balanced fund quarterly report

June 30, 2022

Economic Commentary

Inflation remains the key driver impacting global financial markets. It was expected that inflation had peaked and would show signs of receding throughout the balance of the year. The U.S. inflation rate did decline from 8.5% in March to 8.3% in April, however, the market was surprised when the inflation rate moved higher in May to 8.6%, the highest level since 1981. In addition to wanting to see evidence that inflation is receding, the Fed would also like to see expectations for future levels of inflation start coming down. In that regard, the Fed made reference to the University of Michigan Consumer Sentiment Index, which is normally a second tier economic report. Future levels of inflation as outlined in that report were much higher than expected and that report, in combination with the higher than expected CPI print for May, were the major factors behind the Fed taking a more aggressive stance and hiking interest rates by 75 b.p. its June meeting. Inflation in Canada also moved much higher than expected, surging to 7.7% in May, the highest level since 1983. European inflation levels are also continuing to surprise on the upside, with the Eurozone rate at 8.1%.

The U.S. Federal Reserve and the Bank of Canada have both adopted a much more aggressive path in setting interest rate policy. The projected pace and magnitude of interest rate hikes has accelerated much faster than earlier anticipated. On-going inflationary fears continue to be the major impetus behind the marked change in central bank policy. The Fed raised rates by 75 b.p. in June, moving away from the expected hike of 50 b.p. at the last minute based on worrisome inflation readings. Although the Bank of Canada raised rates by 50 b.p. in both April and June, it is expected that it will raise rates by 75 b.p. in July, matching an expected similar move by the Fed. Fed Chair Powell has stressed that the FOMC will do whatever it takes to bring inflation back in-line with its 2% target rate, even if it means negatively impacting the economy. As recessionary fears began surfacing at the end of the second quarter, investors began to question whether the Fed would have to curtail some of the projected moves, or possibly begin lowering rates shortly after the terminal rate has been achieved.

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