“April is the cruellest month.”
T.S. Eliot, The Waste Land
On May 1, meteorologist Dr. Doug Gillham wrote this for The Weather Network: “If you are someone who longs for consistent warm weather, April will just about always disappoint you. A temperature roller-coaster and parting shots from winter are typical of April, and this year was no exception.” Last month’s thermometer spent more time down in the dips than riding the peaks. Most of the country, from the Pacific coast to southern Quebec, suffered colder-than-normal temperatures.
The globe’s geopolitical situation seemed to echo the gloomy, grey skies Canadians are more than ready to trade for the warm winds of May. Back on February 24, Russia predicted its invasion of Ukraine would be successful in three days. Yet, here we are in the third month of its brutal aggression. Despite the Ukrainian people’s heroic resistance, barbarity and state-sanctioned cruelty continue to assault Ukraine with no end in sight.
In April, inflation steadily slogged upward to multi-decade highs, increasing the hawkishness of central banks. Both the Bank of Canada (BoC) and the U.S. Federal Reserve (the Fed) signalled they will aggressively raise interest rates for the rest of the year and beyond, firmly ending their “ultra-easy monetary policy.” Negative sentiment among market watchers worsened after a surprise contraction in U.S. GDP. Equity and bond markets spiralled downward as both asset classes adjusted to the new regime. Even the S&P/TSX, which offered a rare ray of sunshine at 3.8% growth in Q1, fell swiftly and has more than given back this year’s gains.
Periods when stocks and bonds perform poorly in tandem are infrequent but no less painful when they do occur.
Canada — Favourable tailwinds
The ongoing invasion of Ukraine and persistently higher inflation continue to dominate headlines. Canadians are facing higher prices for food, fuel and big-ticket items. The revival of business activity as pandemic restrictions lifted also led to significant growth in employment and spending spurred by pent-up retail demand.
March’s 6.7% inflation figure was the highest in over three decades. BoC Governor Tiff Macklem now estimates inflation will be 6% in the first half of 2022 and will remain elevated until it returns to its 2% target in 2024. In addition to using increasingly hawkish rhetoric, the BoC raised rates twice in the last two months. The latest increase was 50 basis points in mid-April. Our central bank is widely expected to repeat this move at its June 1 meeting in order to keep pushing up borrowing costs in its pursuit to tame inflation (or at least protect its reputation as an inflation-fighter).
Although most of the world’s economies are starting to slow down, Canada remained resilient. We benefitted from rising commodity prices and a reopening following COVID-19 restrictions that lingered later in Canada than in many other parts of the world. Growth has been stronger than anticipated, coming in at 1.1% in February and posting a flash reading of 0.5% in March. This points to an annualized 5.5% GDP growth for Q1 of 2022. Among the 20 sectors tracked by Statistics Canada, 16 posted increases – good news, but it also provides incentive for the BoC to make more aggressive rate hikes. A hike of 75 basis points has been rumoured for June, but the market anticipates a more moderate move of 50 basis points.
The Canadian bond yield curve shifted up with moderate steepening this month. The two-year government bond yield increased from 2.27% to 2.62%, and the 10-year government bond yield increased from 2.4% to 2.85%. This caused the spread between the two-year yield and 10-year yield to widen from 13 basis points to 22 basis points.
After a strong first quarter, the S&P/TSX surrendered its gains and fell 5.4% in April. The pullback was motivated by fears that aggressive rate hikes in Canada and the U.S. could negatively impact corporate profits and reduce the value of future cash flows for growth-oriented companies. Oil prices remained volatile: West Texas Intermediate traded between US$95 and about US$110 per barrel, ending the month at US$104.
United States — Inflation barometer rising
Out of the blue, the world’s largest economy contracted by an annualized rate of 1.4% for Q1. This negative growth rate marked an abrupt reversal after Q4 2021 when it turned in its best performance since 1984. The contraction was way off the Dow Jones estimate of a 1% gain for the quarter. Prices rose sharply in April, and inflation reached 8.5%. Private investment and government spending also fell precipitously. At the same time, imports increased thanks to retailers rebuilding their inventories. Defence spending plummeted 8.5%, causing the final GDP reading to fall by one-third. On the bright side, all-important consumer spending, which accounts for two-thirds of the U.S. GDP, was up 2.7% despite inflationary pressures. Flush with cash, U.S. households are forging ahead on their buying spree.
Even though the contraction was a surprise and economic momentum is clearly slowing, the starting point is high, and the U.S. is not projected to head into recession territory. Growth will be challenged, however, the Fed has taken an aggressively hawkish stance aimed at combatting rising inflation. Since the U.S. is grappling with the worst inflation in four decades, it is widely believed that the Fed will front-load its rate hikes. In other words, the markets expected the Fed to raise rates 50 basis points at its May 4 meeting (which it did, the biggest rate rise in 22 years). More of the same is probable for the June meeting before it slows to hikes of 25 basis points after that. The Fed will also begin reducing its nearly US$9 trillion balance sheet. It plans to trim its holdings of securities as outlined in the minutes of its March meeting.
In April, President Joe Biden asked Congress for US$33 billion to help support Ukraine, a dramatic escalation of U.S. funding. Mr. Biden’s bill would also allow U.S. officials to seize more Russian oligarchs’ assets and allocate those funds directly to Ukraine.
U.S. equity markets remain mired in an historically poor start to the year – the S&P 500 was down 8.7% for April. The tech-heavy Nasdaq Composite finished its worst month since 2008, down 13.2%.
Europe — Dampened confidence
The eurozone economy grew by a sluggish 0.2% during the first three months of 2022. Rising prices, the war in Ukraine and ongoing supply-chain snarls dampened consumer confidence, which translated into lower spending throughout the region. Inflation continues to be exacerbated by a surge in energy and food costs stemming from Russia’s invasion. Inflation rose to 7.5% in April, up from 7.4% in March.
European Central Bank officials confirmed plans to begin quantitative tightening in Q3. They recently hinted that a rate hike might come as early as July.
In April, Germany indicated its support for a gradual ban on Russian oil imports. The country depends on Russia for approximately one-third of its oil imports and had previously resisted an embargo. While oil prices have been very volatile since the Russian attacks began, a co-ordinated EU prohibition could spark a further price rally.
European equities were generally not spared from the global equity rout during the month but fared better than many others. The Eurostoxx 50, FTSE 100 and DAX returned -2.6%, 0.8%, and -2.2%%, respectively.
China — Sheltering in place
In contrast to the reopening trend in most developed economies, China is steadfastly clinging to its “zero-case” COVID-19 policy. At the start of the pandemic, this approach aided in successfully limiting the coronavirus spread. However, this strategy is now putting the Middle Kingdom at a relative disadvantage while materially impacting its economy, with knock-on impacts on global supply chains.
During Q1, before Shanghai’s lockdown of 25 million people came into full force, China’s economy grew at a higher-than-expected 4.8%, which was also up from the previous quarter’s growth of 4%. Retail sales declined, and factory activity grew, albeit at a slower pace than before. The draconian restraints in China’s largest city and global financial hub will have a significant negative impact on Q2 growth. Severe COVID-19 containment measures are wreaking havoc on the economy.
Understandably, equities were volatile in April. The Shanghai Composite was down 6.3%, and the Hang Seng fell 4.1%.
Japan — An economic umbrella
In contrast to the tightening environment in the West, Japan is still providing significant monetary support to its economy – even though surging commodity prices are starting to cause inflation. Bank of Japan Governor Haruhiko Kuroda’s commitment to keeping interest rates down triggered a yen sell-off, sending it to a 20-year low. Mr. Kuroda defended his position, saying it will be positive for Japan’s export-oriented economy.
Details of Japanese Prime Minister Fumio Kishida’s fiscal support package include spending of 6.2 trillion yen (US$48.2 billion). The focus will be on gasoline subsidies, plus low-rate loans, to ease the strain on consumers and businesses caused by the rising cost of electricity, food and other items.
In March, Japan’s factory output rose by 0.3%, thanks to strong global demand for high-tech chips.
Like most other global indices, the Nikkei 225 declined sharply and was down 3.5% in April.
The last word
April was unpleasant, cold and rainy. Grey skies hovered over natural landscapes, geopolitical landscapes and investment landscapes.
Inflation is running hot and must be brought under control. Rapidly rising interest rates will continue to cause volatility.
Yet, there is reason to believe we may see a break in the clouds. Consumer balance sheets are in great shape, and so are corporate earnings. Both equity and bond markets have moved down quickly and significantly. Bond and share prices are now generally lower and more attractive to investors, offering better value than they did at the beginning of the year.
The Weather Network’s Dr. Gillham points out that even though spring has tested our patience so far, we have the promise of warmer May days ahead.
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