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Commentary

May 2022

Equity and Fixed Income Strategy

Inflation, Slowing Economy and Flattening Yield Curve - Focus on Defensive and Commodity Stocks

Stéphane Rochon, CFA, Equity Strategist; Richard Belley, CFA, Fixed Income Strategist; Iritza Naqvi, Associate 

We have often said that official Gross Domestic Product data is akin to ancient history in market terms. That is because it is backward looking while the stock and bond markets anticipate changes in the real economy by several months. Still, we were taken aback by the very weak U.S. print which showed the largest economy in the world contracted in the first quarter with Real GDP (i.e. including inflation) declining 1.4%. As the BMO Economics team put it: “The economy is still showing some resilience, but the Q1 report signals the start of more moderate growth this year and next, largely in response to higher interest rates. Despite the contraction, the Fed has little choice but to hike aggressively in May to corral inflation”. While the U.S. market and particularly high multiple tech stocks are badly oversold —which can lead to powerful temporary rallies— we continue to think the spectre of inflation and higher interest rates will be powerful headwinds weighing on potential asset returns for some time. 

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Do not hesitate to give either of us a call at 416 359-7565 or 416-359-7564 or email Sharon Kubicek or Alisa Carli if you have any questions respecting your portfolio and the prevailing investment, economic and political issues at play today.
 

Sharon and Alisa