August 18, 2023

Stocks rose across the U.S. and Canada as investors took a risk-on approach to the capital markets with mounting hope for a soft landing – a scenario where inflation falls back to 2% without the economy dipping into a recession. U.S. stocks rallied on the back of declining inflationary pressures, expectations for the ending of the Federal Reserve’s rate-hiking cycle, and better-than-expected Q2 earnings from bellwether companies.

Canada’s benchmark S&P/TSX Composite Index was 2.3% higher in July, as eight of the underlying sectors in the index were positive during the month. The health care sector led the index with a gain of 21.0%. The much larger materials, energy and financials sectors tacked on 6.4%, 4.1% and 3.2%, respectively, in July. Telecommunication services was the worst-performing sector, declining 6.3%. Small-cap stocks, as measured by the S&P/TSX SmallCap Index, rose 6.0% for the month.

The U.S. dollar depreciated by 0.4% versus the loonie during the month, dampening returns of foreign markets from a Canadian investor’s standpoint. Note that all returns in this paragraph are in CAD terms. U.S.-based stocks, as measured by the S&P 500 Index, posted a 2.6% gain in July. All sectors were in the green in July, with energy and telecommunication services leading the benchmark’s gain, rising 6.8% and 6.2%, respectively. International stocks, as measured by the FTSE

Developed ex-US Index, gained 2.9% during the month, while emerging markets rose 5.2%. The investment grade fixed income indices we follow were mixed in July. Canadian investment grade bonds, as measured by the FTSE Canada Universe Bond Index, decreased by 1.1% during the month, while the key global investment grade bond benchmark rose 0.7%. Global high-yield issues gained 1.4%.

Turning to commodities, natural gas prices fell 5.9% during the month, while the price of a barrel of crude oil rose 15.8%. Silver, gold and copper all had a positive month, gaining 9.5%, 2.1% and 7.1%, respectively.

Inflation in Canada declined to 2.8% year-over-year in June, led by falling transportation costs. Inflation remained above the 2.0% target due to elevated food and shelter prices. The Canadian economy added 59,900 jobs in June, as the nation’s unemployment rate rose to 5.4%. During July, the Bank of Canada raised its policy rate by 25 bps to 5.0% as the bank continued to see excess demand and heightened core inflation.

U.S. nonfarm payrolls increased by 209,000 in June, as the unemployment rate fell to 3.6%. The consumer price index slowed to 3.0% year-over-year in June. The U.S. personal consumption expenditures price index increased 0.2% month-over-month.

The Federal Reserve announced a 25-bps rate hike at its July meeting. The increase brought the U.S. policy rate to a target range of 5.25% to 5.50%, its highest level in 22 years. The U.S. economy grew 2.4% in the second quarter of 2023 from 2.0% in the previous quarter, significantly beating market expectations of 1.8%.

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