December Outlook
December 19, 2023  |  By Hank Cunningham

Despite the efforts of several Fed speakers to cool the enthusiasm for rate reductions in early 2024, the bond market remains firm and has priced in 150 basis points of Fed Funds decreases by mid-2024. The Fed did point out that it had no intention of ending its quantitative tightening program and it also highlighted that it is paying close attention to inflation.

Canada faces a weaker economy, teetering on recession and yet our inflation progress has been halting. The Bank of Canada is nowhere near as dovish as the Fed. Other central banks are monitoring their inflation rates and economies closely but have not yet signaled any clear change in their respective stances.

It is likely that the U.S. bond market will revert to a positively sloped yield curve in 2024. While short-term yields will follow the Fed Funds Rate, longer-dated bonds may be slower to fall further given the lack of term premium and still relatively low real yields. Nevertheless, long-term yields may move lower. The long-term floor for the 10-year is 3.25%; to reach that level would entail a receding economy accompanied by more rapidly improving inflation.

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