Equity markets struggled this week, with firm U.S. inflation data further pushing out Fed easing expectations, and even the Bank of Japan is set to end an era of negative interest rate policy.
The S&P 500 dipped 0.1%, with Consumer Discretionary and Health Care lagging.
The TSX added 0.5%, as Energy and Materials posted solid gains.
Inflation
With the U.S. Federal Reserve’s (Fed) “dot plot”—a projection of the expected interest rate trajectory—set to be released this week, attention has turned to recent inflation numbers. Data released last week showed that prices picked up slightly in February, prompting questions about whether rate cuts in 2024 could be in jeopardy. Let’s address the biggest concern first: no, we don’t expect the Fed to move away from their rate cut trajectory. However, we’re not likely to see 50 bps cuts on the way down like we saw 50 bps hikes on the way up, and the schedule for rate cuts is not likely to be aggressive, either. Some investors and analysts have been expecting more than three rate decreases before the end of 2024. In our view, this is aggressive and may not happen, but we continue to believe that between two and three cuts is the most likely scenario. Given the continuing resilience of the U.S. economy, we wouldn’t necessarily be surprised if there are no rate cuts at all in 2024. That is not our base case, however.
Bottom Line: With inflation persisting, we wouldn’t be shocked if the Fed doesn’t lower interest rates in 2024; the most likely scenario, however, is two-to-three rate cuts before the end of the year.
Bonds
The U.S. Treasury’s monthly auctions for bonds showed relatively weak demand in March. Should this worry fixed income investors, and does it mean that interest rate spreads are likely to blow out? In our view, there is some risk—it’s not disastrous that the auctions drew little interest, but it’s certainly not a great sign. Low demand for bonds means that yields will have to go up in order for them to be attractive, and that’s not necessarily positive for bond returns; bond yields tend to be inversely correlated with bond prices. However, if rate cuts do seem imminent later in the year, then that would be a tailwind for bonds because yields would likely head lower and investors would start to believe that bond prices will pick up. With the current pace of equity returns, we could see demand pick up for bonds as equity valuations start to become excessive, but we are not there yet.
Bottom Line: Weak demand for bonds isn’t great news, but potential interest rate cuts and a rotation from equities could cause demand to pick up later in the year.
Earnings
With persistent inflation, speculation about interest rates, and political (and geopolitical) news all creating noise in markets, what should investors expect from corporate earnings for the rest of the year? Overall, we’re still optimistic. As long as the consumer is spending and the employment picture looks relatively good, which is the case at present, we wouldn’t anticipate any major misses. However, keep in mind that expectations do remain high and the bar to beat may not be easy. As the year progresses, there may be an adjustment in spending patterns—we’ve already seen some of that earlier in the year with luxury items, though that trade down seems to have stalled in the last quarter. For now, though, money continues to flow into Consumer Discretionary, and consumers don’t seem to be adjusting as sharply as some had expected.
Bottom Line: We’re still optimistic on corporate earnings, though they may be affected by adjustments in consumer spending in the second half of the year.
The viewpoints expressed by the Portfolio Manager represents their assessment of the markets at the time of publication. Those views are subject to change without notice at any time without any kind of notice. The information provided herein does not constitute a solicitation of an offer to buy, or an offer to sell securities nor should the information be relied upon as investment advice. Past performance is no guarantee of future results. This communication is intended for informational purposes only.
BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate.
Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.
This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.
Commissions, management fees and expenses (if applicable) all may be associated with investments in mutual funds. Trailing commissions may be associated with investments in certain series of securities of mutual funds. Please read the fund facts, ETF facts or prospectus of the relevant mutual fund before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Distributions are not guaranteed and are subject to change and/or elimination.
For a summary of the risks of an investment in the BMO Mutual Funds, please see the specific risks set out in the prospectus. ETF Series of the BMO Mutual Funds trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.
BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.
®/™Registered trademarks/trademark of Bank of Montreal, used under licence.
The view from 10,000 feet is that the economy is still in fairly good shape. That said, it is important to understand that we are beginning to see more signs of underlying economic weakness.
Given recent inflation numbers, are markets resetting rate cut expectations, and is a soft landing is still possible? How will the state of the consumer impact earnings season?
What do Fed Chairman Jerome Powell’s recent comments mean for the interest rate outlook? And what impact are they having on equity and fixed income markets?
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Hitting Snooze on the Bond Trade
March 18 to 22, 2024
Hitting Snooze on the Bond Trade
March 18 to 22, 2024
Sadiq S. Adatia, CFA, FSA, FCIA
Market Recap
Inflation
With the U.S. Federal Reserve’s (Fed) “dot plot”—a projection of the expected interest rate trajectory—set to be released this week, attention has turned to recent inflation numbers. Data released last week showed that prices picked up slightly in February, prompting questions about whether rate cuts in 2024 could be in jeopardy. Let’s address the biggest concern first: no, we don’t expect the Fed to move away from their rate cut trajectory. However, we’re not likely to see 50 bps cuts on the way down like we saw 50 bps hikes on the way up, and the schedule for rate cuts is not likely to be aggressive, either. Some investors and analysts have been expecting more than three rate decreases before the end of 2024. In our view, this is aggressive and may not happen, but we continue to believe that between two and three cuts is the most likely scenario. Given the continuing resilience of the U.S. economy, we wouldn’t necessarily be surprised if there are no rate cuts at all in 2024. That is not our base case, however.
Bottom Line: With inflation persisting, we wouldn’t be shocked if the Fed doesn’t lower interest rates in 2024; the most likely scenario, however, is two-to-three rate cuts before the end of the year.
Bonds
The U.S. Treasury’s monthly auctions for bonds showed relatively weak demand in March. Should this worry fixed income investors, and does it mean that interest rate spreads are likely to blow out? In our view, there is some risk—it’s not disastrous that the auctions drew little interest, but it’s certainly not a great sign. Low demand for bonds means that yields will have to go up in order for them to be attractive, and that’s not necessarily positive for bond returns; bond yields tend to be inversely correlated with bond prices. However, if rate cuts do seem imminent later in the year, then that would be a tailwind for bonds because yields would likely head lower and investors would start to believe that bond prices will pick up. With the current pace of equity returns, we could see demand pick up for bonds as equity valuations start to become excessive, but we are not there yet.
Bottom Line: Weak demand for bonds isn’t great news, but potential interest rate cuts and a rotation from equities could cause demand to pick up later in the year.
Earnings
With persistent inflation, speculation about interest rates, and political (and geopolitical) news all creating noise in markets, what should investors expect from corporate earnings for the rest of the year? Overall, we’re still optimistic. As long as the consumer is spending and the employment picture looks relatively good, which is the case at present, we wouldn’t anticipate any major misses. However, keep in mind that expectations do remain high and the bar to beat may not be easy. As the year progresses, there may be an adjustment in spending patterns—we’ve already seen some of that earlier in the year with luxury items, though that trade down seems to have stalled in the last quarter. For now, though, money continues to flow into Consumer Discretionary, and consumers don’t seem to be adjusting as sharply as some had expected.
Bottom Line: We’re still optimistic on corporate earnings, though they may be affected by adjustments in consumer spending in the second half of the year.
Positioning
For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report, titled The Bulls Keep Running: Why Markets Remain Upbeat.
Disclosures:
The viewpoints expressed by the Portfolio Manager represents their assessment of the markets at the time of publication. Those views are subject to change without notice at any time without any kind of notice. The information provided herein does not constitute a solicitation of an offer to buy, or an offer to sell securities nor should the information be relied upon as investment advice. Past performance is no guarantee of future results. This communication is intended for informational purposes only.
BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate.
Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.
This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.
Commissions, management fees and expenses (if applicable) all may be associated with investments in mutual funds. Trailing commissions may be associated with investments in certain series of securities of mutual funds. Please read the fund facts, ETF facts or prospectus of the relevant mutual fund before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Distributions are not guaranteed and are subject to change and/or elimination.
For a summary of the risks of an investment in the BMO Mutual Funds, please see the specific risks set out in the prospectus. ETF Series of the BMO Mutual Funds trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.
BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.
®/™Registered trademarks/trademark of Bank of Montreal, used under licence.
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