In our economic update this week, we discuss inflation, the tightening of financial conditions, and the odds of a recession. Continuing with this focus, we also have two links from the team at RBC Global Asset Management:

• New developments around inflation, rate hikes, recession risk and more
• Volatility persists – Q&A with Stu Kedwell

This week we are also sharing two important articles from RBC Wealth Management. The first is an article that was originally published in The Globe and Mail, and features David Agnew, RBC Wealth Management’s CEO, discussing the importance of including health-care planning as part of long-term financial goals, Health care planning is part of investment planning in pandemic era. The second article focuses on financial literacy, and encourages you to Improve your financial management skills at every life stage.

As always, we end our weekly newsletter with a few good news stories from in and around our community.

Happy Father’s Day!

Wishing a very Happy Father’s Day to all of the dads, stepdads, and father figures!

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Economic update

Global markets have been under notable pressure in recent days. The trigger was a recent inflation report that has investors believing central banks will have to tighten financial conditions more than planned, thereby increasing the odds of a future recession. We share our perspectives below.

Rising inflation

The most recent U.S. inflation reading for the month of May came in at 8.6 percent, representing the highest inflation rate in over 40 years. It indicates pricing pressures are not only elevated, but still rising. That stands in contrast to what some investors were hoping for - signs that inflation may have already peaked and was on the verge of easing. Core inflation, which excludes food and energy, did show some moderation, but it was also higher than expected. Moreover, the inflationary pressures that began well over a year ago, in areas like vehicles and household goods, have broadened to other categories such as public transportation and rent. Some of these areas have historically proven to be more persistent and slow to normalize, suggesting pricing pressures are at risk of being uncomfortably high even after inflation peaks and begins to moderate, which remains a possibility for the second half of the year.

Following the inflation release, bond yields rose meaningfully and markets now believe the U.S. Federal Reserve’s “Federal Funds Rate” will reach 3.4 percent at year-end, versus the 2.4 percent it was expecting just a few months ago. It’s not necessarily that much different in Canada. In other words, markets expect central banks to raise rates even more forcefully than what they have communicated thus far.

Tightening financial conditions

The predominant concern is that higher rates will lead to tight financial conditions. This is often characterized by a material change in the availability and access to credit that causes consumers and businesses to re-evaluate their spending, hiring, and capital expenditure plans. Historically, these kinds of conditions have resulted in recessions. Not surprisingly, recessions, or even the anticipation of them, have driven some of the weaker periods of stock market performance. On the other hand, some of the strongest periods of market performance have traditionally begun amidst periods of economic hardship, as markets begin to anticipate the potential for an economic and earnings recovery well ahead of one actually occurring.

The odds of a recession over the next few years have undoubtedly risen, and may continue to increase through the second half of the year given the tightening of financial conditions. There are early signs of a slowing in some of the more interest rate sensitive sectors of the North American economy, such as housing. In some ways, this comes as a relief to many who have been concerned, particularly in Canada, about the seemingly endless rise of house prices and the significant decline in affordability. A slowing in the domestic housing market, should it occur, may ironically be a positive development and a sign that policy makers are effectively reining in pricing pressures in some parts of the economy. Elsewhere, some of the indicators in our U.S. recession scorecard framework are also moving in a direction that suggest the odds of a recession are rising, but not necessarily imminent.

We have been preparing our portfolios for a wide range of economic outcomes by undertaking regular portfolio reviews, re-evaluating positions across all asset classes, and considering rebalances within our portfolios to achieve the targets in our investment plans. Moreover, episodes of volatility can typically be characterized by an indiscriminate amount of selling across all assets, regardless of quality. This can present investors with opportunities to add to existing holdings or build new ones. These are some of the actions we continue to explore in our portfolios.

New developments around inflation, rate hikes, recession risk and more In this video, RBC Global Asset Management’s Chief Economist, Eric Lascelles, reviews how the latest inflation readings are impacting the risk of recession. While some pressures are cooling, he observes that prices are increasing for more and more products. As central banks respond with faster rate hikes, he explores how soon we might expect rate cuts to begin. These headwinds are reflected in his downgraded forecast for economic growth. Watch the video online: New developments around inflation, rate hikes, recession risk and more

 

Volatility persists – Q&A with Stu Kedwell

Market volatility has persisted through the first five months of the year. Investors are clearly focused on the ongoing concerns around inflation, rising rates and the risk of recession. Stu Kedwell, Co-Head of North American Equities with RBC Dominion Securities, recently shared his thoughts on the state of markets.

Read the Q&A online: Volatility persists – Q&A with Stu Kedwell

Health care planning is part of investment planning in pandemic era David Agnew discusses the importance of including health-care planning as part of long-term financial goals. “COVID has been a wake-up call for all Canadians to prepare or update their financial affairs, but also beyond the pandemic, people are now living longer,“ Mr. Agnew said in an interview. “Clients are much more concerned about what health issues they could be facing, as well as who will take care of them if they can no longer be at home." Read the full article online: Health care planning is part of investment planning in pandemic era

 

Improve your financial management skills at every life stage

Many of us may have a tendency to isolate education as something that's primarily limited to the formal schooling years. But with financial education, the reality is that it can and should be an ongoing process, and it's never too early or too late to start.

Find out how an ongoing approach to financial learning can help you and your family, from early saving to preserving assets to fund your retirement.

Read the article online: Improve your financial management skills at every life stage

Community Corner Each week, we like to share a few good news stories from in and around the community. We hope that they brighten your day! Guelph Black Heritage Society launches Dream Makers youth program The Elliott Community shows its Pride Gallery: Hot wheels hit Carden Street Elora Soap Box Derby ready to race on July 1 Elora Community Theatre celebrates 50 years this fall 47th annual Georgetown Highland Games celebrated Food trucks at Milton Fairgrounds for Father’s Day event

 

As always, we are available to connect with you personally. Please don’t hesitate to contact us at 519-822-2024 or elineskyschuett@rbc.com.