BMO Global Asset Management is a brand name that comprises BMO Asset Management Inc. and BMO Investments Inc.
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. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Particular investments and/or trading strategies should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.
The portfolio holdings are subject to change without notice and only represent a small percentage of portfolio holdings. They are not recommendations to buy or sell any particular security.
Forward-Looking Statements
Certain statements included in this news release constitute forward-looking statements, including, but not limited to, those identified by the expressions “expect”, “intend”, “will” and similar expressions. The forward-looking statements are not historical facts but reflect BMO GAM’s current expectations regarding future results or events. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations. Although BMO GAM believes that the assumptions inherent in the forward-looking statements are reasonable, forward-looking statements are not guarantees of future performance and, accordingly, readers are cautioned not to place undue reliance on such statements due to the inherent uncertainty therein. BMO GAM undertakes no obligation to update publicly or otherwise revise any forward-looking statement or information whether as a result of new information, future events or other such factors which affect this information, except as required by law.
®/™Registered trademarks/trademark of Bank of Montreal, used under licence.
The Inflation Slayer: The Fed will “Keep at it”
August 26th, 2022
The Inflation Slayer: The Fed will “Keep at it”
U.S. Federal Reserve (the “Fed”) Chair Jerome Powell delivered a powerful market-steering speech in Jackson Hole, Wyoming (Source: CNN) where he insisted on the Fed being dedicated to slay inflation with high interest rates. While his speech was short, it was unambiguously clear and even alluded to what investors have believed for a while, that the battle against inflation would bring “some pain” for the economy: “reducing inflation is likely to require a sustained period of below-trend growth”.
Back in July, investors began entertaining the idea that the Fed was about to “pivot” away from its hawkish rhetoric and switch to a dovish policy stance. Because this market narrative largely fueled the equity rally into early August, the risk-off market reaction was severe as Powell delivered a wake-up call to the markets. Bonds yields and the U.S. Dollar rose while equities suffered heavy selling for the reminder of August. The European Central Bank and the Bank of England also joined the hawkish campaign with rate hikes in recent weeks, which sent global bonds into an historical rout, down over 20% from their January 2021 peak (Chart 1). Although we think fixed-income market probably underestimate the degree of tightening the Fed and other major central banks will have to deliver to slay inflation, we are nevertheless approaching the later innings of the hiking cycle, which means that 10-year yields have less upside when sitting above 3%. Overall, we think the risks remain titled for higher long-term yields, until the economy hits a major speed bump that sparks a wave of layoffs.
Chart 1: Global Monetary Policy Tightening Causing Epic Bond Rout
Meanwhile, U.S. economic indicators have maintained their mixed tone as the labour market remains robust. Unsurprisingly, in the eye of the rate-hike storm lies the housing market, which is starting to correct as home-sales have tumbled in recent months.
Global Markets in August: Equities and bonds feeling Powell’s pain
Chart 2: The Unstoppable Greenback
Europe Outlook: Increasing risks for a winter chill
Europe’s supplies of natural gas are increasingly jeopardized as Russia weaponizes energy and turns to economic war in retaliation against economic sanctions (Source: Reuters). While European countries agreed to a 15% gas savings plan (Source: SP Global) and they seek to protect their industries from energy-supply disruptions, we nevertheless expect economic activity to be negatively impacted beyond the upcoming winter unless a peace deal is reached over Ukraine, but this optimistic scenario appears unlikely at this point. To help households and businesses avoid paying stratospheric spot energy prices (Chart 3), European countries are rolling out extraordinary subsidies (Source: Bloomberg). While subsidies will partially shield energy consumers from shocking energy bills, the true economic cost is likely to be measured in excess of $1tn, which will add to the inflationary dynamics and require governments to increase their projected deficits and bond issuance.
Chart 3: Soaring Natural-Gas Prices More Painful for Germany Than The U.S
Oil Outlook: What happens when the U.S. is done draining Strategic Petroleum Reserves?
Chart 4: Are Oil Inventories Set to Fall Once SPR Releases Expire?
Outlook and Positioning: Pulling out safety measures as markets remain turbulent
Disclosures
BMO Global Asset Management is a brand name that comprises BMO Asset Management Inc. and BMO Investments Inc.
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. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Particular investments and/or trading strategies should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.
The portfolio holdings are subject to change without notice and only represent a small percentage of portfolio holdings. They are not recommendations to buy or sell any particular security.
Forward-Looking Statements Certain statements included in this news release constitute forward-looking statements, including, but not limited to, those identified by the expressions “expect”, “intend”, “will” and similar expressions. The forward-looking statements are not historical facts but reflect BMO GAM’s current expectations regarding future results or events. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations. Although BMO GAM believes that the assumptions inherent in the forward-looking statements are reasonable, forward-looking statements are not guarantees of future performance and, accordingly, readers are cautioned not to place undue reliance on such statements due to the inherent uncertainty therein. BMO GAM undertakes no obligation to update publicly or otherwise revise any forward-looking statement or information whether as a result of new information, future events or other such factors which affect this information, except as required by law.
®/™Registered trademarks/trademark of Bank of Montreal, used under licence.
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