Canada Monthly Mortgage Commentary - June 2022

Inflation At The Tipping Point

29 Jun 2022

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Market sentiment took a sharp turn as recession speculation continued amid the persistent rise in inflation. U.S. equity markets plunged into bear market territory, led by an extensive revaluation of the tech sector. Bond yields surged with long term rates hitting highs not seen in over 11 years as the market repriced to factor rapidly tightening central bank agendas.

Inflation was again the main culprit as it reached near 40-year highs in the U.S. and Canada. According to the Bank for International Settlements, the growing concern is that inflation expectations may be on the verge of becoming entrenched and self-reinforcing. Such a scenario could quickly lead to a period of stagflation where a slow-growing economy is mired by high inflation and unemployment. To combat this, central banks would need to take rapid action, even if it is at the expense of economic growth.

So far, major central banks have already ramped up their responses, executing some of the largest interest rate hikes of the last few decades. The Federal Reserve recently raised interest rates by 75 bps and hinted at another similar-sized increase in July followed by more hikes. The Bank of Canada is also expected to follow the same trajectory, with its policy interest rate likely to reach as high as 3.25% by the end of the year.

While central banks have been steadfast in their commitment to quelling inflation, the conviction for a ‘soft landing’ has waned with the Federal Reserve acknowledging the possibility of triggering a U.S. recession. Meanwhile, a survey of global CEOs conducted by The Conference Board between May 10 and 24 found that 61% are expecting a recession in their respective local regions by the end of 2023 with a further 15% believing a recession is already underway.

However, despite recent downgrades to their forecasts, most economic advisory firms are not projecting a recession for the Canadian and U.S. baseline scenarios. In fact, some of the latest economic data releases have remained relatively healthy, suggesting that both economies are still in a strong position and should be able to adapt to a tighter monetary policy environment.

Economic Highlights:

  • GDP growth for Q1 2022 was 3.1% led by domestic demand amid lower exports.
  • Inflation rose to a nearly 40-year high of 7.7% in May 2022.
  • Employment grew by 39,800 jobs in May 2022, with the unemployment rate falling to a record low of 5.1%.