Market update

Another choppy week for Markets with some positive outcomes with TSX hitting a 4-week high this week and volatility continued to trend downwards (Volatility Index at lowest since April 22^nd).

Bank of Canada (BoC) raised rates on Wednesday according to expectations and moved the key interest rate 0.50% to 1.50%. BoC will also continue quantitative tightening.

While markets were down very slightly on Wednesday, investors are clearly more encouraged by the BoC’s efforts to continue their fight to cool inflation.

Canadian manufacturing activity expanded at a faster pace in May as firms raised output to meet strong demand for their goods.

U.S. economy saw further strength in the labour market. Weekly jobless claims fell by 11,000 to total 200,000 versus 211,000 expected, indicating the lowest layoffs on record and the strongest labor market in decades. The unemployment rate remained unchanged in May at 3.6%, the lowest level since February of 2020 and added 390,000 jobs in May, above the consensus of 325,000.

U.K. manufacturing expanded at its weakest rate in 16 months in May as the country’s cost of living crisis began to bite consumer goods producers.

Euro zone inflation hit a record high of 8.1% in May, exceeding expectations for 7.7%, as price growth continued to increase, indicating that it is no longer just energy causing inflation.

China factory activity shrinks at a slower pace, but manufacturers are still impacted by weak external demand.

Gold remained firm throughout the week with support from slightly lower U.S. Treasury yields.

Oil prices jumped after EU leaders reached an agreement to ban 90% of Russian crude by the end of the year.

Weekly change: TSX: 0.2%; DOW: -1.0%; S&P 500: -1.2%; NASDAQ: -1%; GOLD: -0.2% WTI: 4.5%

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Bank of Canada Announcement Update written by Avery Shenfeld Link to article

This was yet another larger-than-normal hike, so to justify it, Macklem’s team couldn’t mince words about their concern over inflationary pressures.

Global growth indicators might be slowing, but Canada is described as “strong” and expected to be “solid” in the second quarter, leaving it in “excess demand”, the Bank’s term for overheating.

Other than when rates are near zero or at a clear turning point, Canada’s central bankers aren’t inclined to give detailed forward guidance. Our call for another 50-basis point hike in July would fit the definition for the forceful measures it has talked about.

With another half point hike likely for July, and stern language from the Bank of Canada, we expect more of May’s flight-to-safety rally in bonds to be reversed over the summer if equities can manage to regulate.

If and when we see evidence of tamer growth and inflation, a development to look for come this fall, we may start to see bond yields begin to lower.

 

MacroMemo - May 31 – June 13, 2022 written by Eric Lascelles Link to article

Signs of a Market Reversal - The stock market decline since the start of 2022 reflects a re-evaluation of what constitutes fair value for the tech sector and a decline in broader market valuations to more historically normal readings. Corporate earnings were still strong in the most recent reported quarter and analyst forecasts have not yet priced a significant hit to earnings in the future. All of this to say that RBC GAM are more subdued in investment risk-taking than in 2021, even as the market enthusiastically rebounded over the past week.

Easing inflation worries – With car prices soaring over the last two years, we are beginning to see them now decline as well as the housing market starting to cool. Inflation expectations have finally turned lower, in large part because so much monetary tightening is now priced in. Expectations can be self-fulfilling, so this is a useful development. Food, laundry/cleaning and energy costs continue to rise.

Recession Risk Musings: a cluster of signals being watched

U.S. monetary tightening cycles are associated with a recession, despite 2020 being event driven and 2008-2009 more structural and less related to monetary tightening. In many cases, recessions are the result of particular sectors overheating, and it just so happens that central banks also tend to be tightening when things are overheating.

Losing the peace dividend refers to the economic and societal benefits accrued after the Cold War ended. Most visibly, countries were able to reallocate military spending toward other areas and inherently economies benefited.

China has struggled with COVID-19 significantly and in recent months remained committed to its zero-tolerance policy. However, after many months, Shanghai appears to be under control after a long lockdown and is now re-opening.

 

Global Insights

China says it conducted 'readiness patrol' in the seas and airspace around Taiwan in recent days, saying it was a necessary action to respond to "collusion" between Washington and Taipei.

Reuters

Australia, Britain, Canada and the United States have imposed outright bans on Russian oil purchases, while Group of Seven (G7) nations, including Japan, committed to ban or phase out imports of Russian oil.

Reuters

One of the biggest real estate developers in Toronto says home prices in the city could drop as much as 20 per cent. Longer-term, though, sustained demand from immigration will prevent larger declines that could destabilize the market more broadly.

Bloomberg

U.S. employers hired more workers than expected in May and maintained a fairly strong pace of wage increases, signs of labor market strength that will keep the Federal Reserve on an aggressive monetary policy tightening path to cool demand.

Reuters

CEO Elon Musk has a "super bad feeling" about the economy and needs to cut about 10% of staff at the electric carmaker, he said in an email to executives seen by Reuters.

Reuters

 

 

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