December Outlook
December 10, 2018  |  By Hank Cunningham

The economic outlook has dimmed during the past two months. Both the Federal Reserve and the Bank of Canada have softened their tone. While the Fed is almost certain to increase the Fed Funds rate in December, it might be the last hike for a while.

There are a host of positives still in place in the U.S. economy:

  1. Buoyant retail sales and consumer confidence.
  2. Increased business investment and industrial production.
  3. Tight labour market.
  4. Solid PMIs.

Global growth has been pared slightly by the OECD for 2019 but is still expected to be at 3.4%.

With one more Fed Funds hike coming and with inflation ebbing, the ten-year U.S. bellwether bond yield will not be climbing back to 3.24% anytime soon. That is looking like the market top for now. However, there is not a strong case for bond yields to fall further from current levels either, as a result of all the positive factors still present. Inflation may be ebbing but it is still in the 2% area, leaving real yields barely positive including the Fed Funds rate. The U.S. Treasury had to issue record amounts of bonds to finance the whopping U.S. deficit. With the flatter yield curve, the Treasury may begin to ramp up its issuance of long-term bonds.

Our conclusion is that there is no recession coming soon and that the fears surrounding the corporate credit market, both for investment grade and high yield bonds, are overblown. This is not to ignore them, but even with the recent widening of spreads from government bonds, corporate bond yield spreads are still historically tight. Long-term yields are near the bottom end of what we estimate to be the new trading range of 2.75% to 3.24%.