October Outlook
October 14, 2020  |  By Hank Cunningham

We expect the stop-and-go U.S. economic recovery to continue; it may begin to falter unless another round of fiscal stimulus happens. There is uncertainty about this stimulus and there is also the matter of the election.

For now, inflation expectations have eased. Central banks have maintained liberal monetary policies with no change likely for a couple of years. The burden thus falls on the fiscal side where more stimulus is necessary while the pandemic continues.

There is an upward bias to bond yields and there is a possibility that the U.S. Ten-year note could reach 1%. Central banks are loath to let rising bond yields interfere with the recovery. While they appear to be opposed to formal yield curve control, they could extend the term of their quantitative easing purchases to contain yields.

Consumer confidence and retail sales will continue to be key indicators for the trend of the economy and bond yields.

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September Outlook
September 13, 2020  |  By Hank Cunningham

We expect the uneven U.S. economic recovery to continue; it may begin to falter unless another round of fiscal stimulus happens but that is looking unlikely over the near term.

Following the Fed’s revised approach to inflation-targeting, there appears to be a tug-of-war developing in the outlook for inflation. The evidence supporting higher inflation is visible in higher producer and consumer inflation, rising inflation expectations and firmness in commodity prices.

There remain deflationary headwinds, however, most notably demographics and technology. Much of the recent uptick in inflation may turn out to be cyclical. As well, there are skeptical analysts who doubt the Fed’s ability to push inflation higher.

We conclude that inflation will continue to firm but is unlikely to breech 2%. Central Banks everywhere in the developed world have anchored short-term rates close to zero, indicating that they may keep them there for years. The massive quantitative easing program in the U.S., which entails buying $80 billion of U.S. Treasury bonds and $40 billion of mortgage securities monthly, will continue indefinitely.

Negative bond yields may ease following the bottoming of producer prices, paving the way for higher nominal bond yields. The U.S. ten-year note may move all the way up to 1%!

Consumer confidence and retail sales will be key indicators for the trend of the economy and bond yields.

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August Outlook
August 11, 2020  |  By Hank Cunningham

The rebound in economic activity continues, underwritten by massive monetary and fiscal stimulus. There is a possibility of even more fiscal stimulus. While recent gains in employment are impressive, it is likely that there will be a tapering off of job gains. However, approximately 50% of lost jobs have come back and consumer confidence is high. This argues for further steady improvement in economic performance.

The Fed’s quantitative easing and easy monetary stance have anchored Government bond yields close to all-time lows. Recently, however, there are signs that the tsunami of Government bond issuance to fund the giant fiscal shortfall is nudging these yields higher.

To this date, demand for investment grade corporates has proven to be insatiable, driving yields down to 2.55% while high yield issuance has brought yields to the 4.5-5% range.

The dramatic decline in corporate yields may pause here while the market eyes the forthcoming avalanche of Government bond supply. In addition, traders will cast a wary eye on inflation. The likely outcome will be little change in yields in the coming months.

GDP forecasts point to global growth of -4% in 2020, with the U.S. and Canada forecast to grow at -6% and -6.8% respectively, rebounding in 2021 by plus 4.7% and 5.5% respectively. 

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