Q1 2018 Commentary – Mackenzie Fixed Income Team | Mackenzie Investments

Q1 2018 Commentary

Mackenzie Fixed Income Team

Outlook & Positioning

  • The first quarter of this year was ushered in by strong stock markets, rising inflation and interest rate expectations, and the appointment of a new chairman of the US Federal Reserve. After a prolonged period of low volatility for stock markets, prices began to wobble the very week in early February that Jerome Powell was sworn in at the Fed. Market volatility became the story through the rest of the quarter.
  • Market expectations for economic growth and corporate earnings had moved higher, based on optimism created by the passage of US tax reforms in late 2017. Bond yields also moved higher in response to that optimism and to an expanding US fiscal deficit that needs financing.
  • As it turned out, economic data failed to hit these lofty expectations, plus there was an uptick in inflation and a slightly more hawkish tone from the Fed to begin the tumult in February. Into March, geopolitics took center stage as renegotiations of US trade policy with Canada and Mexico became only one front of a possible trade war. The US first imposed tariffs on imported steel and aluminum from certain countries, then announced potential tariffs on a range of goods from China. China announced a plan to retaliate with tariffs on some US goods.
  • Some observers suggest that the US trade policy changes are merely an attempt by the Trump White House to gather support among Republican voters in key states with mid-term elections in the Fall. While there is likely some validity to this, remember that Trump campaigned in 2016 by promising to get tough on trade and reduce the trade deficit with China. In any event, markets may have to get used to the ebb and flow of geopolitics as a source of volatility.
  • In light of the recent volatility and softer-than-expected data, bond yields peaked and moved slightly lower toward the end of the quarter. It remains an open question as to whether the new FOMC led by Powell will be sensitive to market volatility in their messaging and actions with the path of tightening. The market still expects two to three more hikes from the Fed this year, with Powell having just served up his first in March.
  • With US economic growth likely to remain solid, it will probably take a bit more volatility and more data disappointments to keep the Fed from following its “dot-plot”. If more rate hikes come through this year, I expect to see the yield curve continue to flatten with most of the upward pressure on the front-end.

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