July 12 to 16, 2021

What happened last week

Markets fluctuated amid uncertainty over the pace of economic recovery

North America’s benchmark equity indexes struggled to stay near record levels, and government-bond yields fell, as investors focused on the outlook for economic recovery and central-bank forecasts for the withdrawal of monetary-policy support.

Underperformance from the energy sector, exacerbated by retreating global oil prices, weighed on equity markets through most of the week. Futures contracts for crude oil reached a four-week low on Thursday; investors anticipated that the Organization of the Petroleum Exporting Countries and its allies (OPEC+) would formalize a deal to increase production, following reports that the United Arab Emirates made significant progress in resolving its dispute with Saudi Arabia. The strengthening U.S. dollar, reports of rising production and inventories in the U.S., along with concern over COVID-19 breakouts around the world, also weighed on the demand outlook and prices for the commodity.

U.S. inflation data rattled the markets

According to a Department of Labor report released on Tuesday, U.S. consumer prices surged in June – rising the most since 2008 and higher than economists had forecast. The consumer price index (CPI) jumped 0.9% in June and 5.4% higher than the same month last year. Core CPI, which excludes volatile categories such as food and energy, rose 4.5% from June 2020, its most significant increase since November 1991. Used-vehicle prices made up a third of the gain, followed by hotel rates, car rentals, airfares and clothing – which will likely be in great demand as the U.S. economy reopens. The larger-than-expected spike in prices seemed to challenge recent statements out of the U.S. Federal Reserve (the Fed) suggesting that inflationary effects would be temporary. On Tuesday, the major U.S. stock index closed – down from recent record highs – as investors considered whether the news would force the Fed to accelerate its timeline for raising interest rates to combat inflation.

Congressional testimony from the Fed chair added to market volatility

During scheduled appearances before U.S. Congress on Wednesday and Thursday, Fed Chair Jerome Powell told lawmakers that the U.S. economic recovery still hasn’t progressed enough to begin scaling back monetary-policy support. He also noted that inflation is likely to remain high in the coming months: “Strong demand in sectors where production bottlenecks or other supply constraints have limited production has led to especially rapid price increases for some goods and services, which should partially reverse as the effects of the bottlenecks unwind.” Powell added: “Prices for services that were hard hit by the pandemic have also jumped in recent months as demand for these services has surged with the reopening of the economy.”

The Fed has continued to hold interest rates near zero, maintaining its US$120-billion-a-month bond purchases – even as the economy and the labour market show signs of recovery. Republican and Democratic lawmakers pressed Powell on rising prices and asked him to explain how the Fed would know when it would need to taper bond buying. “It’s very difficult to be precise about it,” Powell said. “We will provide lots of notice as we go forward on that.” This testimony added some real-time volatility to markets, with yields on 10-year U.S. Treasuries falling and with U.S. stocks fluctuating.

The Bank of Canada announced further tapering of its bond purchases

In contrast to U.S. central-bank policy, the Bank of Canada announced the further tapering of its emergency-support measures, given the pace of economic recovery. In its latest monetary-policy update on Wednesday, the Canadian central bank said that weekly purchases of government debt would be reduced by one-third (to $2 billion) and that the benchmark overnight interest rate would be held at 0.25% (where policy-makers continue to see it until at least the second half of 2022). This update marked the third time in 2021 that the bank has reduced its asset purchases, reinforcing expectations that the Bank of Canada will be among the first major central banks to hike rates to curb inflation into 2023. “This adjustment reflects continued progress towards recovery and the bank’s increased confidence in the strength of the Canadian economic outlook,” Bank of Canada Governor Tiff Macklem said during the bank’s press conference.


The stock and bond market*
INDEX CLOSE WEEK YTD
S&P/TSX Composite 19,985.54 -1.34% 14.64%
Dow Jones Industrial Avg. 34,687.85 -0.52% 13.33%
S&P 500 Index 4,327.16 -0.97% 15.20%
Nasdaq Composite 14,427.24 -1.87% 11.94%
10-yr GoC Yield 1.24% -0.08% 0.57%
10-yr U.S. Treasury Yield 1.31% -0.06% 0.38%
WTI Crude Oil (US$/bbl) 71.45 -4.26% 47.26%
Canadian Dollar US$0.7941 -0.92% 1.11%
Bank of Canada Prime Rate 2.45%

*Weekly performance ending July 16, 2021. Sources: www.bloomberg.com, www.bankofcanada.ca and www.treasury.gov.


What’s ahead

  • Economic data: Housing and retail sales figures will provide investors with key readings on the Canadian economy. In the U.S., housing, energy inventory, manufacturing and employment reports are also scheduled for release this week.

Circle these dates

  • July 27 to 28: U.S. Federal Reserve meetings and statement
  • Aug. 2: TSX closed for Civic holiday
  • Sept 6: Canadian and U.S. markets closed for Labour Day

Key take-away

We’re here for you. Having a solid financial roadmap is the best way to weather ever-changing market conditions. And designing that roadmap – and staying the course – can be a lot easier with the help of a Co-operators financial representative.


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