Canada
Resilient economic and job growth continues to keep the Bank of Canada (BoC) on its toes as it tries to gauge the need for more monetary policy tightening to ensure inflation remains on a downward trend. While inflation remains too elevated at 5% given the BoC’s target of 2%, moderating wage pressure and increasing signs that consumer demand may be petering out suggest that interest rate increases are at or nearing an end. Recent U.S. and Swiss banking troubles are souring the positive tone towards equities that kicked off the year, with markets becoming increasingly cautious given the negative outlooks of companies across various sectors. With a recession likely in the months ahead, bond markets have rallied, providing an important bright spot for weary investors.
United States
The U.S. Federal Reserve’s (Fed’s) laser focus on bringing down decades-high inflation continued unabated, as the central bank raised its benchmark rate for a ninth time in a row in March, despite concerns that its increasingly hawkish monetary policy was causing substantial liquidity challenges in the banking system. The collapse of Silicon Valley Bank and Signature Bank sent a ripple of fear through markets. But the swift response of the Fed, the U.S. Treasury Department, regulators and other banks worked to shore up confidence in the sector and allayed worries that a broader crisis might unfold. While the economy and employment continued to defy the odds and show considerable strength, leading indicators suggest that the country is likely headed into recession in the second or third quarter of this year.
Europe
Despite fears that the region would be devastated by the loss of oil and natural gas supplies from Russia, Europe managed to navigate the worst months of winter and find new sources of supply. While the region continues to enjoy a resurgence in travel and tourism as COVID-19 worries fade, the region continues to adjust to sharply higher interest rates as central banks try to combat double-digit inflation. Offsetting the cloudier outlook and buoying financial markets are easing supply constraints, which allowed companies to work through order backlogs built during the pandemic. Banks’ balance-sheet strength, as well as the firm backing of the European Central Bank and key governments, should prevent another Credit Suisse-type bank collapse.
Emerging Markets
Emerging Markets (EM) rebounded from a poor 2022 to start the year, as optimism rose around the outlook for the global economy. China’s lifting of its stringent COVID-19 restrictions and continued strength in the U.S. economy buoyed sentiment. But equity markets quickly surrendered their gains over worries that the Fed would need to rely on further interest rate hikes to quell persistent inflation. Despite the worries, Chinese markets outperformed thanks to surging domestic consumption, while India fell back on concerns that rising rates would dampen global growth. An important trend favouring EM stocks in the months ahead is the expected depreciation of the U.S. dollar, which is strongly associated with EM outperformance.
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