March Outlook
March 24, 2023  |  By Hank Cunningham

Global growth prospects have improved, with the IMF forecasting a growth rate of 2.6%. In light of recent developments in the banking industry, the global economy will be fragile. Recession forecasts are growing, and some are concerned about an impending credit contraction.

Consumer confidence has been dealt a huge blow, which may contribute to a meaningful near-term contraction in economic activity. Fed tightening over the past 14 months is working its way through the system and the recent liquidity calamity is evidence that tightening is straining the U.S. economy. Once this liquidity crisis passes, and it will, market participants will re-focus on inflation, the economy and the Federal Reserve.

Inflation remains the number one issue facing fixed income markets and investors. After slowing over the previous four months, inflation in the U.S. is picking up again, particularly in the important services sector where wage growth is accelerating. It is premature to measure the impact of monetary tightening to date as it takes time to work its way through economies. With recent economic data exceeding estimates and inflation still high, central banks may continue to tighten.

The yield curve will stay inverted for a while, but it has flattened meaningfully in the past week. In the meantime, fixed income investors can earn 2-4% plus on short-duration bonds, thus producing positive returns with minimal risk to principal.

In summary, there will be more drama and wild fluctuations in bond yields, and we still expect a wide trading range of 3.25% to 4.25% on the U.S. 10-year Treasury bond. It approached 3.25% but bounced back up to 3.50%.

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