September 2023
Reassured by the resilience in macro data, and frustrated that inflation isn’t falling fast enough, major central banks have continued with monetary tightening. The result has been eroding purchasing power, a rising cost of living, and persistent inflationary pressures. For those facing mortgage term renewals, the higher rates remove purchasing power from their discretionary budget. The cost of rent is soaring as landlords push through higher carrying costs to renters. This creates a self-perpetuating inflationary cycle. The recent upturn in oil prices and the widening federal budget deficit in the U.S. have led to the government’s net interest outlays soaring. Bond yields might have to rise higher to attract buyers for the mounting supply of Treasuries. The inverted U.S. Treasury yield curve is suggesting bond market participants have taken up longer-dated Treasury bonds in anticipation of a dramatic economic and/or inflation slowdown. As the lagging impact of the aggressive rate hikes ripples through economies, the trend remains for slowing growth with rolling recession and recovery in the back half of the year. In September, 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.
China’s consumer prices rose by 0.1% year over year in August.1 China’s surveyed urban unemployment rate inched down to 5.2% in August.2 China’s trade surplus slumped to USD 68.36 billion in August 2023 from USD 78.65 billion in the same period a year earlier, as exports dropped more than imports. Exports shrank 8.8% year over year, the fourth straight month of decline, while imports fell by 7.3%.3 The annual inflation rate in the Euro Area was revised lower to 5.2% in August.4
The U.S. economy grew at an annualized rate of 2.1% in the second quarter of 2023. Exports experienced the largest decline since the aftermath of the COVID-19 outbreak.5 The annual inflation rate in the U.S. accelerated for a second straight month to 3.7% in August. Oil prices have been on the rise in the previous two months, which coupled with base effects from last year.6 The unemployment rate in the U.S. rose to 3.8% in August.7 The U.S. trade deficit widened to $65 billion in July 2023. Exports were up 1.6%. Imports increased 1.7%.8 Canadian GDP stalled in the second quarter of 2023.9 The annual inflation rate in Canada rose to 4% in August from 3.3% in the previous month. The increase was largely attributed to a rebound in the cost of transportation (2.3% vs -0.8% in July), as the extension of crude oil production cuts from OPEC nations and limited capacity in North American oil refiners pushed gasoline prices higher. The CPI also accelerated for shelter (6% vs 5.1%), lifted by higher rent costs, as soaring interest rates by the BoC disfavored home ownership and saturated the rental market. Despite remaining high, prices continued to subdue for food (6.8% vs 7.8%). The unemployment rate in Canada was at 5.5% in August of 2023.10
Despite a strong recovery in the latter part of the month, the U.S. market rally took a breather in August, with the S&P 500 down 1.6%. Smaller caps performed even worse, with the S&P SmallCap 600 down 4.1%. Canadian equities finished the month on the downside. The S&P/TSX Composite posted a decline of -1.4%. The S&P Europe 350 retreated 2.4% in August. 14 of 16 countries detracted from pan-European equity returns this month. Denmark was a bright spot, contributing +0.3%, while the Netherlands was the biggest detractor with a contribution of -0.6%. The S&P Pan Asia BMI plunged 4.2% in August, erasing most of its quarter to date gains. All S&P Pan Asia BMI regions ended August in the red, with China the largest detractor from the regional benchmark’s return with -1.5%.
In September, 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. The recent changes in yields have led to a ‘bear steepening’ of the yield curve. But the expectation of a slowdown is a scenario in which gold has historically performed well. Gold is considered a long-term strategic asset alongside bonds as it provides excellent returns in a wide range of economic conditions.
As the cost of capital becomes more expensive, banks are likely to be more selective in lending, driven by the potential for increased regulation, as well as heightened competition for deposits. We anticipate that economic deterioration will drive an increase in defaults and other unintended consequences. Production capacity is expected to be constrained in the new regime of higher macro and market volatility. Historically, such periods have resulted in 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
Drew Millard, Portfolio Manager
1 Trading Economics. China Inflation. September 9, 2023.
2 Trading Economics. China Unemployment. September 15, 2023.
3 Trading Economics. China Trade. September 7, 2023.
4 Trading Economics. EU Inflation. September 19, 2023.
5 Trading Economics. U.S. GDP. August 30, 2023.
6 Trading Economics. U.S. Inflation. September 13, 2023.
7 Trading Economics. U.S. Unemployment. September 1, 2023.
8 Trading Economics. U.S. Trade. September 6, 2023.
9 Trading Economics. Canada Inflation. September 1, 2023.
10 Trading Economics. Canada Unemployment. September 8, 2023.
Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. August 31, 2023. Index performance is based on total returns and expressed in the local currency of the index.
