, central bankers made clear that a return to the inflation regime in place most of the decade preceding the pandemic is unlikely. European Central Bank President Christine Lagarde said that forces have been unleashed “that are going to change the landscape within which we operate,” adding that she does not think we are going back to a low-inflation environment because of factors such as de-globalization and “greenflation” (the costs associated with a green energy transition).
CANADIAN ECONOMIC NEWS
If you were flying this weekend, you probably experienced significant delays. Air Canada announced it will cut dozens of daily flights this summer amid soaring demand for travel at a rate well above expectations.
A recent report shows that home sales in Canada could fall by as much as 25% this year and remain low into 2023. The reason is higher interest rates resulting in higher borrowing costs and a more difficult stress test, especially for first-time home buyers.
US ECONOMIC NEWS
The International Monetary Fund forecasts that the US will not go into a recession in 2022 or in 2023. It sees the US economy expanding by 2.9% this year and 1.7% in 2023.
The Institute for Supply Management’s US manufacturing purchasing managers’ index declined to 53 in June from 56.1 in May as the new orders and employment subindices slipped. The data show that production bottlenecks appear to be resolving themselves at long last and a PMI number above 50 continues to show the US economy is expanding.
EUROPEAN ECONOMIC NEWS
Euro zone inflation reaches record high
Consumer prices in the euro zone rose 0.8% in June from May and 8.6% from a year ago (up from 8.1% in May), putting pressure on the ECB to tighten policy more aggressively than the 0.25% hike this month and a 0.5% one in September that the central bank has all but pre-announced. After Friday’s data, markets are now pricing in a half-point hike for July. Government subsidies for public transportation in the wake of the energy price spike helped bring the core rate of inflation down to 3.7% in June.
JAPAN, CHINA and EMERGING MARKETS ECONOMIC NEWS
With China’s economy reopening more fully after a series of COVID-related lockdowns, purchasing managers’ indices in the country rebounded strongly in June, moving from contractionary to expansionary readings, led by the services sector.
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