The global expansion underway continues to show resilience to synchronised monetary tightening.  The dynamics of higher rates put constraints on demand and credit availability, undermining business sector health and expansion, resulting in downturns that are more globally synchronized, with higher terminal policy rates, leading to global recession. Evidence of moderation in global inflation such as the deterioration in the developed market purchasing manager indices (PMI) suggests that higher interest rates are slowly beginning to take their toll on economic activity. Weakness now appears to be spreading to the services side of the economy as tailwinds from pent-up services demand moderate and the headwind from aggressive tightening intensifies. While inflation may come down from the highs of 2022, it is expected to stay above 2% and more likely 3% over the next decade. Among the likely sources of price pressure are the end of the China-led low-cost labour boom, the reversal of globalisation, the expanded role of fiscal spending that began during the pandemic, and underinvestment in commodity supplies in recent years. We continue to anticipate a mild contraction in the U.S. in late 2023 and slow growth in other developed markets. In August, we maintained our twelve-month forward outlook for the U.S. economy of six months of Stagnation, followed by three months of Recession and then three months of Stagnation.

The Chinese economy expanded by 6.3% year-on-year in Q2 2023, showing faster growth compared to the 4.5% recorded in Q1.1 China’s surveyed urban unemployment rate inched up to 5.3% in July 2023.2 China’s trade surplus plunged to USD 80.6 billion in July 2023 from USD 102.7 billion in the same period a year earlier, as exports fell more than imports. The trade surplus with the U.S. widened to USD 30.3 billion in July from USD 28.72 billion in June.3 The consumer price inflation rate in the Euro Area was confirmed at 5.3% in July 2023.4 The Euro Area seasonally adjusted unemployment rate was at a record low of 6.4% in June. Amongst the largest Euro Area economies, the lowest jobless rate was recorded in Germany (3%), while the highest rates were registered in Spain (11.7%).5 The Eurozone posted a trade surplus in June. Among major trade partners, imports declined mainly from Russia, China, the U.K., and the U.S.6

The U.S. economy expanded at an annualized 2.4% in the second quarter of 2023.7 The annual inflation rate in the U.S. accelerated to 3.2% in July compared to the year earlier inflation peak of 9.1%.8 The annual inflation rate in Canada rose to 3.3% in July. The mortgage interest cost index (+30.6%) posted another record year-over-year gain and remained the largest contributor to headline inflation.9 The unemployment rate in Canada edged higher to 5.5% in July. A net 6,400 jobs were removed from the Canadian economy, surprising markets that expected a 21,100 gain.10 

Extreme optimism towards stock markets throughout 2023 has given way to growing skepticism in August. Global government bond yields extended their upward climb as resilient economic data challenged the view that central banks rates are peaking. Treasuries have been a key driver of the global debt selloff. The U.S. market rally gained steam in July, with the S&P 500 up 3.2%. The breadth of the market continued to widen as a result of small-cap momentum, with the S&P SmallCap 600 up 5.5% vs 4.1% for Mid-Caps. Commodities outperformed U.S. equities, with the S&P GSCI posting a stellar gain of 11%, boosted by Energy and Industrial Metals. The S&P/TSX Composite posted an increase of 2.6%. The S&P Europe 350 extended its year-to-date gains by 2.1% in July to 14.2%. Thirteen of sixteen countries contributed positively to pan-European equity returns. The U.K. was the brightest spot, contributing +0.6%, followed by Switzerland and Germany with 0.4% and 0.3%, respectively. The S&P Pan Asia BMI soared 4.9% in July, extending its YTD gain to 11.5%. All S&P Pan Asia BMI regions ended July in the black, with China the largest contributor to the regional benchmark’s return with 1.7%.

In August, we maintained exposure to all asset classes, reflecting the prolonged interest rate tightening cycle and the impact that it is having on the economy. Our view remains that a U.S. recession will occur. We continue to maintain gold exposure across all models as we expect gold to remain supported on the back of rangebound bond yields and a weaker dollar.

We anticipate that economic deterioration will drive an increase in defaults and other unintended consequences following tighter credit conditions. Long-term trends will keep production capacity constrained in the new regime of higher macro and market volatility. Historically, such periods have resulted in higher volatility, significant stock market pullbacks, and an overall appetite for high quality, liquid assets such as gold. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

Deborah Frame, President and CIO

1 Trading Economics. China GDP. July 17, 2023.

2 Trading Economics. China Unemployment. August 15, 2023.

3 Trading Economics. China Trade. August 8, 2023.

4 Trading Economics. E.U. Inflation. August 18, 2023.

5 Trading Economics. Europe Unemployment. August 1, 2023.

6 Trading Economics. Europe Trade. August 17, 2023.

7 Trading Economics. U.S. GDP. July 27, 2023.

8 Trading Economics. U.S. Inflation. August 10, 2023.

9 Trading Economics. Canada Inflation. August 15, 2023.

10 Trading Economics. Canada Unemployment. August 4, 2023.

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. July 31, 2023. Index performance is based on total returns and expressed in the local currency of the index.