Michael Watkins
June 23, 2023
Weekly Market Update
Looks like it’s back to volatility I’m afraid, as Central Banks have been squarely in the spotlight this week. In testimony before US Congress, US Federal Reserve Board (Fed) Chair Jerome Powell noted that more interest-rate increases are likely this year. Powell said most officials believe the central bank will need to lift rates even further, given persistent inflationary pressures. Powell believes those rate hikes will come relatively slower than last year.
- Fed Chair Jerome Powell appeared before U.S. lawmakers for his Semi-Annual Monetary Policy Report. The Fed kept the target range of its federal funds rate at 5.00%-5.25% at its meeting last week, marking the first meeting without raising rates since the beginning of 2022.
- Fed officials strongly believe more rate increases will be necessary this year, largely due to still elevated inflation. The Fed believes more rate increases may help tame inflation and could slow economic activity. Inflation in the US is well above the Fed’s 2% target. At its last meeting, the Fed estimated rates could reach 5.6% this year.
- Many lawmakers questioned Powell on the Fed’s bank oversight. Powell indicated the Fed has not voted on any changes to bank rules but is considering a few tweaks.
- The Fed is not alone in its efforts to tame inflation. Yesterday, the Bank of England raised its policy interest rate by a larger-than-expected 50 basis points to 5.00%. The Swiss National Bank also raised its key interest rate yesterday
Higher interest rates worldwide appear here to stay, likely going even higher this year. The Bank of Canada was one of the first major banks to pause interest rates but reversed course this month with persistently elevated inflation and strong economic growth.
In other economic news, the Canadian dollar surpassed 1.32 per US dollar in mid-June, driven by various factors. US dollar weakness and a more aggressive monetary policy outlook by the Bank of Canada (BoC) contributed to the currency's appreciation.
- In a surprising move, the BoC raised its key interest rate by 25 basis points in its last meeting, signaling a return to its tightening cycle. The shift highlights the central bank's belief that borrowing costs were not as restrictive as initially anticipated.
- Higher domestic interest rates tend to attract currency investment from international companies. As such, the Canadian dollar often rises when the BoC raises interest rates. Conversely, when inflation rises compared to another region, currency value typically declines.
- Signs of a softer US labour market and the U.S. Federal Reserve Board’s (Fed) decision to pause interest-rate increases at its last meeting may also have contributed to the Canadian dollar’s strength. In currency markets, the outlook for aggressive Fed policy moves was reduced
Statistics Canada reported that Canadian retail sales increased in April, the first increase in three months. The Canadian consumer’s relative resilience despite tighter financial conditions is helping prop up the Canadian economy. Undoubtedly, the Bank of Canada (BoC) is closely monitoring the impact its return to raising interest rates will have on Canadian households and businesses.
- Retail sales in Canada rose by 1.1% in April over March, which marked its first monthly increase since January 2023. The rise topped the 0.4% increase economists estimated in a Bloomberg survey. In March, retail sales dropped by 1.5%.
- Stronger sales over the month were recorded in several key categories. Sales advanced at general merchandise stores, clothing and accessories retailers, and at motor vehicle and parts dealers.
- Canada’s economy expanded at a stronger-than-expected pace in the first quarter of 2023, largely due to stronger household spending. The Canadian consumer has proven relatively resilient despite high inflation and rising interest rates. A strong labour market combined with high savings rate has largely offset the impact of tighter financial conditions.
The health of the Canadian consumer reveals the relative strength of Canada’s economy, whereas some economies globally have not necessarily been as fortunate. While we often speak about the benefits of investing globally, it is also important to invest in Canada, where there are many successful companies. With respect to consumer stocks, the consumer staples and consumer discretionary sectors have provided positive returns this year to the end of May despite volatile conditions.
Demographic challenges, including declining birth rates and an aging workforce, are fueling Canada’s immigration strategy. According to the Economist, the largest 15 countries, as measured by gross domestic product, have a fertility rate below the replacement rate of 2.1. As industrialized nations face population shifts, Canada is taking a proactive approach to support economic growth.
- Statistics Canada announced there were 40 million Canadians as of June 16, 2023. In 2022, the number of Canadians increased by 1,050,110.
- The challenges of an aging population, including reduced tax revenue, are unfolding across the globe. France faced public opposition when proposing raising retirement by two years to 64.
- Germany’s working population could drop by five million by the end of the decade, exacerbating strains in its industrial-heavy economy.
- Japan, traditionally resistant to immigration, is grappling with labour shortages and less activity in rural towns.
- Larger Canadian cities have more pull. As of July 1, 2022, newcomers accounted for more than 600,000 people in one year in larger cities, versus 21,000 in smaller communities.
- Canada's immigration strategy positions it to mitigate issues from an aging population by bolstering its workforce, sustaining economic growth, and fostering innovation.
As always, give us a call if you have any questions, or if you’d like to book a portfolio review.
Source: CIBC Morning Market Brief