Equity markets have recovered some of their first half of the year losses, but continue to grapple with rising interest rates, high inflation and slowing economic growth. Central banks are expected to continue interest rate increases over the next several months, but at a lower trajectory than previously expected as economic activity wanes and housing markets show signs of significant slowing.
Recession
Recession is generally defined as a decline in GDP for two successive quarters. GDP in the U.S. fell 1.6% in the first quarter followed by a decline of 0.9% in the second quarter. So, the US is in recession, right? Well maybe not. The National Bureau of Economic Research (NBER), the official arbiter of recessions, defines a recession as "a significant decline in economic activity spread across the market, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales" and uses multiple other factors in making its determination of official recessions. Politicians and analysis can debate the 'official definition' but, the fact remains that two negative quarters of GDP spells trouble in the economy.
Inflation
Canada’s annual inflation rate rose 8.1% in June 2022, the highest since January 1983. Prices rose at a faster rate for transportation (16.8% in June vs 14.6% in May) due to higher global demand for energy which led to rising gas prices (54.6% in June vs 48.0% in May). The Canada Mortgage and Housing Corporation (CMHC) says a recession could be in the cards by the end of the year. Central banks continue to raise interest rates at a quick pace to catch up and fight inflation. The Bank of Canada surprised markets with a full percent increase on July 13, the ECB raised rates by 50 BPs on July 21 (the first increase in a decade) and the Fed hiked rates another 75 BPs on July 27.
Canadian Housing
Canadian homes sales were down in June 2022 with national home sales falling 5.6% on a month-over-month basis. Monthly activity came in at 23.9% below the record set in June 2021. New listings were up 4.1% from the previous month while the Home Price Index edged down 1.9% from May but was still up 14.9% from the previous year. Sales were down in most local markets, led by Canada’s largest cities. Sales are continuing to slow in the face of rising interest rates and economic uncertainty. June sales of Toronto homes fell by just over 41% compared with the same month last year as higher borrowing costs weighed on the market. The CMHC expects home prices to fall 5% from the peak of 2022 by the middle of next year, but we have seen private sector forecasts that call for a price drop as high as 20%.
The most staggering statistic we have come across during this housing pullback was the Greater Toronto Area recorded 643% terminations in the listing of condos. The number of terminated listings jumped from 380 in January to 2,822 in June, which represents the 643% increase over the past six months. Sellers are disappointed with with offers much lower than expected and choose to delist their condos instead of selling at the lower price. Supply shortages along with interest rates topping out over the next several months could help stabilize the housing market in the short-term.
Gold
Gold is facing the headwinds of higher real interest rates and a surging U.S. dollar but safe haven demand and high inflation are providing support. High geopolitical tensions, decade low consumer sentiment, high inflation, and less hawkish central banks all add up to a positive environment building momentum for gold over coming months.
China
It is going to take many years from China to recover from the economic turmoil of 2022 which include:
A continuing zero Covid policy path. The government has no reservations about locking down entire cities with relatively few infections.
Tanks being deployed to prevent depositors from withdrawing money from crisis-hit banks. Many people were calling it Tiananmen Square 2.0.
Wealthy Chinese looking to leave the country. Bloomberg reported that around 10,000 wealthy Chinese are looking to leave the country with approximately $50 billion.
Plummeting home sales. Home sales in China have collapsed nearly 60% compared to a year ago and the current decline of sales over the past 11 months is said to be the worst in China’s history.
Increased tensions with the U.S. over Nancy Pelosi's (Speaker of the U.S. House of Representatives) visit to Taiwan.
Nancy Pelosi's visit to Taiwan will further incentivize China, to 'de-dollarize' and work with other countries including Russia to find alternatives to the U.S. dollar as the main trade and reserve currency.
Bonus Tip: We don't think that markets are out of the woods yet and turbulent markets are likely to continue over coming months. Have some gold & silver exposure.
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Peter Szydlowski
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