balanced fund quarterly report
June 30, 2024
Economic Commentary
Progress continues to be made on the inflation front, however, declines have not occurred on a path that central bankers would like to see. Although current inflation levels are much lower than the peak levels reached in 2022, monthly improvements have not exhibited a consistent downward trend. Canadian inflation started the year at 3.4%, fell during the first two months of the year, and then moved higher in March to 2.9%. Further progress was made in April, with inflation declining to 2.7%, however, there was a surprise uptick to 2.9% again in May. U.S. inflation, which also started the year at 3.4%, has not had a consistent trend either and was 2.9% in May. Inflation in Europe, which peaked at much higher levels than in North America, has shown more dramatic improvement. May inflation in the Eurozone was 2.6% and in the U.K it was 2.0%. Inflation still remains higher than the central bank target of 2% and continues to be the major factor that will impact monetary policy going forward.
The Bank of Canada was the first major central bank to cut interest rates, with a 25 bp drop at its June meeting. A decline in April inflation to 2.7% was a key factor contributing to the rate cut. Markets were expecting a further 25 bp cut at the July meeting, however, the surprise uptick in May inflation to 2.9% diminished hopes that a subsequent rate cut would occur. The European Central Bank had its June meeting the day after the Bank of Canada and lowered interest rates by 25 bp as well. Although the U.S. Federal Reserve has pivoted from an environment of interest rate hikes to potential rate cuts, they have not changed their overnight rate so far this year. The Fed was calling for 75 bp in rate cuts in 2024, however, at their most recent meeting they have scaled that back to only one. Persistent inflationary pressure has kept the Fed on the sidelines longer than expected this year. Financial markets are anticipating two interest rate cuts by the Fed this year, with the first cut expected in September.
