Both equity and fixed-income markets allowed investors to take a breath during July, ending the month on a positive note. Both the US Federal Reserve (Fed) and the Bank of Canada (BoC) continued hiking overnight lending rates, with the BoC delivering a 1% rate hike. The largest since 1998, this increase is intended to ‘front-load’ rate hikes now in order to stave off larger hikes in the future. Mid- to long-bond yields fell in response as the market grapples with a lower and longer-term growth outlook. The prospect of a slower economy was outweighed by the effects of a lower discount rate for stocks, which gained over the month despite the prospect of lowered earnings.

Below are total returns in Canadian dollar terms for July, and year-to-date respectively:

In North American markets, the focus on the Russian invasion of Ukraine shifted to inflation and central banks, as energy and other commodity prices dropped over the month. After dropping nearly 6.8% ($7/bbl) to around $98/bbl, oil prices are back to near pre-invasion levels, while gasoline prices continue to fall in tandem (down around 4%). Agricultural commodities also continued to drop over the month, and with an agreement in place to let Ukraine export grain and other agricultural products, it is hoped that prices will continue to stabilize. Falling commodity prices should eventually show up in consumer price levels, although some inputs such as oil and gasoline will have a more immediate impact compared to items like wheat or copper.

While we are seeing some moderation of input prices, the US CPI posted another increase for June, rising 9.1% on a yearly basis, with Canada’s CPI not far behind at 8.1%. These figures were less of a concern for markets than central bank language about the rate hikes during the month. The BoC somewhat surprised markets by raising rates 1%, but mid- to long-bond yields over the month actually fell. Market expectations of a slowing economy over the next year from rising rates continue to weigh on yields, as the yield curve inverted further and the traditionally quoted two-year- to 10-year spread dropped to -47bps –the lowest since 1990. The language coming out of the Fed and BoC continues to focus on bringing inflation under control. And in the case of the Fed, it will do so even if it means triggering a mild recession. 

A ‘technical recession’ is most commonly defined as two consecutive quarters of negative GDP growth, which is what the US entered in Q2 2022, as real GDP continues to contract by -0.9% on a quarterly basis. The National Bureau of Economics essentially must declare a recession to make it official, but that usually happens after the fact, or once a recession is well underway. They take a number of other statistics into account, such as employment, consumption and other broad measures of the economy. Looking at these figures paints a different picture; for example, the US unemployment rate is still at 3.6%, with just under 11 million job openings, and consumer spending growing at a robust 8.4% on a yearly basis. Canada on the other hand, is still on track to avoid a contraction, (and thus a recession) as monthly real GDP growth for May came in flat.

As government bond yields fell throughout the month, the Canadian universe bond total return index finally saw a positive month, rising 3.9% by the end of July. While the fixed-income holdings within the ATBIM funds also benefited on an absolute basis from falling yields, a shorter duration coupled with an overweight to corporate bonds saw the funds underperform the bond universe by roughly 1.5%.²

Equities in general were also benefactors of a combination of lower government bonds yields, and a possible slowdown in growth (since a slowdown would likely lead to lower inflation and a shift to monetary easing) as most developed market indexes gained over the month. Despite earnings warnings from some retailers such as Walmart and a miss in earnings from Google, the S&P 500 gained 8.7% in Canadian dollar terms, with the US component of the funds slightly behind, rising 7.8%.³ The international and Canadian mandates did well on an absolute and relative basis, as both markets gained over the period, despite some weakness in Canada due to falling energy prices.