Global markets have been under notable pressure in recent days. The trigger was a recent inflation report that has resulted in the U.S. central bank tightening financial conditions more than planned and likely paving the way for similar actions here at home.

 

The most recent U.S. inflation reading for the month of May came in at 8.6%, 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 markets 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 too was 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.

 

This week bond yields rose significantly, which usually points to further interest rate increases. In fact, it is possible we will see a full percentage point higher than most economists would have thought at the start of the year. 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 will ironically be a positive development and a sign that policy makers are effectively reining in pricing pressures in some parts of the economy.

 

We have been preparing our portfolios for a wide range of economic outcomes this past year. Everything from shortening duration in our fixed income holdings to re-evaluating positions across all equity markets. You will have seen significant activity as we rebalance back to investment policy targets, an activity aimed at reducing some of the volatility that markets are presenting at the moment. Episodes like this can feel pretty uncomfortable but it is important to note that we will make use of this period, taking the opportunity to add into existing holdings or build new ones.

As always, we would be happy to hear from you and we would encourage any questions or concerns that you would like addressed.

 

Regards,

 

Livingston Wealth Management Group