Dec Mullarkey
Managing Director, Investment Strategy
& Asset Allocation

As the Fed tightens, recession fears keep mounting. The Fed’s chief, Jerome Powell, is asked everywhere he turns what are the odds he may tank the economy. This week the Senate Banking Committee grilled him. When asked if higher rates could ignite a recession, he said it was “certainly a possibility” but not his intent. When pressed that his actions could leave millions unemployed, he commiserated but responded that high inflation that becomes entrenched could be toxic for long term growth. His job is certainly bedeviled with trade-offs.   

Estimates from the Federal Bank of Atlanta suggest quarter to date GDP may be running close to 0%. Disappointing construction spending and auto sales are major culprits. Construction spending is plummeting as mortgage rates rise and auto sales are experiencing a setback from a sudden shift in demand. Consumers now want energy efficient cars while dealers have none in stock, as they were expecting trucks to remain in vogue.

This could certainly lead to another poor quarterly GDP print. Which on the heels of a negative first quarter showing could qualify as a recession. But at this point with a vibrant job market and strong household and business balance sheets any growth interruption would feel more like a speed bump than something more debilitating. And this will remain the ongoing assessment for investors: if a recession is inevitable how deep could it get?      

Source: Bloomberg, June 2022 

Randall Malcolm
Senior Managing Director,
Portfolio Manager, Public Fixed Income

The last time Canadian headline inflation was this high was 1983 and back then it was falling back to earth like a Top Gun plane on a steep descent. Lucky for us, Top Gun has returned, but inflation is also back and continued its steep ascent in May, reaching 7.7%. The May CPI reading was above market expectations and reflected strength in energy prices but also showcased broad-based gains across the Bank of Canada’s three core measures. This was also the first report with the new CPI basket weights that gave slightly higher weight to transportation and lower weights to the shelter and household components of the CPI index. The market reaction to higher-than-expected inflation was to send yields lower across the entire curve as the Bank of Canada may be more inclined to raise their overnight rate faster and potentially push the economy into a recession. Lower commodity prices and a cooling Canadian housing market may also help ease the inflationary pressure in June.

Source: Statistics Canada

Market insights are based on individual portfolio manager opinions and market observations. These are observations only and are not intended to provide specific financial, tax, investment, insurance, legal or accounting advice and should not be relied upon and does not  constitute a specific offer to buy and/or sell securities, insurance or investment services. Investors should consult with their professional advisors before acting upon any information posted her

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