Bi-Weekly Letter: A Perspective on the 2022 Financial Markets

June 03, 2022 | Warren Andrukow


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Global markets have experienced a modest recovery in recent weeks, which has been met with a collective sigh of relief by investors. It is hard to point to a particular catalyst, but a growing view that inflation, while still very elevated, may be close to peaking could be partly responsible. The easing of virus-related restrictions in China also fueled some optimism that the worst of some of the global supply chain disruptions may be behind us. Closer to home, there have been some noticeable developments in recent weeks. We delve into this more below.

The Bank of Canada delivered another 0.5% rate increase over the past week, after having raised its policy rate by the same amount nearly two months ago. This was in-line with expectations. More surprising were the comments made by policymakers who expressed increasing concern about the state of inflation and the risk it could become more entrenched in the expectations of consumers, households, and businesses. They indicated they will act “more forcefully” if needed. When pressed to explain exactly what that meant, policymakers indicated that rates need to go higher than they initially thought, and this could involve either rate hikes of greater magnitudes than what we have witnessed thus far, or a longer tightening cycle in duration. Finally, they acknowledged that while they will try to do “what is best for Canadians” with respect to economic growth, the Bank’s inflation mandate will take precedence. In other words, slower growth is a cost they are willing to incur if it can ultimately bring inflation back down towards its longer-term target.

Meanwhile, the Canadian banks reported second quarter results within the past few weeks. Overall, they were solid, suggesting the recent operating backdrop remained healthy. The results were highlighted by reasonably strong consumer and commercial loan growth. The banks released some of their provisions, or capital buffers, they had set aside in recent years to cushion against any loan losses. This reflects a relatively benign environment for credit. Some banks raised their dividends in a sign of confidence in their businesses and capital positions.

It’s worth remembering these results were for the quarter that ended in April. This period was largely before some of the more forceful actions were taken by the Bank of Canada and U.S. Federal Reserve. Given the inflationary backdrop, rapidly tightening financial conditions, and the multitude of other issues the world is having to deal with, the management teams at the Canadian banks acknowledged they are preparing for a more challenging environment to emerge in the months that lie ahead. They expect economic growth to decelerate, with interest rate sensitive areas like housing to be particularly impacted, leading to lower growth in residential mortgage demand, among other things. But, generally speaking, they believe the North American economy is starting from a relatively good position and appeared confident that their businesses can navigate through a period of heightened uncertainty.

It is clear that central banks remain committed to their aggressive monetary tightening plans. It may take a meaningful and sustained fall in the inflation rate to convince them that longer-term inflation risks have subsided. We are hopeful that kind of a change in trend – from rising to falling inflation – could appear in the second half of the year. In the meantime, we remain patient and prepared for the ongoing level of volatility to continue.

Market Decline and Recovery Results

The peak-to-trough numbers for the COVID-19 market decline and subsequent recovery are provided in the table below, as of today’s closing prices.