May Malaise

It could very well be that May was the month that things got real and where the Financial Markets fully came to grips with the extent of the inflation fight central banks have on their hands. The TSX and the S&P 500 retreated further during the first half of the month only to reverse course midway, making a valiant push to finish essentially flat. The S&P/TSX closed -32.66 down from 20,762 to 20,729.34 and S&P 500 finished 0.22 points up from 4,131.93 to 4,132.15.

May proved there are simply no easy wins in this environment for inflation. With regards to bringing inflation back to home base our Chief Economist writes, “the road ahead is long and treacherous, replete with plenty of potential deep disappointments, the occasional rush of relief, but unquestionably fraught with serious heartache.” U.S. CPI came in on the high side of expectations in April, remaining stubbornly above 8% on the headline and north of 6% on core. Germany confirmed its 7.8% pace for the same month which is the highest the nation has seen since 1973. Even China reported a faster-than-expected 2.1% clip despite taking a hit to growth with multiple cities under lockdown. 

The key issue for the market is whether the degree of Fed tightening will be enough to tackle the rampaging inflation. BMO Economics indicates the short answer is “just barely enough” and further adds that “while an emerging issue that markets are now see-sawing on is whether the degree of tightening won’t also spark deeper-than-expected weakness in the underlying economy.” However, it is not all doom and gloom. 

There are two main reasons why it is quite possible for the economy to continue churning forward. It is important to note that Management sentiment remains positive, as such, business spending looks to remain solid as firms expand capacity to catch up with demand. In addition, we fully anticipate consumer spending to be consistent with both pent-up demand for some hard-to-source goods and the fact that personal savings is still quite high.

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