A few topics our newsletter touches on this month:
- Our Thoughts: Central Banks take Centre Stage
- Spousal Loan Interest Deadline June 30th for 1% Prescribed Rate
- Other Links: Global Insight, RBC Economics & More
We hope everyone is safe and has had power restored following the derecho storms last week, please do not hesitate to reach out if you need support or have any questions about your portfolio.
Our Thoughts: Central Banks take Centre Stage
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.
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.
Meanwhile, the Canadian banks reported second quarter results within the past few weeks. Overall, they were solid, suggesting the recent operating backdrop remained healthy. Some of the 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 - 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. 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.
On the US equity side, last week marked the first weekly gain for the S&P 500 (essentially flat on the month) following seven consecutive weeks of losses. The lengthy drawdown has primarily been driven by multiple contraction instead of negative earnings as the S&P 500 has fallen from its January peak while 2022 and 2023 Earnings per Share (EPS) estimates have been revised higher over the same period (source: JPMorgan).
On both sides of the border it is clear 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.
Spousal Loan Interest June 30th Deadline for 1% Prescribed Rate:
Clients who could benefit from making family loans for income splitting have until June 30th to lock in a 1% prescribed interest rate. If you are interested in learning more about this type of strategy, or reviewing your financial plan, please reach out to our team to book a call.
By the numbers (May): The TSX was up 0.1% while S&P 500 was up 0.2% (down 1.5% in Canadian dollars). The Europe, Australia & Far East index (EAFE) was down 1.4%, while the Emerging Markets index was down 1.5%. The Canadian bond universe was down 0.1%.
Interesting Listening/Reading
- Disruptors (Season 4) - A dynamic ~30 min RBC podcast co-hosted by John Stackhouse and Trinh Theresa Do about reimagining Canada’s economy in a time of unprecedented change.
- Reinventing Innovation: How Canada Can Prosper in Turbulent Times
- The 10-Minute Take: A New Reality for Canada’s Hot Housing Market
- Rock On: Blockchain’s Promise to Empower Musicians
- The 10-Minute Take: Is Canada Poised for a Cashless Future?
- The Climate Conversations: How Indigenous Leadership Can Drive Canada’s Energy Transition
- To check out our Global Insight Monthly for May find the link here
- RBC Economics “Forward Guidance: Our Weekly Preview”. This week touches on rate hikes and GDP forecast.
Reminder: Please let us know if any of your personal information has changed including your address, banking information, contact information and employment details.
Summer is a great time to review you long-term goals and retirement plans – give us a call anytime to book a consultation.
Mark, Sarah, Peter, Corinne & Nathalie
Gallivan Wealth Management Team
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