September Outlook
September 9, 2022  |  By Hank Cunningham 

The monetary tightening, only recently begun, is starting to impact economic growth prospects. In the U.S., GDP was negative for two consecutive quarters, accompanied by an inversion of the yield curve. These are traditional barometers of a recession. Global economic forecasts have been tempered but are still positive. Housing markets have softened noticeably, while commodity prices have endured a severe correction.

After the recent cooling in the CPI, speculation was rife that the Fed will only hike its rate by a further 50 basis points. These hopes were quashed by a hawkish speech from Fed Chair Powell at the recent Jackson Hole gathering. The Fed is on record for wanting to see several sequential months of improvement in the inflation trends before considering any change in its stance.

The Bank of Canada, after hiking its key lending rate by a further 75 basis points, indicated that further hikes are coming. The Bank is concerned that inflation is becoming entrenched. The Bank of Canada stated that the economy remained strong and that wage increases were accelerating.

The ECB joined the tightening crowd, hiking its key rate by an unprecedented 75 basis points, while downgrading Europe’s growth prospects.

We expect the U.S. 10-year Treasury yield to expand, perhaps reaching 3.5%. Corporate bond yields will track government yields closely as credit conditions are still positive but as modest strains have emerged of late. Some widening from Treasury yields is likely.

Wage pressures are escalating and have moved to the 5% plus level and may prevent the inflation rate from falling back to 2%. Long-term deflationary pressures, such as demographics and technology, will re-emerge eventually and help ease inflation. Overall, inflation will be slow to subside, with most forecasts, including those from the central banks, estimating it to land between 4-5% this year. Inflation indicators, such as break-even rates, have softened noticeably lately.

Already, the market has discounted several further rate hikes and thus markets are not likely to react in a knee-jerk fashion. The Fed, and other central banks, remain committed to normalizing short-term interest rates in the belief that moving rates to the 4% area will not affect economies unduly.

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August Outlook
August 11, 2022  |  By Hank Cunningham

The monetary tightening, only recently begun, is starting to impact economic growth prospects. In the U.S., GDP was negative for two consecutive quarters, accompanied by an inversion of the yield curve. These are traditional barometers of a recession. Global economic forecasts have tempered but are still positive. Housing markets have softened noticeably while commodity prices have endured a severe correction.

After the recent cooling in the CPI, speculation is rife that the Fed will only hike its rate by 50 basis points. It may be premature for such optimism, since the Fed is on record for wanting to see several consecutive months of improvement in inflation trends.

Consumer sentiment has ebbed but retail sales have held up. A major concern is whether capital spending is reduced or delayed. At the same time, the geopolitical landscape has produced widespread uncertainty, and even more inflationary pressure.

We expect the U.S. 10-year Treasury yield range of 2.50% to 3.25% to persist. Corporate bond yields will track Treasury yields closely as credit conditions are still positive.

Wage pressures are escalating and have moved to the 5% level and may prevent the inflation rate from falling back to 2%. Long-term deflationary pressures, such as demographics and technology, will re-emerge eventually and help ease inflation. Overall, inflation will be slow to subside, with most forecasts, including those from the central banks, estimating it to land between 4-5% this year.

It is likely that the Fed will be flexible in its monetary policy, owing to the uncertainty surrounding growth and geopolitical conflict. Already, the market has discounted several rate hikes and thus are not likely to react in a knee-jerk fashion. The Fed, and other central banks, remain committed to normalizing short-term interest rates in the belief that moving rates to the 3% area will not unduly affect economies.

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June Outlook
June 10, 2022  |  By Hank Cunningham

The Federal Reserve and the Bank of Canada have begun to remove monetary accommodation and there is more tightening to come. To date, there has been little impact on economic data nor has the geopolitical conflict fed into the mix. Indeed, the Fed has maintained a positive economic outlook and is forecasting the inflation rate to average out at 4.3% for 2022. Many central banks, including the Bank of Canada, the Bank of England and the ECB, have joined the Fed in tightening.

The Fed and the Bank of Canada have discussed their plans to return to the so-called “neutral” level for their key lending rates. This rate is projected to be 2.5%-3% and, barring a major exogenous shock, is likely to occur.

It is reasonable to acknowledge that growth, both domestic and global, will suffer somewhat. Indeed, the IMF has downgraded global economic growth for this year and next to 3.6% versus previous estimates of 4.4% and 3.8%, respectively. Consumer sentiment has ebbed but retail sales have held up. A major concern is whether capital spending will be reduced or delayed. Meanwhile, the geopolitical landscape has produced wide-spread uncertainty, and even more inflationary pressure.

Real yields are rising rapidly and have moved into positive territory. A combination of further increases in bond yields, plus some easing in inflation will result in real yields turning even more positive. Thus, we expect yields at all maturities to gain further with a 3.25% target for the bellwether 10-year U.S. note. Corporate bond yields will move up in at least a similar fashion and possibly widen further from Treasury yields. Corporate financial health remains solid.

Wage pressures are escalating and may prevent the inflation rate from falling back to 2%. Commodity prices have soared of late too. Long-term deflationary pressures, such as demographics and technology, will re-emerge eventually and help ease inflation. Overall, inflation will be slow to subside. Most forecasts, including those from the central banks, estimate it will land between 4-5% this year.

It is likely that the Fed will be flexible in its monetary policy, owing to the uncertainty around growth and the geopolitical conflict. Already, the market has discounted several rate hikes and thus is not likely to react in a knee-jerk fashion. Also, the beginning of quantitative easing by the Fed and other central banks will impact market yields negatively.

Given this outlook, returns for fixed income investors will continue to be disappointing.

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