February 2022

Greetings and Happy 2022 from Joe and Stu!

Since we’ve taken over management at the end of 2021 we’ve been actively trying to connect with everyone one-on-one. If you haven’t heard from us, please know you will soon! If you have an immediate need, please reach out by calling, texting or emailing.

Joe Quach – joe(at)castlewealthservices.com, 226-546-5424
Stuart Driedger – stuart(at)castlewealthservices.com, 431-341-2100

Below you’ll find some detailed information from Optimize Wealth Management and First National Financial about the current state of the economy and an outlook on 2022. Overall 2022 looks predictable, which is great news after the last couple years of uncertainty.

We look forward to connecting and working for you!

Joe & Stu

Important Information and Dates

1)RRSP Deadline is fast approaching!  March 1, 2022 is the final date for RRSP contributions that can apply against your 2021 income.

2)2021 Tax Slips have been sent out directly from Optimize.  You can also access your tax slips through your online portal.  If you need a hand finding them, please let us know!

From the Desk of Optimize Wealth Management

Very Strong Financial Results in 2021: Client portfolios had another very strong year in 2021, with Canadian equities in our portfolios outperforming the TSX by 9.5% and the U.S equities outpacing the Dow Jones over the course of the year. Our Premium Income Fund was up more than 13% in 2021 whereas traditional bonds and North American investment grade debt tumbled 2-5% during the same timeframe. Despite the continued pull-back in the US markets year-to-date, our portfolios have exhibited tremendous relative strength to all of the major financial markets in North America.

A Rising Rate Environment is Actually Good for Certain Sectors: As history has shown, a rising rate environment has had a very positive impact on certain parts of the economy, namely financial services.  In fact, the financial sector of which our portfolios have an overweight position, has consistently outperformed the S&P 500 by a greater margin than any other sector during periods of rising interest rates. Moreover, Energy companies and specifically oil prices remain well positioned as the geopolitically fueled supply concerns continue to place upward momentum on oil prices. The Canadian housing market continues to remain at very tight levels with employment levels in Canada having fully recovered from the COVID-19 shock.

Strategic Positioning and Proactive Rebalancing across our Portfolio Mandates: While there are certain sectors that are positioned better than others for this type of market, we continue to take a very measured approach within our portfolios and still see tremendous value within large-cap blue chip companies. Investing in companies which exhibit strong Returns on Equity, Solid Dividend Yields, and steady Revenue Growth has always, and will certainly continue to be our focus in 2022. We also continue to hold very strong, defensive names such as Walmart and Costco, which perform very well in current market conditions (Costco, for example, was up over 50% in 2021). To complement and further diversify our portfolios, we also have a very meaningful allocation invested in our pension-style asset classes which exhibit very low correlation levels to the broader markets.

And while we will of course continue to be extremely proactive should we feel the need to make changes within our portfolios, we are already certainly very well-positioned to take advantage of the current market conditions and we look forward to another very strong year overall.

From the Desk of First National Financial

This morning (January 26, 2022) in its first scheduled policy decision of 2022, the Bank of Canada left its target overnight benchmark rate unchanged at what it describes as its “lower bound” of 0.25%. As a result, the Bank Rate stays at 0.5% and the knock-on effect is that borrowing costs for Canadians will remain low for the time being. 

The Bank also updated its observations on the state of the economy, both in Canada and globally, leaving a strong impression that rates will rise this year.

More specifically, the Bank said that its Governing Council has decided to end its extraordinary commitment to hold its policy rate at the effective lower bound and that looking ahead, it expects “… interest rates will need to increase, with the timing and pace of those increases guided by the Bank’s commitment to achieving” its 2% inflation target.

These are the other highlights of today’s BoC announcement.

Canadian economy

-The economy entered 2022 with considerable momentum, and a broad set of measures are now indicating that economic slack is absorbed

-With strong employment growth, the labour market has tightened significantly with elevated job vacancies, strong hiring intentions, and a pick up in wage gains

-Elevated housing market activity continues to put upward pressure on house prices

-Omicron is “weighing on activity in the first quarter” and while its economic impact will depend on how quickly this wave passes, the impact is expected to be less severe than previous waves

-Economic growth is then expected to bounce back and remain robust over the Bank’s “projection horizon,” led by consumer spending on services, and supported by strength in exports and business investment

-After GDP growth of 4.5% in 2021, the Bank expects Canada’s economy to grow by 4% in 2022 and about 3.5% in 2023

Canadian inflation

-CPI inflation remains “well above” the Bank’s target range and core measures of inflation have edged up since October

-Persistent supply constraints are feeding through to a broader range of goods prices and, combined with higher food and energy prices, are expected to keep CPI inflation close to 5% in the first half of 2022

-As supply shortages diminish, inflation is expected to decline “reasonably quickly” to about 3% by the end of 2022 and then “gradually ease” towards the Bank’s target over the projection period

-Near-term inflation expectations have moved up, but longer-run expectations remain anchored on the 2% target

-The Bank will use its monetary policy tools to ensure that higher near-term inflation expectations do not become embedded in ongoing inflation

Global economy

 -The recovery is strong but uneven with the US economy “growing robustly” while growth in some other regions appears more moderate, especially in China due to current weakness in its property sector

 -Strong global demand for goods combined with supply bottlenecks that hinder production and transportation are pushing up inflation in most regions

 -Oil prices have rebounded to well above pre-pandemic levels following a decline at the onset of the Omicron variant of COVID-19

 -Financial conditions remain broadly accommodative but have tightened with growing expectations that monetary policy will normalize sooner than was anticipated, and with rising geopolitical tensions

 -Overall, the Bank projects global GDP growth to moderate from 6.75% in 2021 to about 3.5% in 2022 and 2023

January Monetary Policy Report

The key messages found in the BoC’s Monetary Policy Report published today were consistent with the highlights noted above:

 -A wide range of measures and indicators suggest that economic slack is now absorbed and estimates of the output gap are consistent with this evidence

-Public health measures and widespread worker absences related to the Omicron variant are slowing economic activity in the first quarter of 2022, but the economic impact is expected to be less severe than previous waves

-The impacts from global and domestic supply disruptions are currently exerting upward pressure on prices

-Inflationary pressures from strong demand, supply shortages and high energy prices should subside during the year

-Over the medium term, increased productivity is expected to boost supply growth, and demand growth is projected to moderate with inflation expected to decline gradually through 2023 and 2024 to close to 2%

-The Bank views the risks around this inflation outlook as roughly balanced, however, with inflation above the top of the Bank’s inflation-control range and expected to stay there for some time, the upside risks are of greater concern

Looking ahead

The Bank intends to keep its holdings of Government of Canada bonds on its balance sheet roughly constant “at least until” it begins to raise its policy interest rate.  At that time, the BoC’s Governing Council will consider exiting what it calls its “reinvestment phase” and reducing the size of its balance sheet. It will do so by allowing the roll-off of maturing Government of Canada bonds.

While the Bank acknowledges that COVID-19 continues to affect economic activity unevenly across sectors, the Governing Council believes that overall slack in the economy is now absorbed, “thus satisfying the condition outlined in the Bank’s forward guidance on its policy interest rate” and setting the stage for increases in 2022.

Original Article: https://www.firstnational.ca/mortgage-brokers/resources-for-mortgage-brokers/article/bank-of-canada-holds-benchmark-interest-rate-steady-updates-2022-economic-outlook