DM Rates Outlook: Rate Cuts Arriving and Positive Yield Curves

March 22, 2024 2:00 PM UTC

U.S. Outlook: Fed to Ease as Economy Gradually Slows

March 22, 2024 10:00 AM UTC

•    The U.S. economy has continued to see growth surprising to the upside supported in particular by consumer spending. While the momentum of the second half of 2023 will be difficult to sustain the economy now looks poised for a soft landing, with risk that continued resilience in the econom

Preview: Due January 11 - U.S. December CPI - Marginally above 0.2% before rounding

January 10, 2024 2:00 PM UTC

Our forecast for the core rate would be a slowing from 0.3% (0.285% before rounding) in November, though similar to October’s outcome of 0.227%.
We expect some slowing from November accelerations in owners’ equivalent rent and medical care though these components should remain stronger than most

Shipping Freight Cost Jump and Inflation – Some Perspectives

January 9, 2024 2:24 PM UTC

Figure 1: Freight Cost Surge in Perspective
Source: DataStream 
How Long?
Houthi rebels have been attacking some ships in the Red Sea in recent weeks.  The key question is how long this will last?  One line of thinking is that the Houthi attacks are part of Iran axis of resistance alongside attacks

AI and Technology Impact on Growth and Inflation

January 3, 2024 10:30 AM UTC

Bottom Line: The full benefits of the latest AI wave will likely not kick in until the late 2020/early 2030’s.However, 5G over the last couple of years has been enabling more connectivity via the Internet of Things and allowing more big data analysis, including AI tools and algorithms. In the 2hal

Preview: Due January 11 - U.S. December CPI - Marginally above 0.2% before rounding

January 2, 2024 5:03 PM UTC

Our forecast for the core rate would be a slowing from 0.3% (0.285% before rounding) in November, though similar to October’s outcome of 0.227%.
We expect some slowing from November accelerations in owners’ equivalent rent and medical care though these components should remain stronger than most

Equities Outlook: Rate Cuts To Help in 2024

December 15, 2023 11:00 AM UTC

Equities Outlook: Rate Cuts To Help in 2024
·        For other DM equity markets, EZ and UK are undervalued in contrast to the U.S., but are in or close to recessions and economic recovery will likely be weak and disappointing.  Though the ECB and BOE will likely ease in Q2 with the Fed, we

U.S. Outlook: Slower Growth to Sustain Improved Inflation Picture

December 15, 2023 10:01 AM UTC

·         Given the strength of recent GDP growth the Fed is rightly cautious about declaring victory on inflation despite recent encouraging progress. Should data surprise to the upside, the Fed could still tighten again, even if it now looks unlikely. However, we believe that data will sh

Preview: Due December 12 - U.S. November CPI - Flat again overall but not quite as soft in the core

December 11, 2023 1:25 PM UTC

Gasoline prices saw accelerated declines in November and this could feed through to other components such as air fares. In the core rate, October’s downside surprise was mostly due to shelter, which came in below trend after an above trend September, and we expect shelter in November to look simi

December Government Bond Volatility

December 10, 2023 2:32 PM UTC

Figure 1: 10yr-Fed Funds (%)
Source: Continuum Economics/Datastream
Government bond yields so far in December have continued the November trend to lower yields, as speculation grows about the scale of easing from DM central banks in 2024/25.  While numerous central banks meet this week, the bond mark

Preview: Due December 8 - U.S. November Employment (Non-farm Payrolls) - Slightly firmer due to returning strikers

December 7, 2023 12:46 PM UTC

October's payroll saw a decline of 35k in manufacturing with 33k of that due to autos, where the monthly strike report reported that 25k were on strike. We expect a 25k increase in manufacturing in November, more than fully due to autos. October's strike report also showed 16k on strike in the motio

Bank of Canada Forecast Fine Tuned, Easing Later but Faster in 2024

October 25, 2023 5:06 PM UTC

The BoC’s updated view
The BoC stated that there is growing evidence that past interest rate increases are dampening economic activity and relieving price pressures. There can be little doubt over the first conclusion given recent GDP data, but that the BoC felt able to make the second conclusion i

Bank of Canada to Hold Rates on October 25, Won’t Signal Rates Have Peaked

October 17, 2023 4:34 PM UTC

A quarterly Monetary Policy Report is due at the meeting. This will confirm that Q3 GDP at -0.2% annualized significantly underperformed a 1.5% forecast made with July’s MPR, and that Q3 CPI, averaging 3.7% yr/yr, significantly exceeded July’s 3.3% projection. Q3 GDP appears to be tracking below

FOMC Forecasts Justify More Hawkish Dots, but May Be Too Optimistic

September 20, 2023 8:41 PM UTC

Fed’s updated economic view justified more hawkish dots
Since the FOMC dots were last updated in June, GDP has exceeded expectations, with Q1 revised up, Q2 exceeding expectations and early signals for Q3, particularly from consumers, as stressed by Chairman Jerome Powell in the press conference, l

Bank of Canada Pauses as GDP Slips but Remains Worried About Inflation

September 6, 2023 2:47 PM UTC

The BoC stated that given signs of easing excess demand and given policy lags they decided to hold the rate at 5.0% but they go on to say that they are concerned about persistent underling inflationary pressures and are prepared to tighten further if needed. While we expect the BoC to keep rates at

Navigating the Path to Peace: Saudi Talks on Ukraine-Russia Conflict

August 7, 2023 10:59 AM UTC

Saudi plays peacemaker
The goal of the meeting in Jeddah this weekend was to discuss and potentially agree upon essential principles that could pave the way for a peaceful end to the conflict in Europe. Saudi brought together several stakeholders with diverse interests and perspectives on the conflic

Fed Q3 Senior Loan Officer Survey - Similar Picture to Q2 Keeps Business Investment Risks Moderate

July 31, 2023 6:34 PM UTC

For C+I loans, a net 50.8% tightened standards for large and medium firms and 49.2% did for small firms, up from 46.0% and 46.7% respectively in Q2, and the highest since Q3 2020. However this was a second straight modest deterioration, suggesting the banking turmoil earlier this year has not had a

July 12, 2023 4:22 PM UTC

The statement welcomed a slower May CPI outcome but saw downward momentum in inflation as largely from energy. It added that with three-month core rates rising around 3.5-4.5% since September underlying price pressures appear more persistent than anticipated. The BoC now sees inflation running aroun

July 3, 2023 3:12 PM UTC

After tightening by 425bps to 4.50% in the 12 months to January 2023, the BoC paused at its March and April meetings, before resuming tightening with a 25bps move in June. The statement released in June noted stronger than expected data from both growth and inflation and concluded that policy was no

BoC June Deliberations Focused on Consumer and Core Inflation Strength

June 21, 2023 6:04 PM UTC

Global growth as seen as moving in line with expectations but resilience in core inflation, and in North America, consumer spending, was noted. Turning to Canada, the BoC stressed the strength of consumption within the stronger than expected Q1 GDP release but did see some signs of easing in labor m

Fed Hawkish Pause

June 14, 2023 7:35 PM UTC

Figure 1: Fed March Summary of Economic Projections (SEP) 
Source: Fed (June SEP) 
More Tightening Before 2024 Rate Cuts 
The June FOMC statement and Fed Chair Powell Q/A provide a number of clues on prospective policy tightening. Key points include

May U.S. Median CPI Makes Marginal Further Progress

June 13, 2023 4:32 PM UTC

The Median CPI has shown improvement in the last three months, with February’s outcome much stronger at 7.9%, but the Median CPI looks to be fairly well correlated with owners’ equivalent rent in the CPI breakdown, which has seen 3 straight months at 0.5% after trending around 0.7% before then.

Bank of Canada Resumes Tightening, Hawkish Tone Suggests Scope For More

June 7, 2023 2:43 PM UTC

In detailing a stronger than expected 3.1% annualized rise in GDP the BoC notes strength in consumption, increasing demand for interest-sensitive goods and a pick-up in housing activity, before going onto note labor market strength and concluding that excess demand looks more persistent than anticip

FOMC Preview for June 14: A Skip Not a Pause

June 6, 2023 3:35 PM UTC

Data, particularly inflation, still looks too strong
At the last FOMC meeting on May 3, language anticipating further tightening was dropped for language stating that further tightening may be appropriate. Since the meeting we have seen strong non-farm payroll gains for both April and May, and gains

Bank of Canada Preview for June 7: Maintaining a Tightening Bias

May 31, 2023 4:08 PM UTC

The policy rate currently stands at 4.5%, with the last two meetings, on March 8 and April 12, having seen rates left unchanged. Since the April 12 meeting Canadian CPI slipped from 5.2% in February to 4.3% in March, but unexpectedly corrected higher to 4.4% in April. The core rates did however cont

U.S. Trimmed Mean PCE Price Index Showing Little Sign Of Slowing

May 26, 2023 6:11 PM UTC

April’s Trimmed Mean PCE Price Index rise by 4.39% annualized, up from 3.83% in March which was revised up from 3.37%. The lack of recent progress is illustrated by the one month rate being exactly the same as the 6 month rate. Both are below the 12 month pace, which suggests pressures in the late

U.S. Debt Ceiling Drama and Scenarios for Markets

May 15, 2023 10:54 AM UTC

U.S. debt ceiling negotiations are progressing slowly. Meanwhile, financial markets assume default will be avoided, with tensions only seen in some t bill yields. What will happen?
Market Implications: If a deal is reached then the focus switches back to the macro and policy picture and this could se

April U.S. Median CPI Sustains March's Slowing

May 10, 2023 3:36 PM UTC

The Median CPI has a reasonably close relationship with owners’ equivalent rent, which has now seen two straight gains of 0.5% after ten straight months above that pace. However owners’ equivalent rent is still running well above its mid-2021 trend of around 0.3% per month so there is more to sl

U.S.: The Unintended Consequences of “Exiting” Ultra-Easy Monetary Policy

May 9, 2023 3:32 PM UTC

Ex BIS Chief Economist in 2012 wrote a paper on ultra-easy policy and the law of unintended consequences (here), but what are the unintended consequences of exiting the era of low rates and QT in the U.S.?
Figure 1: CRE Loans Tightening Bank Standards 
Source: April Fed Loan Officer Survey (here) 
Ec

Fed Senior Loan Officer Survey - Mixed data may be less weak than many feared

May 8, 2023 6:27 PM UTC

A net 46.0% of large and medium banks and 46.7% of small banks reported tightening standards on C+I loans, not much changed from 44.8% and 43.8% respectively in January, and this may come as something of a relief to the Fed. However a net 55.6% of large and medium banks saw weaker demand as did 53.3

FOMC Likely to Pause in June Unless Data Surprises Significantly to the Upside

May 3, 2023 8:04 PM UTC

The decision to tighten by 25bps was unanimous and as expected. The last statement on March 22 had stated that it anticipated that some additional policy firming may be appropriate and went on to list factors that would influence the extent. This time the statement lists the same factors as influenc

First Republic and The Regional Bank Problem

May 1, 2023 9:20 AM UTC

Figure 1: U.S. Bank Failures by Year and Assets 
Source: FDIC 
Weaker Bank Woes 
JP Morgan seem happy with the First Republic takeover, both as it is expected to be net income enhancing and it increases exposure to wealthy jumbo mortgage holders. However, after the SVB and Signature bank receivershi

FOMC Preview: 25bps Tightening With Limited Forward Guidance

April 28, 2023 2:59 PM UTC

FOMC views have probably not changed much from March
Minutes from March 22 suggested that were it not for the escalation of banking sector worries, strong economic data would have pushed the FOMC into providing more hawkish dots, rather than leaving the end-2023 rate unchanged from the December view

U.S. Outlook: Two Subdued Years for the Economy as Inflation Falls Only Gradually

March 27, 2023 12:43 PM UTC

Source: Federal Reserve, Bureau of Economic Analysis, Bureau of Labor Statistics, Continuum Economics
Source: Continuum Economics
Two Straight Subdued Years for the U.S Economy
The U.S. economy ended 2022 with renewed momentum. Consumers look healthy with the second half of 2022 seeing renewed growth i

U.S. Equities: Valuation or Earnings?

August 24, 2022 3:18 PM UTC

Figure 1: 10yr U.S. Real Treasury Yield Inverted and Forward S&P500 P/E Ratio (% rhs)
Source: Datastream, Continuum Economics using breakeven inflation from index-linked bonds
Valuations or Earnings Outlook
The bounce in U.S. equities since the start of July has been driven by short covering, specul

Oil Prices: Recession Headwinds

August 11, 2022 12:39 PM UTC

Figure 1: WTI Net Non-commercial Future Positions
Source: CFTC
Various Factors Take the Steam Out of Oil
A number of factors are leading to our downward revision of the WTI oil price outlook.
Figure 2: OECD Oil Inventories in Number of Days
Source: U.S. EIA
Nevertheless, we do see oil prices rising in

4th Taiwan Straits Crisis

August 10, 2022 11:12 AM UTC

Figure 1: Taiwan Straits Exercises nearer than 1995-96
Source: CSIS
Temporary Military Flexing or Prelude to Invasion, Blockade or Tensions?
China's military exercises in the Taiwan straits are not at the same intensity but are being extended, as China shifts to a new normal on Taiwan. China wants to

U.S. Inflation Reduction Bill: Little Macro but Helping Climate Change Fight

August 8, 2022 3:54 PM UTC

Figure 1: Historical and Modeled Net U.S. Greenhouse Gas Emissions (billions metric tonnes CO2 equivalent)
Source: Rapid Energy Policy Evaluation Tool Kit (REPEAT here)
Little Inflation or Macro, More Reducing Climate Emissions
The Inflation Reduction Act of 2022 will likely have little impact on ne

U.S. Bond Yield Decline and Equity Recovery

August 2, 2022 2:39 PM UTC

Figure 1: S&P500 12mth Forward Earnings Yield and U.S. 10yr Government Bond Yield (Inverted) (%)
Source: Datastream, Continuum Economics
Lower Bond Yields and Higher U.S. Equities
The clear rebound in U.S. equities has some participants questioning whether a bottom has been reached and a Fed pivot c

Ukraine War Scenarios: Long war, Exhaustion or Cyberattack

July 22, 2022 12:58 PM UTC

Figure 1: Possible Scenarios
Source: Continuum Economics.(1) Other scenarios would be a remaining 10% including a double cold war with China and Russia versus the west; Putin stepping down or dying or a successful Ukraine counter offensive that reclaims a fair portion of lost territory.
2 Main Scenari

China FX Reserve Diversification

July 19, 2022 1:10 PM UTC

Figure 1: China (mainland) Holdings of U.S. Treasuries ($bn)
Source: U.S. Treasury
Fewer Treasuries, More Diversification
Mainland Chinese holdings of U.S. Treasuries continued to fall in May (Figure 1), which has raised questions of whether China has accelerated reserve diversification away from th

Supply and Labor Problems: Easing or Persisting?

July 15, 2022 1:38 PM UTC

Figure 1: NY Fed Global Supply Chain Pressure Index
Source: NY Fed
Some Easing of Supply Concerns
The COVID pandemic and Ukraine war have caused persistent supply chain and labor market problems, but how are these changing during 2022? A range of data points to an easing of pressures, but others are

U.S. Yield Curve Inversion and the Recession Question

July 14, 2022 3:39 PM UTC

Figure 1: 10-2yr U.S. Treasury Yield Curve (%)
Source: Datastream, Continuum Economics
Yield Curve Inversion and the Recession Story
The 10-2yr U.S. yield curve has become more clearly inverted since the start of July, as the money market has shifted from forecasting a peak of 3.25% to 3.75% Fed Fun

Government Bonds: Inflation or Slowdown Risk?

July 6, 2022 2:36 PM UTC

Figure 1: G4 10yr Government Bond Yields (%)
Source: Datastream, Continuum Economics
Government Bonds Become Two-way
The one-way upward surge in DM government bond yields has finished for now, and government bond yields are torn between high inflation and slowdown/recession risks (Figure 1). The rece

July 5, 2022 12:50 PM UTC

Figure 1: Grains Prices (Jun 2005 = 100)
Source: Datastream, Continuum Economics
Grain Price Relief
Grain prices have fallen in recent weeks (Figure 1), as concerns about a U.S. recession have caused a change in sentiment in commodity markets, with a decline in oil and copper prices also being eviden

U.S. Equities and the Earnings Question

July 1, 2022 11:58 AM UTC

Figure 1: S&P500 Earnings Change (%)
Source: IBIS
Earnings the Next to Drop
Bottom-up equity analysts are looking for a 9.7% increase in S&P500 earnings for 2023 (Figure 1), which top-down economists and equity strategists regard as too high given the growing risk of a sharp slowdown in the U.S.