July Outlook
July 15, 2019  |  By Hank Cunningham

Where does the market go from here? There are clear signs of slowing in global and American growth. Canada is an exception to this, with its economy performing well.

Monetary ease, in an attempt to forestall further weakness has returned everywhere but Canada. Bond yields, primarily in Europe, have fallen deeper into negative territory. It is premature to fear a recession in the near term, but GDP growth should abate somewhat.

The U.S. consumer remains confident and employment remains strong, while inflation actually stirred to everyone’s surprise. It is likely that bond yields will stay suppressed indefinitely, but we believe that a modest uptrend in yields may take place, especially if inflation continues to tick up.

Of course, global trade concerns are of major importance but it is difficult to predict the outcome or impact. Thus, they are the wild card and could lead to market disruption.

Canada is enjoying a period of positive economic results which should leave the Bank of Canada on the sidelines. The strength in the loonie will act as a de facto tightening, which should continue as the Fed contemplates lowering rates and weakening the U.S. dollar as a result.

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June Outlook
June 13, 2019  |  By Hank Cunningham

The stage is set for monetary easing. Fed Chair Powell signalled as much and the market has priced in one cut in July and two more for the rest of the year. This has resulted in a modest steepening in the yield curve, as measured by the two-year-ten-year spread, mostly as a result of the plunge in the two-year yield. Presently at 1.93%, the two-year is approximately 50bps below the Fed Funds Rate.

While bond yields may ebb and flow, we are in for a sustained period of low interest rates and bond yields.

The Bank of Canada finds itself in an interesting position. With the Fed poised to ease, the bank is being pressured to follow but, given the recent strength across the Canadian economy, it may hold off for now. The loonie moved up steadily given the relatively attractive fundamental differences between the U.S. and Canadian economies. As a strong Canadian dollar represents de facto tightening, the Bank of Canada may have little option but to follow the Fed.

Credit conditions improved following the relaxation in trade tensions, witnessed in the narrowing yield spreads between corporate bonds, investment-grade, high-yield and government bonds.

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May Outlook
May 9, 2019  |  By Hank Cunningham

Bond yields have reached the low end of what we perceive to be a 2.40-2.80% trading range. If Fed Chair Powell is correct in labelling the recent softness in inflation as “transitory”, then bond yields may tick higher. Some of the recent decline in yields may also have emanated from the safe-haven bid after the latest trade spat.

Global growth is positive but at a reduced pace from 2018; Europe is mired in a 1% growth phase with a majority of its bonds at negative yields.

With most central banks on the sidelines (i.e., no tightening), corporations have little to fear from rising rates. Corporate bond yields, both investment grade and high yield, have thus narrowed versus government yields. This has held true in Canada where the Bank of Canada finally abandoned its tightening bias.

Thus far, inflation has not shown any signs of accelerating and we expect no jarring moves in bond yields.


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