To my clients:

It was a down week for North American stock markets with the Canadian TSX finishing down 1.1%; the U.S. Dow Jones Index finishing down 2.3%; and the U.S. S&P 500 finishing down 3.2%.

Early update this week ahead of the Canada Day long weekend here in Canada, and U.S. Independence Day in the U.S.

This morning, the Federal Reserve’s preferred measure of inflation, the core “Personal Consumption Expenditure” index (Core PCE for short) declined for the 3rd consecutive month, and actually came in mildly better than expectations. That’s the good news. The bad news is that it remains uncomfortable high at 4.7%. Further, as the “core” measure, it doesn’t include food and energy costs which we all know are higher still (although here I’ll note that I’ve anecdotally observed modestly lower prices at the pump when filling up my own car the past few weeks). While the Core PCE Index is the Fed’s preferred measure, it’s somewhat paradoxically less focused on by the markets. Markets tend to focus on the much more widely followed Consumer Price Index (CPI) which is set to be released in two weeks’ time. The reason for this divergent focus is that the PCE data which the Fed prefers can be largely deduced from certain elements of the CPI data, and the CPI data comes out sooner than the PCE data (in other words, the CPI data “leads” the PCE data). Hopefully the next set of CPI data will show continued easing on the “core” measure and, perhaps, might also show easing on the headline measure too (which includes energy and food costs) if the anecdotal observations about my own fill-up costs is broadly representative.

But until inflation shows a significant and sustained slowing, the U.S. Fed will continue to aggressively raise rates. There is no disputing that this “hawkish” activity by the Fed will continue to be a headwind for markets. Further, considering these hawkish plans, the possibility of rate hikes unintentionally provoking a U.S. or global recession over the next year or two cannot be ruled out. However, neither can the possibility that slower economic growth and signs inflation has peaked will permit the Fed to back away from more aggressive tightening in early 2023, leaving the door open to a “soft landing” for the U.S. economy. As I said in my recent calls with clients, this is a very tricky time in markets. Further, and as I also said in my calls, even if the worst case scenario plays out, it is our belief that a mild recession has already been largely priced-in by markets. As always though, we will continue to monitor events closely.

That’s it for this week. Happy Canada Day!

Nick

Nick Scholte, CIM, FCSI

Senior Portfolio Manager

Scholte Wealth Management
RBC Dominion Securities Inc. │ Tel: 604.257.7569 │ Fax: 604.235.9950
3200-1055 West Georgia │ Vancouver, BC │ V6E 3P3
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