Monthly Review

What’s the path for growth going forward?

Written on
July 7, 2021

The global economy continues its healing process as it slowly returns to its pre-COVID levels. However, some indicators suggest that growth may be peaking. One recent clue was the significant miss on retail sales in the US and the UK for the month of May, with monthly declines of 1.3% and 2.1% respectively. After the large gains recorded in 2020 and early 2021, could we be seeing consumer fatigue for retail goods?

Overall consumption should remain healthy as confidence indicators suggest consumers are feeling rather good at the moment. In addition, households have built a sizeable amount of excess savings over the last few quarters and we believe that should help support consumption going forward with the service sector likely benefiting the most in the coming months.



The month of June provided a similar pattern to what we saw in May with stronger than expected inflation and a disappointing employment report. In the US, the 3.8% change in the annual core CPI was the highest since 1992, with an increase of more than 3% for the service sector. While the large rise in inflation was largely expected by investors, the lower-than-expected employment gain was not. The US economy only created 559,000 jobs while economists expected a gain of almost 700,000. Once again, the miss appears to be driven by the lack of Americans looking to get back to work; the most recent Job Openings and Labor Turnover Survey (JOLTS) shows there are more than 9.2 million job vacancies. According to Reuters1, states that ended federal benefits recorded a larger drop in unemployment insurance claims, suggesting the incentive to return to work increases as benefits are reduced. While hiring has not picked up significantly in these states, employment gains will probably improve in the coming months as benefits expire.


While higher inflation is unlikely to alter the Federal Reserve’s outlook – it is expected to be transitory – an improved labour market could entice some of the Federal Open Market Committee (FOMC) board members to remove some of the accommodative measures that are still in place.


On the COVID-19 front, concerns are growing about the Delta variant. The rapid spread is driving a significant rise of positive cases in many regions around the globe. The British government was compelled to push back the last phase of its re-opening2 while other regions re-imposed some restrictions to limit the spread of the virus3,4. The good news is that hospitalizations have not accelerated as much as in previous waves. If this trend continues and the stress on national health-care systems is manageable, governments should be able to keep restrictions to a minimum and, as a result, the economic impact will be rather limited.



Lastly on the macro front, one of the biggest surprises last month was the hawkish shift in the FOMC interest rates forecast. The most recent “dot plots” showed that FOMC members are now pencilling in two rate hikes by 2023 compared to none before. Despite the shift in the forecast, the US Federal Reserve Chairman, Jerome Powell, downplayed the change while confirming there would be no modification to the asset purchase program. Consequently, the US interest rate curve flattened; short-term rates rose while yields on long-dated bonds declined with the US 10-year treasury yield sitting at 1.5% on June 30. This compares to 1.68% at the start of the quarter.





Market performance

The global stock market kept going; it reached another record high in June with a rise of 2.1%, marking the 5th consecutive monthly gain and putting the index 36.8% above the level recorded a year ago. North American stocks posted the strongest return in June with a 2.7% jump while European equities rose 1.6%. The Pacific region and emerging markets lagged with respective increases of 1.0% and 0.8%.


June brought a wide dispersion of sector performances. Materials ended 2.5% lower as many commodities were negatively impacted by the stronger US dollar following the more hawkish FOMC. For example, the price of gold fell by more than 7%, copper dropped 8% while lumber prices ended the month down 58% from the peak recorded in May. In contrast, energy, also considered a resource sector, advanced 4.3% thanks to the price of crude which defied the reversal observed in most commodities prices. The financial sector fell 2.2%, weighed down by the combination of lower long-term treasury yields and a flatter yield curve. Conversely, the lower rates help boost investors’ interest for IT stocks; the sector boasted a strong 6.5% return.




Peak economic growth, stimulus and earnings revisions, combined with stretched valuations and extended investor sentiment, continue to justify a defensive positioning.


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