Globally, central banks currently face a trade-off between persisting with their pace of tightening cycles until inflation is back down to more manageable levels and triggering further distress in the financial sector. There have been some reductions in headline rates of inflation due to monetary tightening, a stabilization of commodity markets, and an easing of supply-chain conditions. Our outlook remains that these trade-offs combine to tip the U.S. into recession by year-end. In June, 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.

Buoyant global economic activity is expected in Asia, with China’s reopening projected to boost activity across the continent. China exports were off to a slow start in May, declining 7.5% year over year to a three-month low. Exports to the U.S. plunged by 18.2% from a year earlier, while those to the EU declined by 26.6%. Shipments to Russia increased by 114%, largely due to energy.1 

The Eurozone economy shrank 0.1% in the first three months of 2023, putting the eurozone into a technical recession. Among the bloc’s biggest economies, GDP contracted in Germany (-0.3%) and the Netherlands (-0.7%) while expansion was recorded for France (0.2%), Italy (0.6%), and Spain (0.5%).2 The consumer price inflation rate in the Euro Area fell to 6.1% in May 2023.3 The seasonally adjusted unemployment rate in the Euro Area edged down to 6.5% in April 2023.4

The Senate passed a bill to suspend America’s debt ceiling until January 2025, allowing the government to resume borrowing money and avoid an imminent sovereign default. The U.S. economy grew by an annualized 1.3% on quarter in Q1 2023, slightly higher than 1.1% in the advance estimate.5 The consumer price inflation in the United States declined to 4.0% in May 2023.6 The unemployment rate in the U.S. increased to 3.7 % in May 2023, the highest since October 2022.7 The number of Americans filing for unemployment benefits jumped to 261K in the week ended June 3rd 2023 which included Labour Day holiday, the highest figure since October 2021.8

The Canadian economy grew by 0.8% in the first quarter of 2023. Exports of goods and services advanced by 2.4%. Imports edged up at a slower 0.2% on an annualized basis, and GDP expanded by 3.1%.9 The Bank of Canada unexpectedly raised the target for its overnight rate by 25 basis points to 4.75% in June 2023, after pausing the tightening campaign in the previous two meetings. Borrowing costs are now at high levels not seen in 22 years.10 Canada posted a trade surplus of CAD 1.94 billion in April of 2023, supported by a 46% surge in sales of gold as higher quantities coincided with the upswing in bullion prices for the period.11

Investors struggled in May to anticipate the Fed’s rate hike trajectory and the outcome of the federal debt ceiling debates. The S&P 500 posted a gain of 0.4%, outpacing smaller caps, with the S&P Mid Cap 400 down 3.2% and the S&P Small Cap 600 down 1.8%. Canadian equities finished the month down 5.0%. The S&P Europe 350 shed 2.3% in May, erasing its Q2 gains. 14 of 16 countries detracted from pan-European equity returns, with the U.K. and France the largest detractors, with contributions of -0.8% and -0.7%, respectively. 10 of 14 S&P Pan Asia BMI regions ended May in the red, with China the largest detractor from the regional benchmark with a contribution of -1.5%.

In June, we maintained our asset allocation from May, including the presence of a gold position across all models. Following a historical high level of central bank gold buying, the 2023 World Gold Council survey revealed that 24% of central banks intend to increase their holding reserves in the next 12 months. We continue to maintain short duration exposure to fixed income and a greater exposure to Canadian equities over U.S. equities as we anticipate a continuing weaker underlying economy through the remainder of 2023.

Looking forward, we are monitoring global concerns over the resilience of supply chains. The Inflation Reduction Act, the CHIPS Act, and the Build America, Buy America Act have included provisions that are explicitly designed to favor goods and services produced in the U.S. or in North America. Protectionist provisions distort trade and investment risk, fragmenting global supply chains and triggering retaliatory actions by trading partners. These “Made in America” policies are bad for U.S. growth, productivity, and labor market outcomes. We also are monitoring signs of strain in commercial property markets, with global transaction volumes down by 17% over the past year and the value of U.S.-listed real-estate investment trusts (REITS) down by between 14% and 20% year on year in the first quarter of 2023.12 In the U.S., vulnerabilities in the commercial property sector risk creating a doom loop with the banking sector, with around three-quarters of U.S. commercial property lending coming from smaller banks.  A slump in commercial property values risks causing a spike in bad loans, and could have a cascading impact in parts of the U.S. banking system.

We are positioned for a recession in the U.S. in the third quarter. 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 Trade. June 6, 2023.

2 Trading Economics. EU GDP. June 8, 2023.

3 Trading Economics. EU Inflation. June 1, 2023.

4 Trading Economics. EU Unemployment. June 1, 2023.

5 Trading Economics. U.S. GDP. May 25, 2023.

6 Trading Economics. U.S. Inflation. June 13, 2023.

7 Trading Economics. U.S. Unemployment. June 2, 2023.

8 Trading Economics. U.S. Unemployment. June 8, 2023.

9 Trading Economics. Canada GDP. May 31, 2023.

10 Trading Economics. Canada Interest Rates. June 7, 2021.

11 Trading Economics. Canada Trade. June 7, 2023.

12 International Monetary Fund. U.S. Report. June 2023.

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