by BeiChen Lin, Russell Investments
Executive summary:
- Core inflation ticked up in Canada amid a rise in shelter costs
- Both the Bank of England and the U.S. Federal Reserve kept interest rates unchanged at their September policy meetings
- U.S. markets tumbled on fears the Fed could hold rates higher for longer.
On the latest edition of Market Week in Review, Investment Strategist BeiChen Lin and ESG and Active Ownership Analyst Zoe Warganz discussed the latest inflation numbers from Canada and the UK. They also reviewed recent announcements from the Bank of England (BoE) and the U.S. Federal Reserve (Fed) and assessed the market’s reaction to newly released U.S. unemployment data.
Shelter prices spur rise in Canadian inflation
Warganz and Lin kicked off the conversation by looking at the latest inflation reports from Canada and the UK. Noting that there were some contrasts between the two countries, Lin said that in Canada, inflation came in a little hotter than expected. “The Bank of Canada (BoC)’s three measures of core inflation averaged around 4% in August on a year-over-year basis, which was an uptick from July’s rate of 3.3%,” Lin remarked.
He explained that rising shelter prices were a key reason why core inflation surprised to the upside. Case-in-point: Canadian rental prices last month rose about 6.5% on a year-over-year basis, Lin said, defying expectations that the country’s housing market might start to weaken in the face of tight monetary policy. Because of this, shelter costs are likely to be a watchpoint for the BoC moving forward as it tries to bring inflation back down to target, he noted.
By contrast, inflation in the UK came in softer than anticipated, Lin said, with core inflation declining from roughly 7% in July to about 6% in August on an annual basis. However, he stressed that 6% is still well above the Bank of England (BoE)’s target range of 2%.
“The bottom line on the inflation front is that while central banks have made some progress, there’s still plenty of work to be done,” Lin stated.
Bank of England, U.S. Federal Reserve hold rates steady
Speaking of progress on reining in price pressures, Lin said the Bank of England (BoE)’s unexpected decision to hold rates steady can probably be attributed to the decline in the UK’s inflation rate as well as weaker growth numbers. “The BoE has been in a bit of a tricky spot: core inflation rates are still well above target, yet officials also realize that changes in monetary policy work with a lag,” he remarked. Lin explained that, given the latest numbers and the amount of tightening that’s already been done, the BoE decided to let more time evolve in order to see how the data unfolds.
He said that the U.S. Federal Reserve (Fed) also recently opted to skip a rate increase for similar reasons, with Fed Chair Jerome Powell noting that the central bank will “proceed carefully” when weighing future rate hikes. The Fed’s summary of economic projections shows that officials anticipate keeping rates at a high level for a longer period of time, he noted.
In addition, the central bank also revised its growth forecast upward and lowered its unemployment forecast, Lin said. “This shows that Fed officials still believe they can pull off a soft landing and avoid a recession. I wish them luck, but the historical record is unfortunately not on their side. It’s really difficult to get inflation under control without causing a recession, and the Fed chair is Jerome Powell, not Harry Potter,” he remarked. Lin added that he doesn’t necessarily think a U.S. recession is inevitable, but he does see recession risks as still relatively elevated.
Markets react strongly to new U.S. jobless claims data
Warganz and Lin wrapped up the segment by reviewing recent U.S. market performance. Lin stated that Sept. 21 was not a good day for investors, with the S&P 500® Index tumbling by 1.6%—the worst day for the U.S. equity benchmark in six months. Bond markets also struggled, with U.S. Treasury yields rising as bond prices fell, he said.
One of the key drivers for the selloff was a drop in weekly U.S. unemployment claims, Lin stated. He explained that the decline was a classic good news is bad news situation—where what’s good news for Main Street is bad news for Wall Street. In this instance, the drop in jobless claims suggests that the U.S. labor market is still robust, which means the Fed might have to keep interest rates higher for longer than expected in order to curb inflation, Lin said.
These fears led to a spike in market volatility, he noted, with the CBOE Volatility Index—also known as the VIX—jumping by roughly 15% on Sept. 21. “Up until now, volatility in equity markets had been subdued for quite some time. The events of Sept. 21 serve as an important reminder that markets experience both times of calm and times of volatility,” Lin explained. He finished by emphasizing that during volatile times, it’s especially important for investors to stay disciplined and stick to their plans.
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