23 September, 2022

Weekly Update - Stocks Drop as Central Banks Fight Inflation with Rate Hikes

Canadian inflation appears headed in the “right direction” but remains too elevated, a top Bank of Canada official said.

 

Deputy Governor Paul Beaudry said the central bank needs to work hard to ensure expectations for inflation don’t become entrenched at higher levels, with “coherent, clear and relatable” public messaging that it remains focused on its 2% target.

 

His remarks come hours after a Statistics Canada report showed annualized inflation slowing to 7.0% in August, from 7.6% in July. “While we’re headed in the right direction, that’s still too high,” Beaudry said.

“We will continue to take whatever actions are necessary to restore price stability for households and businesses and to maintain Canadians’ confidence that we can deliver on our mandate,” the deputy governor said.

 

Two weeks ago, Bank of Canada policymakers led by Governor Tiff Macklem raised the benchmark overnight interest rate by 75 basis points to 3.25%, up a full three percentage points from the emergency pandemic low that held until March. They are expected to hike again in October.

 

The influential U.S. Federal Reserve raised interest rates by 75 basis points for the third consecutive time on September 21, taking the target range for U.S. interest rates to 3.0% - 3.25% -- the highest level since before the 2008 financial crisis -- and forecast they would reach 4.6% in 2023, stepping up their fight to curb inflation that’s persisted near the highest levels since the 1980s.

 

Stocks dropped over the course of the week and bond yields – which move in the opposite direction to bond prices – hit multi-year highs after a slew of global central banks joined the Bank of Canada and the Federal Reserve in hiking interest rates in an effort to curb scorching levels of inflation even as it comes at the expense of economic growth.

 

Stocks have been declining for much of this year as investors fear aggressive interest rate hikes by central banks will tip the economy into a recession.

 

As markets 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: Stocks dropped and bond yields continued to climb after a slew of global central banks joined the Bank of Canada and the U.S. Federal Reserve in hiking interest rates.

 

• 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. Contact your advisor to discuss any questions and concerns you may have.

Our Experts Say...

 

“We really like investment grade Canadian fixed income right now, and we haven't said that in at least five years."

 

Konstantin Boehmer,

Portfolio Manager and Co-Lead,

Mackenzie Investments

Fixed Income 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 January 13, 2012 to September 22, 2022 in local currency. Volatility is illustrated by the rolling 5-day minimum and maximum percentage change for each of the indices shown.