22 April, 2022

Weekly Update - Canadian inflation spikes to 6.7%

Canadian inflation accelerated in March at a far greater rate than economists anticipated, with Statistics Canada’s consumer price index jumping 6.7% year-over-year, the highest since January 1991 and well above market expectations of 6.1%. That’s also up a full percentage point from February’s 5.7% reading.

 

The StatsCan report shows inflation pressures may be more elevated than the Bank of Canada estimated just earlier this month, reinforcing pressure on the Bank to withdraw stimulus from an overheating economy.

 

Gasoline prices were the biggest contributor to the monthly and annual gain in prices, but inflation has become broad-based with sharp increases in costs for housing, food and cars. Goods inflation hit 9.2% in March, the highest since 1982. Services inflation rose to 4.3%, the highest since 2003.

 

All eyes will now be on the Bank of Canada to see if it will deliver a repeat of this month’s plus-sized half-percentage point rate hike at its next update. 

 

Trading in money market swaps show investors are now fully pricing in a second 50-basis-point increase at the central bank’s June 1 meeting. Odds for the second outsized rate hike next month rose to 100% on Wednesday for the first time, as the annual inflation report blew past expectations.

 

On equity markets, U.S. stocks had their best day in over a month on Tuesday, as investors responded to positive earnings and dovish comments from two U.S. Federal Reserve officials on interest rate hikes. Canada’s S&P/TSX also rose, although not quite as much. Because the TSX is more heavily weighted toward commodities, it has been outperforming so far this year over U.S. markets which have a greater number of high-growth, high-risk sectors such as technology.

 

However, that was reversed on Thursday as both stocks and bonds fell. The tech-heavy Nasdaq 100 extended losses, underperforming major benchmarks, as the jump in bond yields – which move in opposite direction to bond prices – weighed on growth-related stocks in particular.

 

As markets continue to react and adjust to changing conditions, a continued focus on your long-term goals remains the best course of action. Investing through a well-diversified portfolio has historically provided the best experience through a combination of goals-based returns and reduced volatility over time.

 

  • Short-Term View: Inflation continues to run hot in Canada and elsewhere, forcing central banks and markets to contemplate jumbo-sized rate increases and the resulting impact on equities, bonds and the economy.

  • Longer-Term Thinking: Sticking to your long-term plan through periods of volatility is central to investment success.

  • Logic Over Emotion: Perspective is key. Focus on long-term goals and timeframes.

Our Experts Say...

 

“Challenges are arising in the context of a global economy that was, in many regions, continuing to recover from pandemic-related pressures. So far at least, the evidence suggests further expansion, albeit at a moderating pace, and amid increasing chatter about recession risk.”

 

Chuck Johnson, Portfolio Manager,

Acadian Asset Management

Global Dividend and North American

Equity High Income Investment Specialist

 

 

 

Over the past 10 years, markets are positive. Perspective is key. Markets do react to short-term increases in volatility – see the grey lines below – but the long-term trend is upward in the blue and red lines.

 

Source: Morningstar Direct. Growth of $100,000 shown. Total returns from Jan. 13, 2012 to April 21, 2022 in local currency. Volatility is illustrated by the rolling 5-day minimum and maximum percentage change for each of the indices shown.