Consumption Slows with Sustained Inflation
June 2022 Commentary & Performance Review
Stubbornly high inflation led the U.S. Federal Reserve to quicken the pace of their rate increases to 0.75%. The last time the ‘Fed’ raised rates this much in a single meeting was November 1994. Equity markets continued their bearish trend after the announcement, with the Dow Jones Industrial Average and the S&P/TSX Composite finished the month down 6.7% and 9.0%, respectively.
While equity and fixed income markets have had a grim first half of the year, portfolios having gold exposure have had a softened blow to their overall returns. Gold has been surprisingly resilient when taking into consideration its typical negative correlation to Treasury yields. Recently, G7 countries agreed to ban imports of Russian gold in retaliation to the invasion of Ukraine, which could continue to support the precious metal.
The U.S. Dollar Index, a measure of the value of the U.S. Dollar in relation to a group of international currencies, is trading at levels last seen in 2016 shortly after the U.S. flooded the global market with oil extracted from the Permian Basin. This U.S. dollar strength has surprisingly been overshadowed by the strength of the Russian Ruble. Currency traders believe sustained demand for Russian energy in Asia as well as the implementation of capital controls have helped to prop up the currency.
Recent data has shown that consumer spending is beginning to slow on big-ticket purchases, in addition to travel and entertainment. According to the data, retail sales slowed last month for the first time in 2022 while flight bookings dipped 2.3% from the prior month. Credit card analytics from Barclays shows that spending has pulled back significantly in the last six weeks, particularly on services. Restaurant bookings were rebounding with the removal of COVID restrictions but have begun to slow.
Cryptocurrencies have been highly correlated to the sell‐off in high-growth tech stocks, temporarily dropping the global crypto market capitalization below US$1 trillion in June. Crypto markets have been highly sensitive to inflation and rising interest rates. Bitcoin, the largest currency by market capitalization, has fallen over 50% since the start of the year. Ethereum performance has also been mired by the delayed rollout of their ‘difficulty bomb’, which is intended to promote the use of Ether 2.0.
- Gold exposure through Ninepoint Gold Bullion (NPP226) added modestly to returns as the precious metal retained value. Units ended the month up 0.02%
- Verizon Communications (VZ‐US) continued a strong year, adding 0.70% when taking foreign exchange into consideration
- Shares of Nucor Co (NUE‐US) fell ‐21% as steel prices pulled back due to the increased risk of a global recession
- The lower liquidity of Granite REIT (GRT.UN‐CA) shares led to a dramatic pullback of ‐13% as investors redeemed units