February Outlook
February 13, 2024  |  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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