Below is a summary of some of the relevant news items from the Capital Markets and the Economy from the past week extracted from RBC Global Insights and FactSet Research.

 

Markets

Market scorecard as of close on Friday June 3, 2022.

Equity Indices	Level	1 week	YTD	52-week
S&P/TSX Composite	20,791	0.2%	-2.0%	3.8%
S&P 500	4,109	-1.2%	-13.8%	-2.9%
NASDAQ	12,013	-1.0%	-23.2%	-13.0%
Euro Stoxx 50	3,784	-0.7%	-12.0%	5.5%
Hang Seng	21,082	1.9%	-9.9%	-24.8%

Source: Bloomberg, RBC Wealth Management

• TSX closed lower in Friday afternoon trading, near worst levels. Most sectors down, tech, health care, consumer discretionary, materials and industrials the laggards with staples and energy the only two in positive territory. Canadian equities eked a 0.2% weekly gain.

• US equities finished lower in fairly quiet Friday trading, oscillating in the same trading range for much of the session. Major indices logged weekly declines after notching big gains in the prior week; S&P now down eight of past nine weeks.

• Market seemed to be in good-news-is-bad-news mode following a somewhat stronger nonfarm payrolls print. Similar dynamic played out earlier this week with the ISM manufacturing upside. However, that report also featured an elevated inflation component while wage growth was softer than expected in the employment data. Employment report drove another round of upside pressure on yields as peak Fed narrative comes under further scrutiny following the pushback against a September "pause" earlier this week.

Excerpt from Global Insight Weekly, RBC Global Portfolio Advisory Committee (June 2, 2022):

• With healthy corporate balance sheets, ongoing strength in employment and wage growth, and households in solid financial shape with a sizable amount of excess savings that can tapped into to smooth spending, we believe the outlook for the largest components of the U.S. economy—personal consumption and business investment—is likely to remain adequately robust to sustain the expansion over the coming quarters.

• Our expectation for slower, but still positive, economic growth suggests that, despite a moderating growth rate, earnings are likely to be higher 12 months from now. Because the direction of stock markets typically aligns with profit trends (beyond the near term), a further expansion in earnings in coming quarters should provide some degree of fundamental support for share prices.

• We think the bottom line is that risk-reward for equities and bonds look considerably more attractive than even a few months ago. This is markedly the case for riskier corporate credit such as high-yield bonds, whose volatility-adjusted expected return potential is arguably competitive with equities.

 

Economy

Canada

• Inflation continues to run hot, with Canada’s Consumer Price Index rising 6.8% y/y in April, marking the fastest pace in 30 years. Notably, groceries and gasoline climbed 9.7% and 36.3%, respectively, further increasing the pinch on the consumer’s wallet. In a continued effort by the Bank of Canada (BoC) to fight what feels like ever-weakening purchasing power, interest rates were hiked another 50 basis points (bps) on Wednesday.

U.S. 

• Recent commentary from major U.S. retailers including Walmart, Gap, and Target suggests inflation in goods prices may have hurt demand. Overall retail inventories grew by $45 billion in the latest quarter, up 26% from a year ago. But as consumers pivot from spending on goods to services, this glut of merchandise may prompt summer discounts and take the heat off inflation.

Further Afield

• Energy prices have also been a major driver of inflation this quarter. Oil rallied to almost $120 per barrel at the start of the week after European leaders imposed an embargo on two-thirds of the oil imported from Russia. In response, OPEC raised its output target by 648,000 barrels/day in both July and August after pressure from oil-consuming nations.

• In the face of higher inflation, the European Central Bank (ECB) is preparing to lift interest rates for the first time in more than a decade and the upcoming June policy meeting will be closely watched by the market.

• Japan’s economic rebound has come under pressure as factory output fell more than the consensus expected, partly due to COVID-19 lockdowns in China that have disrupted supply chains. According to Japan’s Ministry of Economy, Trade and Industry, production in April dropped 1.3% m/m, with reduced output of memory chips, digging equipment, and cars among the items with the largest declines.

 

Notes About Companies in Model Portfolio

• The Big Six Canadian banks reported Q2 earnings that beat consensus expectations, supported by rising interest rates, solid loan growth, and benign credit risks. On the interest rate front, aggressive monetary measures from global central banks enabled the entire group to benefit from margin expansion. Loan growth was also solid, growing 3.5% sequentially, driven by strength in commercial lending and offset by some softness in mortgage originations.

• • Credit provisions were the star of the show, in our opinion, as all banks with the exception of one opted to release reserves back into earnings, citing low credit risk conditions and healthy capital levels.

  • To top things off, the majority of the banks announced dividend increases with an average hike of roughly 4%. All else equal, this was a solid showing for the Canadian banks, in our view, and RBC Capital Markets is still forecasting mid-single-digit earnings growth through 2023. This in conjunction with an average dividend yield of 4% makes for a solid total-return profile, in our opinion.

 

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I appreciate the opportunity to serve you and look forward to continuing to help you accomplish your long-term financial goals.

 

Regards,

Shiuman