June 14 to 18, 2021

What happened last week

Stock markets struggled for direction, with sector rotation on full display

Concerns that the pace of economic recovery could spark a sharp rise in prices continued to weigh on sentiment, with Canada reporting its highest annual-inflation rate in over a decade and with the U.S. Federal Reserve (the Fed) sharing its projections for raising interest rates. All the major North American benchmark stock indexes lost ground on a weekly basis. Technology stocks were back in favour, after underperforming other sectors for most of 2021.

On the surface, markets appeared to be moving in familiar directions through the first half of the week. Investors began looking ahead to a policy update from the Fed (on Wednesday), as inflation concerns continued to simmer on both sides of the border. But several trends associated with the so-called “reflation trade” of 2021 had already begun to reverse themselves. By Thursday, in the aftermath of the update, prices for copper, gold and oil were weakening while the U.S. dollar strengthened, long-term bond yields fell from recent highs, and technology stocks entered rally mode as investors turned away from cyclical stocks. With the exception of a rebound in oil prices, these trends carried over into Friday and pushed the major North American stock indexes to close out the week in negative territory.

Canadian consumer prices rose in May, at the fastest rate in a decade

According to a report from Statistics Canada, inflation accelerated in May, hitting its highest level since 2011. Consumer prices were up 3.6% from a year ago, topping the 3.4% annual pace reached in April. On a monthly basis, prices rose 0.5%. Canada’s red-hot housing market also contributed, fuelled by a spike in demand for single-family homes and rising costs of construction materials, like lumber. The costs of home ownership rose 11.3% from a year ago, marking the largest annual increase since 1987.

Analysts have noted, however, that the annual comparisons are skewed by the dramatic drop in prices seen in the early months of the pandemic – what they refer to as “base effects.” The Bank of Canada, which uses its monetary-policy tools to keep inflation under control, has indicated that it expects inflation to ease once the initial rush of demand (accompanying economic reopening) subsides and once supply stabilizes. But, if inflation continues to rise, it could force the Bank of Canada to move up interest-rate increases – something that investors aren’t anticipating until later next year.

The Fed shared its forecast for interest-rate hikes

In its latest and much-anticipated update, the U.S. central bank raised its expectations for how quickly it will reduce monetary-policy support, considering the pace of economic recovery. While the central bank left the target range for its benchmark policy rate unchanged (at 0% to 0.25%, where it’s been since March 2020), Fed Chair Jerome Powell told a press conference that the committee had begun a discussion about scaling back bond purchases. He referred to forecasts that suggest two interest-rate increases by the end of 2023. “The economy has clearly made progress,” Powell said. The Fed raised its projections for economic growth, seeing the gross domestic product (GDP) expanding 7% this year, up from its earlier projection of 6.5%. The Fed maintained its 2022 forecast of 3.3% growth, while raising its 2023 estimate to 2.4% from 2.2%.

The Fed also provided updated inflation forecasts through the end of 2023, showing prices rising 3.4% in 2021 – compared with a March projection of 2.4%. The 2022 forecast rose to 2.1% from 2%, and the 2023 estimate was raised to 2.2% from 2.1%. Prices have risen faster than expected over the last two months – 0.8% in April and 0.6% in May – becoming the two biggest monthly increases since 2009, according to the U.S. Labor Department. Powell noted: “As the reopening continues, shifts in demand can be large and rapid, and bottlenecks, hiring difficulties and other constraints could continue to limit how quickly supply can adjust – raising the possibility that inflation could turn out to be higher and more persistent than we expect.”

The stock and bond market*
S&P/TSX Composite 19,999.59 -0.69% 14.72%
Dow Jones Industrial Avg. 33,290.08 -3.45% 8.77%
S&P 500 Index 4,166.45 -1.91% 10.93%
NASDAQ Composite 14,030.38 -0.28% 8.86%
10-yr GoC Yield 1.37% -0.01% 0.70%
10-yr U.S. Treasury Yield 1.45% -0.02% 0.52%
WTI Crude Oil (US$/bbl) 71.64 1.03% 47.65%
Canadian Dollar US$0.8052 -2.19% 2.52%
Bank of Canada Prime Rate 2.45%

*Weekly performance ending June 18, 2021. Sources: www.bloomberg.com, www.bankofcanada.ca and www.treasury.gov.

What’s ahead

Economic reports: Manufacturing data, as well as wholesale 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 1: Canadian markets closed for Canada Day
  • July 5: U.S. markets closed for Independence Day
  • July 14: Bank of Canada interest-rate announcement and monetary-policy update

Key take-away

There are countless factors influencing market cycles. Some are easier to anticipate than others. Getting through times of uncertainty isn’t about knowing which stage of the cycle we’re in, but understanding how the stages work. From there, having an investment plan geared toward your individual goals and objectives – and sticking to it – is the best defense against inevitable market downturns. Speaking with a Co-operators financial representative can help.

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