The third quarter was marked by heightened uncertainty and persistent volatility as investors tried to make sense of the macroeconomic landscape.
Earlier in the quarter, expectations of a soft landing were bolstered by slowing inflation and robust economic data. However, market sentiment gradually shifted towards the possibility that interest rates could stay higher for longer. As policymakers continued to maintain a hawkish stance, bond yields in the long end of the curve spiked to new cycle highs (the US 30-year Treasury yield saw its biggest quarterly increase since the first quarter of 2009) while global equity markets also ended the quarter with negative returns.
Inflation in both Canada and the US bounced back higher as oil production cuts led to a surge in crude oil prices. From its lowest reading of 2.8% for the month of June, headline inflation in Canada increased to 4.0% in August. In similar fashion, US inflation also climbed higher from 3.0% in June to 3.7% in August. These unexpectedly higher inflation numbers which are well above the 2% central bank target have raised the odds for further rate hikes, supporting the higher for longer rates narrative. Yet, the Bank of Canada held its benchmark interest rate steady at 5.0% during its two rate decisions in the third quarter, but did not rule out future hikes.
It was a tough quarter for bonds as they gave up all of the gains made in 2023 and then some with yields on the long end of the curve reaching 16-year highs. Canadian bonds, represented by the FTSE Canada Universe Bond Index, dropped by 3.9% in Q3, and are down 1.5% on a YTD basis.
Although global equities started the quarter on a positive note, they ended in red after the negative sentiment during September which was mostly driven by higher interest rates and oil prices. Global equities were down 3.3% for the quarter but are still up 9.7% so far this year. Canadian equities outperformed US equites over the quarter as more cyclical sectors like energy and financials outperformed. However, the TSX was still down 2.2% in Q3, returning 3.4% on a YTD basis. The S&P 500 dropped 3.3% last quarter but is still up 13.1% YTD after the strong rally by mega cap technology names earlier in the year.
Head of Investments
Yelena Stepanyan is the Head of Investments at Embark. A lover of all things related to the financial markets, she is currently the Chair of the Chartered Financial Analyst Society Toronto's Institutional Asset Management Committee.