Lots to unpack today, so let’s get right to it.

Statisticians threw the Bank of Canada a slight curve ball ahead of tomorrow's policy decision, with growth in quarter one coming in at 3.1%, well below the consensus expectation and what was suggested by previously released industry data. That said, the growth rate in quarter one was still in line with the Bank's April MPR forecast, and the 0.7% monthly increase for March, combined with an advance estimate for a 0.2% gain in April, will leave quarter two GDP tracking not too far below the Bank's 6% forecast for that quarter. Moreover, with inflation continuing to surprise on the upside and the unemployment rate at historic lows, it still appears likely that policymakers will deliver two more 50bp hikes (tomorrow and at the July meeting), before slowing down and seeing how the economy is responding to those higher rates. The details of the first quarter’s GDP were a little stronger than the headline, with final domestic demand up by a solid 4.8%. Consumer spending accelerated modestly relative to quarter four, despite some services being closed early in the quarter. However, another large positive contribution from residential investment clearly won't be repeated with that area of the economy already showing signs of slowing thanks to higher interest rates.

Moving on to the States, investors returning from the Memorial Day long-weekend face higher UST yields as hawkish language from FOMC member Waller combines with rising oil prices. The combination has proved to remind the market that inflationary pressures are likely to remain substantive in upcoming months. Headline consumer confidence has not corrected as significantly as the Michigan sentiment. As a consequence, this points toward the risks of a sharper confidence correction than expected. A more aggressive slide in headline confidence, a move which risks combining with a further slide in expectations, points toward building concerns as regards the macro outlook, such presumptions chime with the concerns raised by Bostic last week. Hawks such as Waller, (second in the hawk rankings behind Bullard), continue to call for a series of rate hikes throughout the year in an effort to rein stubbornly high inflation. It is against this backdrop that Fed Chair Powell is set to meet with the President for the first time since May 12th. Treasury Secretary Yellen will also take part in a discussion on the state of the American and global economy. Ahead of the meeting, the President used a Wall Street Journal piece to detail that the President’s top economic priority (it is also a political priority ahead of the mid-terms) is to fight inflation. The President stated it is likely that the pace of job growth could slow from a monthly pace of 500,000 jobs to around 150,000 as a necessary result of the Fed's efforts to combat high inflation.

Across the pond, the European Union finally reached actual unity on an oil embargo at last. Hungary had long been seen as the primary holdout, they had appeared to be holding out for a degree of financial compensation as regards energy transition. However, such demands appear to have melted away. Broad EU unity comes as the block has agreed to a deal that will immediately cut two-thirds of Russian oil exports to the EU. The plans aim to reduce EU imports by 90% by the end of the year. The deal sees the EU being set to embargo seaborne Russian crude supplies only. Pipeline oil, integral to Hungary, Slovakia and the Czech Republic will be exempted from the embargo. The key question is how long will the ‘temporary’ exemption for pipeline oil last? The summit conclusions point toward the EU leaders looking to “revert to the issue . . . as soon as possible”.

In the United Kingdom, consumer credit may have exceeded £1.0bn in the month for a third straight month. Credit card borrowing increased by 11.6% year-over-year in April, this marks the fastest annual pace since November 2005. However, against the backdrop of plunging consumer confidence, we would be wary of credit gains being representative of consumers becoming involuntary borrowers, in order to maintain spending on necessities, rather than luxuries. A substantive slide mortgage approvals, 66.0k were approved in May marking the lowest outcome since June 2020. The continued slide reflects both the impact of higher mortgage rates and diminishing mortgage affordability. Although the UK Parliament is currently in recess, it returns next week, the probability of an impending no-confidence vote in the PM continues to grow. Should 54 Conservative MP’s write a letter suggesting they have lost confidence in the PM this will trigger a no-confidence vote. Currently, around 30 MP’s have publicly announced that they have put in a letter (e-mail). As the number of letters remains secret it is hard to materially determine the probability of an early vote. Nevertheless, there are rumors that the threshold has already been reached. However, some are speculating that the news is not being made public until after the long weekend, the Conservative party does not want to upstage the Queen’s Platinum Jubilee celebrations. Even if the 54 vote threshold is not met now, poor by-election results on the 23rd of June could prove to be another catalyst.

Asian markets are in a wait-and-see mode, closing mixed as China ended positive while Japan slipped with the banking sector. China's factory activity fell at a slower pace in May as COVID-19 curbs in major manufacturing hubs were relaxed, but doubts remain about economic growth in the second quarter. Japan’s industrial production slumped amid supply chain constraints, but retail sales rose following the easing of Covid restrictions. Consumer confidence data registered the strongest monthly gain in eleven months in May. However, an aggressive slide in industrial output, down 1.3% in April, underlines ongoing macro headwinds. The aggressive contraction in industrial production, a 0.2% slide was expected, underlines that domestic activity remains impacted due to supply concerns related to Ukraine and Chinese lock downs.

Oil prices are on course to register a sixth straight monthly gain; this marks the longest price uptrend in more than a decade. The combination of Chinese re-opening optimism allied to the EU finally agreeing to ban most Russian oil imports, at least those arriving by sea, looks set to support prices, maintaining upside inflationary influences.

Yesterdays educational talk from Kristen Yarker was well received by all that attended. The irony of giving a talk about eating habits while we all chowed down on charcuterie and wine was not lost on the presenter (obviously we need the help).

As always, give us a call if you have any questions, or if you’d like to get together for a review.

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