Inflation and the Fed’s commitment to fighting it with rate hikes dominated financial headlines and preoccupied investors during August. Here’s a summary of the notable events that steered the markets.
- Equity markets started August with momentum from the previous month and peaked on positive inflation news before fading as the Fed reiterated it would continue on its policy tightening path.
- U.S. and Canadian bond yields, which move in the opposite direction to bond prices, inched slightly higher through August on expectations central bank interest rates still need to rise further.
- The price of oil, a leading barometer of inflation, which has been steadily declining for a few months, fell under US$90 a barrel on the Fed’s continued rate hiking plans and slowing Chinese demand.
- There were a number of positive U.S. economic indicators during August. Job creation remained robust, consumer spending and wage growth increased and the federal budget deficit narrowed again.
- Canada had some promising economic indicators as well. The unemployment rate remained at a record low, job vacancies grew and house prices cooled for the fourth month in a row.
- It was third quarter reporting season for seven of Canada’s largest banks and results were mixed.
- China’s central bank introduced a 10 basis point rate cut as supply chain disruptions, falling real estate activity and the ruling communist party’s “zero-COVID” policy affected economic growth.
- There was a huge collective sigh of relief by investors and economists as U.S. inflation eased from a four decade high of 9.1% to 8.5%. This was mainly due to lower energy prices which offset food and housing costs. At its annual Jackson Hole summit in Wyoming, Fed chair Powell reaffirmed the Fed would continue hiking rates and hold them at a higher level until inflation was fully under control. Powell added restoring inflation to the Fed’s 2% target was its “overarching focus right now.”
- In Canada, the same scenario played out. Inflation moderated from 8.1% to 7.6%, the first decrease in 12 months, due to falling gasoline prices which mitigated the cost of groceries remaining high. Bank of Canada governor Macklem said the good news is inflation may have peaked but noted it still remains too high and the bank’s job of raising rates won’t be done until inflation is back to normal.
How does this affect my investments?
Even though there are promising signs inflation may have peaked, we are “not out of the woods yet”. A clearer indication will be once we achieve a few months of declining inflation. Markets will likely stay choppy until then, but the hope is that the worst is behind us. For active fund managers and investors the current environment does offer buying opportunities. Economic fundamentals also remain healthy. In time, a sustained recovery will occur and history has proven investors are rewarded over the long-term.
Regardless of where we are in the market cycle, it’s important to take a disciplined approach to investing and stay focused on your long-term goals. This strategy helps you keep your emotions out of investing, typically buying high and selling low like many investors do. Ongoing monitoring and reviewing of your portfolio also ensures it remains on track. Diversifying investments reduces risk as well.
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