April Outlook
April 22, 2024 | By Hank Cunningham
As time goes on and economic and inflation data signal an expanding U.S. economy, the odds of an early reduction in the Fed Funds Rate are falling with a building consensus that there will be no such cuts this year. The Bank of Canada is poised, along with the ECB, to reduce its key rate before the Fed does.
The inflation outlook remains paramount to the bond market. After two successive releases, which were above consensus, it appears that inflation may bottom at 3%.
Economists are preoccupied with what kind of “landing” the U.S. economy will experience: will it be hard, soft or nonexistent? Too much time has been spent forecasting the next recession. Meanwhile, the economy, seemingly ignoring the Fed’s monetary stance, is growing at a 3% pace.
There will be no change in the monetary stance in the U.S. or Canada in the near term. While the Fed has stated that three rate reductions are possible this year, the timing of them has been pushed out, perhaps to next year. The recent CPI reports underscore inflation’s tenacity, meaning a rate reduction could be counterproductive. What is more probable is a gradual move to lower rates with the Fed Funds rate possibly moving 50 to 75 basis points lower over the next twelve months.
A similar scenario is unfolding in Canada after GDP growth picked up towards the end of 2023, putting the Bank of Canada on the sidelines, and reiterating its cautious stance during its recent deliberations.
Another important factor is that the Bank of Japan has begun to tighten its monetary policy, which could lead Japanese investors to sell their U.S. Treasury bonds.
With the recent economic strength, accompanied by escalating wages, it will likely prove difficult for inflation to reach the 2% target. Should that prove to be the case, it stands to reason that longer-term bond yields should rise. It is our view that investors are not being adequately compensated for owning long-term bonds, especially if inflation bottoms at 3%. This also reflects the massive government borrowing requirements as there is no attempt to rein in federal deficits. In addition, the Federal Reserve is still engaged in quantitative tightening (QT). The Bank of Canada is also continuing its QT program. The net effect will ultimately be a return to a positive yield curve, with short- and mid-term yields likely falling below longer-term yields. Still, the normalization of the yield curve probably won’t happen until the latter part of the year.
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March Outlook
March 14, 2024 | By Hank Cunningham
Economists are preoccupied with what kind of “landing” the U.S. economy will experience: will it be hard, soft or nonexistent? Too much time has been spent forecasting the next recession. Meanwhile, the economy, seemingly ignoring the Fed’s monetary stance, is growing at a 3% pace.
There will be no change in the monetary stance in the U.S. or Canada in the near term. While the Fed has stated that three rate reductions are possible this year, the timing of those has been pushed out. The recent CPI reports underscore inflation’s tenacity, meaning a rate reduction could be counterproductive to the Fed’s fight. What is more probable is a gradual move to lower rates with the Fed Funds rate possibly moving 50 to 75 basis points lower towards the end of the year.
A similar scenario is unfolding in Canada after GDP growth picked up towards the end of 2023, putting the Bank of Canada on the sidelines, and reiterating its cautious stance at its recent deliberations.
Another important factor is the increasing likelihood that the Bank of Japan will tighten its monetary policy and that could lead Japanese investors to sell their U.S. Treasury bonds.
Inflation remains the key fundamental for the bond market outlook. With the recent economic strength, accompanied by escalating wages, it will likely prove difficult for inflation to reach the avowed 2% target level. Should that prove to be the case, then it stands to reason that longer-term bond yields should rise from current levels. This also reflects the massive borrowing requirements as there is no attempt to rein in federal deficits. In addition, the Federal Reserve is still engaged in quantitative tightening (QT). The Bank of Canada is also continuing its QT. The net effect ultimately will be an eventual return to a positive yield curve, with short- and mid-term yields likely falling below longer-term yields. Still, the normalization of the yield curve probably won’t happen until the latter part of the year.
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February Outlook
February 13, 2023 | By Hank Cunningham
The resilience of the U.S. economy has prompted the FOMC to maintain its monetary stance for now. While it has stated that three rate reductions are possible this year, the timing of those has been pushed out. The recent CPI report underscores inflation’s stickiness, meaning a rate reduction could be counterproductive. What is more probable is a gradual reduction, with the Fed Funds rate likely to move 50 to 75 basis points lower towards the end of the year.
A similar scenario is unfolding in Canada after GDP growth picked up at the end of 2023, putting the Bank of Canada on the sidelines.
Inflation remains the key fundamental for the bond market outlook. With the recent economic strength, accompanied by escalating wages, it will likely prove difficult to reach the avowed 2% inflation target. Should that prove to be the case, it stands to reason that longer-term bond yields will rise. This also reflects the massive borrowing requirements as there is no attempt to rein in federal deficits. In addition, the Federal Reserve is still engaged in quantitative tightening.
The net effect will be an eventual return to a positive yield curve with short- and mid-term yields falling below longer-term yields.
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