National Bank of Canada Fixed Income Monthly Monitor for May 2022

Among the highlights of the report, National Bank said that given “uncomfortably high” inflation, we are likely to receive 50 basis point hikes on both sides of the border in June and July, bringing the corresponding level of US and Canadian target rates at 2% by mid-summer. “From here,” the bank added, “accumulating evidence of falling demand suggests that a more gradual rate hike path could be adopted even if inflation remains somewhat sticky.”

Given its expectations of moderating demand, easing financial conditions and possibly slowing inflation, National said we could see Powell and Macklem end rate hikes at 2.5% before the end. of the year. He said the two could then choose to use balance sheet runoff as a longer-term and “perhaps less invasive” tightening tool. Ahead of a “brutal” rally in recent sessions, National noted that markets had cut key interest rates by 3%+ by the end of the year. At press time, markets are holding on to more ambitious upside expectations than our own view, the bank added.

QT, National said, remains a “significant” valuation factor on the curve. “Although,” he added, “the more recent pressure on longer-term yields appears to be more a function of high inflation and expanding term premia.” Despite this week’s rally, National allowed a gradual sell-off in 10-year Treasuries as the Fed continues with bigger 50 basis point hikes the next two times. “For us,” the bank added, “higher, stickier yields on the curve essentially amplify the slowdown in key rate hikes, making a 2.5% fed funds hike theoretically more restrictive than if longer-term rates had calmed down”.

National concluded: “We warn that market volatility remains high, while investor attitudes are fluid. This has led to a sharp repricing in prices across all asset classes, shortening the half-life of market forecasts. financial and requiring non-trivial revisions of previous reflections.”

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