{"id":6574,"date":"2023-08-28T17:46:32","date_gmt":"2023-08-28T17:46:32","guid":{"rendered":"https:\/\/www.guardiancapital.com/investmentsolutions\/?post_type=insight&#038;p=6574"},"modified":"2024-08-08T17:38:53","modified_gmt":"2024-08-08T17:38:53","slug":"fixed-income-outlook-h2-2023","status":"publish","type":"insight","link":"https:\/\/www.guardiancapital.com/investmentsolutions\/insights\/fixed-income-outlook-h2-2023\/","title":{"rendered":"Fixed Income Outlook (H2 2023)"},"content":{"rendered":"<h2><span style=\"color: #000000;\">Summary<\/span><\/h2>\n<ul class=\"bullets\">\n<li style=\"margin-left: 3rem;\">The global economy has shown unexpected resilience<\/li>\n<li style=\"margin-left: 3rem;\">Both consumer spending and corporate profits have held up contributing to the economic resilience<\/li>\n<li style=\"margin-left: 3rem;\">Market sentiment exhibits skepticism based on a fear of the impact of an aggressive global tightening policy, but such concerns have yet to fully play out<\/li>\n<li style=\"margin-left: 3rem;\">Goods inflation pressures have abated considerably over the last year and it looks like they could well continue to moderate, albeit more modestly<\/li>\n<li style=\"margin-left: 3rem;\">Service and shelter inflation provide an offset to falling goods inflation and are likely to keep central banks from pivoting soon<\/li>\n<li style=\"margin-left: 3rem;\">Markets are better aligned with central bank guidance suggesting more modest rate volatility ahead<\/li>\n<li style=\"margin-left: 3rem;\">Apart from global factors, domestic risks remain for the consumer and corporations to retract spending in the face of higher interest servicing costs<\/li>\n<\/ul>\n<h2><span style=\"color: #000000;\">Fixed Income Strategy <\/span><\/h2>\n<ul class=\"bullets\">\n<li style=\"margin-left: 3rem;\">We anticipate the Bank of Canada (Bank) to maintain its hawkish bias until it assesses inflation is on a durable path to its 2% target<\/li>\n<li style=\"margin-left: 3rem;\">Sticky inflation poses a risk for some further upside to front-end rates but, failing a negative economic shock, expect 10 year yields to tread water around the last year\u2019s range<\/li>\n<li style=\"margin-left: 3rem;\">If inflation continues to decline, the real policy rate will become more restrictive without any actions from the Bank, thereby limiting the need for further tightening<\/li>\n<li style=\"margin-left: 3rem;\">The current curve inversion means the ultra-short segment of the yield curve provides the most attractive risk-return profile in the short-term<\/li>\n<li style=\"margin-left: 3rem;\">Given the balance of risks, the belly of the curve looks attractive as it may benefit from policy normalization (i.e., there appears to be more scope for rates to decline over time than rise)<\/li>\n<li style=\"margin-left: 3rem;\">We continue to believe high-quality credit, which offers a spread \u201ccushion\u201d that can offset small increases in yields, is likely to outperform<\/li>\n<\/ul>\n<h2><span style=\"color: #000000;\">Rates in a holding pattern<\/span><\/h2>\n<p>While it is undeniably the case that the general mood in the market is less downbeat now than it has been in a while, sentiment continues to be restrained by significant concerns over the outlook.<\/p>\n<p>Despite the global economy\u2019s persistent resiliency and success in overcoming the numerous obstacles laid in its path over the last three years, the consensus among forecasters remains that a recession is the most likely outcome for the bulk of Developed Markets (DM) over the next year.<\/p>\n<p><strong>Recession risks remain<\/strong><\/p>\n<p><span style=\"color: #9e886a;\"><strong>Consensus expected probability of recession in 12 months<\/strong><\/span><br \/>\n(percent)<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-6607 size-large\" src=\"https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart1-1024x570.png\" alt=\"Graph of recession risks\" width=\"1024\" height=\"570\" srcset=\"https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart1-1024x570.png 1024w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart1-300x167.png 300w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart1-768x427.png 768w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart1-1536x855.png 1536w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart1-2048x1140.png 2048w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/p>\n<p><em style=\"font-size: 10px;\">Source: Guardian Capital based on data from Bloomberg to July 28, 2023<\/em><\/p>\n<p>The continuous upgrades to the near-term outlook over the last nine months that have been necessitated by persistently stronger-than-anticipated activity, have just been treated as delaying an imminent downturn. The weakness has just been kicked out to the end of this year.<\/p>\n<p><strong>Kicking the can down the road<\/strong><\/p>\n<p><span style=\"color: #9e886a;\"><strong>Consensus real GDP growth forecast, G7<\/strong><\/span><br \/>\n(quarter-over-quarter percent)<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-6605 size-full\" src=\"https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart2.png\" alt=\"Graph of consensus real GDP growth forecast\" width=\"492\" height=\"274\" srcset=\"https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart2.png 492w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart2-300x167.png 300w\" sizes=\"auto, (max-width: 492px) 100vw, 492px\" \/><\/p>\n<p><em style=\"font-size: 10px;\">Series labels represent the date of consensus forecast, Jul-23 is as at July 28, 2023; G7=Canada, France, Germany, Italy, Japan, UK and US; source: Guardian Capital based on data from Bloomberg<\/em><\/p>\n<p>These doubts about the health of the global economy and the durability of the current expansion are being echoed in sentiment surveys.<\/p>\n<p>Measures of consumer and business confidence across DM show scant signs of elation. The aggregated gauges of sentiment for the 38-member countries of the Organisation for Economic Co-operation and Development<sup>1<\/sup> (OECD) are depressed and at levels consistent with past recessions.<\/p>\n<p><strong>Feeling depressed<\/strong><\/p>\n<p><span style=\"color: #9e886a;\"><strong>Consumer &amp; business sentiment, OECD<\/strong><\/span><br \/>\n(index; long-term average=100)<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-6603 size-large\" src=\"https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart3-1024x570.png\" alt=\"Graph of consumer &amp; business sentiment\" width=\"1024\" height=\"570\" srcset=\"https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart3-1024x570.png 1024w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart3-300x167.png 300w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart3-768x428.png 768w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart3-1536x855.png 1536w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart3-2048x1140.png 2048w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/p>\n<p><em style=\"font-size: 10px;\">Shaded regions represent periods of US recession; source Guardian Capital based on data from the OECD and Bloomberg to June 2023<\/em><\/p>\n<p><strong>Waiting for the other shoe to drop<\/strong><\/p>\n<p>The main source for this looming sense of dread (driving the broadly-held view that a downturn is coming) is monetary policy.<\/p>\n<p>The long and variable lags between central bank decisions and their impact on the real economy make calibrating the broad-reaching policy difficult.<\/p>\n<p>Accordingly, policymakers have poor track records for getting inflation under control without choking off broader economic growth. Almost every recession in the post-World War II era has the fingerprints of monetary policy all over it (the exogenous shock of the pandemic being one of the few exceptions.)<\/p>\n<p>Combine that with the fact that this tightening cycle has seen policy rates rise faster and further than any in recent history \u2014 central banks may take them higher still as they are not yet willing to declare victory over inflation \u2014 and with an unparalleled unanimity across the globe, and the assumption is that something ultimately will have to give.<\/p>\n<p><strong>Higher, Further, Faster<\/strong><\/p>\n<p><span style=\"color: #9e886a;\"><strong>Central bank policy interest rates<\/strong><\/span><br \/>\n(percent)<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-6601 size-large\" src=\"https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart4-1024x513.png\" alt=\"Graph of central bank policy interest rates\" width=\"1024\" height=\"513\" srcset=\"https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart4-1024x513.png 1024w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart4-300x150.png 300w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart4-768x384.png 768w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart4-1536x769.png 1536w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart4-2048x1025.png 2048w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/p>\n<p><em>Shaded regions represent periods of US recession; dashed lines represent Bloomberg consensus forecasts as at July 28, 2023; source: Guardian Capital based on data from Bloomberg to July 28, 2023<\/em><\/p>\n<p>The higher costs of carrying debt serve to restrain demand for credit, the lifeblood of the economy. At the same time, surveys indicate its supply is being constrained as lenders raise their standards for qualifying for loans in the name of protecting their books from the assumed looming downturn \u2014 the flare-up of financial system stress earlier this year also exacerbated concerns on this front as well.<\/p>\n<p>Bank surveys in the US, Europe and Canada all point to a degree of tightening in standards that typically coincides with a recession.<\/p>\n<p><strong>Raising their standards<\/strong><\/p>\n<p><span style=\"color: #9e886a;\"><strong>Balance of opinion on standards for business loans<\/strong><\/span><br \/>\n(net percent of banks tightening versus easing)<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-6599 size-large\" src=\"https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart5-1024x570.png\" alt=\"Graph of standards for business loans\" width=\"1024\" height=\"570\" srcset=\"https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart5-1024x570.png 1024w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart5-300x167.png 300w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart5-768x427.png 768w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart5-1536x855.png 1536w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart5-2048x1140.png 2048w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/p>\n<p><em style=\"font-size: 10px;\">Shaded regions represent periods of US recession; source: Guardian Capital based on data from the US Federal Reserve, European Central Bank and Bank of Canada to Q2 2023<\/em><\/p>\n<p>Echoing this tightening of financial conditions, the yield curve \u2014 the gap between long-term and short-term market interest rates \u2014 remains deeply inverted or in negative territory.<\/p>\n<p>Given that banks traditionally borrow in the short term to finance longer-term loans, the curve is treated as a leading indicator of credit availability. A yield curve inversion has historically been a harbinger of a recession within the next two years (it first turned negative a year ago).<\/p>\n<p><strong>Curve your enthusiasm<\/strong><\/p>\n<p><span style=\"color: #9e886a;\"><strong>Government of Canada yield curves<\/strong><\/span><br \/>\n(basis points)<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-6597 size-large\" src=\"https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart6-1024x570.png\" alt=\"Graph of Government of Canada yield curves\" width=\"1024\" height=\"570\" srcset=\"https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart6-1024x570.png 1024w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart6-300x167.png 300w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart6-768x428.png 768w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart6-1536x855.png 1536w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart6-2048x1140.png 2048w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/p>\n<p><em style=\"font-size: 10px;\">Shaded region represents periods of US recession; source: Guardian Capital based on data from Bloomberg to July 28, 2023<\/em><\/p>\n<h2><strong>Other than that, Mrs. Lincoln\u2026<\/strong><\/h2>\n<p>With all of this said, there are still reasons to believe that the proverbial \u201cwall of worry\u201d being built can continue to be scaled in the months ahead.<\/p>\n<p>For starters, the fact that everybody is keenly aware of the risks to the outlook and proceeding with caution arguably lowers those risks \u2014 as well as the potential size of any fallout. The unexpected and inherently unpredictable shocks are the ones that tend to cause the most damage.<\/p>\n<p>Secondly, aside from unexpected shocks (such as war, natural disasters, or a pandemic), economic downturns are the product of systemic imbalances.<\/p>\n<p>These excesses arise from misallocations of capital during periods of ample liquidity and can persist until there is a reason for positions to unwind. Typically, it is a central-bank-induced jump in costs of capital that makes overextended financial positions untenable, with the larger the imbalance, the greater the unwind and resultant negative spillovers.<\/p>\n<p>The persistent uncertainty over the economic outlook over the last three years has undoubtedly factored into preventing significant financial imbalances from developing simply because the constraints on activity limited the ability and willingness of households and businesses in the aggregate to overextend themselves.<\/p>\n<p>The resultant underlying strength of consumer and corporate finances appears to be a reason behind the fairly limited fallout so far from the most aggressive tightening cycle in decades. There are no indications yet that of widespread difficulties in meeting financial obligations.<\/p>\n<p>For businesses, the improved profitability and efforts over the last decade to take advantage of positive financing conditions to improve balance sheets have resulted in corporate finances being in good shape, with low leverage, extended maturities of debt and high-interest coverage providing flexibility to weather the challenges of the past three years.<\/p>\n<p>This is a key reason why the surge in market interest rates over the last year has not caused material distress in credit markets as yet. Corporate bond default rates remain muted and credit spreads, while above recent lows, are not insinuating that the credit cycle will soon take a harsh turn.<\/p>\n<p><strong>Default Settings<\/strong><\/p>\n<p><span style=\"color: #9e886a;\"><strong>High Yield bond par-weighted default rate &amp; credit spreads<\/strong><\/span><br \/>\n(percent)\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 (basis points)\u00a0\u00a0\u00a0 (percent)\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 (basis points)<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-6595 size-large\" src=\"https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart7-1024x598.png\" alt=\"High Yield bond par-weighted default rate &amp; credit spreads\" width=\"1024\" height=\"598\" srcset=\"https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart7-1024x598.png 1024w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart7-300x175.png 300w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart7-768x448.png 768w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart7-1536x896.png 1536w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart7-2048x1195.png 2048w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/p>\n<p><em style=\"font-size: 10px;\">Shaded regions represent periods of US recession; source: Guardian Capital based on data from Bank of America Merrill Lynch to June 2023<\/em><\/p>\n<p>On the consumer side, by some measures households now are the least debt-reliant in generations (more so in the US than Canada), while aggregate wealth is back within arms\u2019 reach of all-time highs even with last year\u2019s weakness in financial markets and the slump in housing prices.<\/p>\n<p>Add to that the fact that consumers continue to sit on a pandemic-driven excess of savings \u2014 the US is the only G7 economy that has seen much of a drawdown to date, supporting better relative performance, but the well has not run dry.<\/p>\n<p>Accordingly, households are still in good shape. Loan delinquencies remain benign, and while they are inching higher for credit cards, they remain at levels that are still below pre-pandemic norms.<\/p>\n<p><strong>Staying On Top Of Payments<\/strong><\/p>\n<p><span style=\"color: #9e886a;\"><strong>Delinquent consumer loans at chartered banks, Canada<\/strong><\/span><br \/>\n(percent of outstanding loans)<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-6593 size-large\" src=\"https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart8-1024x570.png\" alt=\"Graph of delinquent consumer loans at chartered banks\" width=\"1024\" height=\"570\" srcset=\"https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart8-1024x570.png 1024w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart8-300x167.png 300w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart8-768x428.png 768w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart8-1536x855.png 1536w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart8-2048x1141.png 2048w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/p>\n<p><em style=\"font-size: 10px;\">Shaded regions represent periods of US recession; source: Guardian Capital based on data from the Bloomberg and the Canadian Bankers\u2019 Association to May 2023<\/em><\/p>\n<p>This may well change in the coming years as ultra-low interest rate pandemic-era mortgages come up for renewal at higher costs. As of yet, however, there are limited signs of an impending wave of financially strapped homeowners being forced to put their homes on the market \u2014 and this lack of supply is putting a floor in the market and setting up the potential for a notable turnaround should buyers be coaxed back in by improved affordability.<\/p>\n<p><strong>Not For Sale<\/strong><\/p>\n<p><span style=\"color: #9e886a;\"><strong>Supply Existing Single-Family Homes for Sale, Canada<\/strong><\/span><br \/>\n(months to clear inventory at current sales rates)<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-6591 size-large\" src=\"https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart9-1024x570.png\" alt=\"Graph of single-Family Homes for Sale\" width=\"1024\" height=\"570\" srcset=\"https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart9-1024x570.png 1024w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart9-300x167.png 300w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart9-768x428.png 768w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart9-1536x855.png 1536w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart9-2048x1141.png 2048w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/p>\n<p><em style=\"font-size: 10px;\">Source: Guardian Capital based on data from the Canadian Real Estate Association to June 2023<\/em><\/p>\n<p>On that score, the prospect of further aggressive increases in interest rates looks to be limited as the major driver of policy concern appears to be abating.<\/p>\n<p>High inflation, particularly on necessities such as food and energy, is a big headwind for activity as it means that consumers have to spend more on less.<\/p>\n<p>And while rates of inflation remain above central banks\u2019 comfort levels, the moderating trends are anticipated to be sustained in the months ahead.<\/p>\n<p><strong>The peak is in the past<\/strong><\/p>\n<p><span style=\"color: #9e886a;\"><strong>Consumer price index<sup>2<\/sup><\/strong><\/span><br \/>\n(year-over-year percent change)<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-6589 size-large\" src=\"https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart10-1024x570.png\" alt=\"Graph of consumer price index2\" width=\"1024\" height=\"570\" srcset=\"https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart10-1024x570.png 1024w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart10-300x167.png 300w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart10-768x428.png 768w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart10-1536x855.png 1536w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart10-2048x1140.png 2048w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/p>\n<p><em style=\"font-size: 10px;\">Shaded regions represent periods of US recession; dashed lines represent consensus forecasts as at July 28, 2023; source: Guardian Capital based on data from Bloomberg to June 2023<\/em><\/p>\n<p>Looking at overall price gauges, the reversal of last year\u2019s Russian-invasion-driven surge in agricultural and energy commodities has played a significant role in bringing inflation rates down to earth.<\/p>\n<p>Commodity prices in the aggregate are 20% below year-ago levels, and barring a material shift higher in the coming months, will continue to exert downward pressure on inflation rates in the coming months.<\/p>\n<p><strong>No longer a hot commodity<\/strong><\/p>\n<p><span style=\"color: #9e886a;\"><strong>S&amp;P\/Goldman Sachs spot commodity price index<sup>3<br \/>\n<\/sup><\/strong><\/span>(year-over-year percent change)<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-6587 size-large\" src=\"https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart11-1024x570.png\" alt=\"Graph of S&amp;P\/Goldman Sachs spot commodity price index\" width=\"1024\" height=\"570\" srcset=\"https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart11-1024x570.png 1024w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart11-300x167.png 300w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart11-768x427.png 768w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart11-1536x855.png 1536w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart11-2048x1140.png 2048w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/p>\n<p><em style=\"font-size: 10px;\">Shaded regions represent periods of US recession; source: Guardian Capital based on data from Bloomberg to June 2023<\/em><\/p>\n<p>As well, while they may have proven to be less \u201ctransitory\u201d than assumed, the pandemic-driven upward pressures on prices throughout supply chains are fading quickly.<\/p>\n<p>Port congestion has been alleviated, order backlogs caught up, inventories replenished, and transportation and shipping costs have come back down to earth.<\/p>\n<p>Aggregated gauges of supply-side pressures have returned to pre-pandemic levels.<\/p>\n<p><strong>Pressure release<\/strong><\/p>\n<p><span style=\"color: #9e886a;\"><strong>Supply chain pressure index<\/strong><sup>4<\/sup><strong>, world<\/strong><\/span><br \/>\n(standard deviations from the average)<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-6585 size-large\" src=\"https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart12-1024x570.png\" alt=\"Graph of supply chain pressure index\" width=\"1024\" height=\"570\" srcset=\"https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart12-1024x570.png 1024w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart12-300x167.png 300w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart12-768x428.png 768w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart12-1536x855.png 1536w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart12-2048x1140.png 2048w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/p>\n<p><em style=\"font-size: 10px;\">Shaded regions represent periods of US recession; source: Guardian Capital based on data from New York Federal Reserve Bank to March 2023<\/em><\/p>\n<p>Against these positive developments, indicators of price pressures in the production pipeline have plunged worldwide \u2014 China, which is often the first step in the value chain, has seen producer prices decline particularly sharply relative to last year.<\/p>\n<p><strong>Plunging pipeline price pressure<\/strong><\/p>\n<p><span style=\"color: #9e886a;\"><strong>Producer price index<sup>5<\/sup><\/strong><\/span><br \/>\n(year-over-year percent change)<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-6583 size-large\" src=\"https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart13-1024x570.png\" alt=\"Graph of producer price index\" width=\"1024\" height=\"570\" srcset=\"https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart13-1024x570.png 1024w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart13-300x167.png 300w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart13-768x428.png 768w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart13-1536x855.png 1536w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart13-2048x1140.png 2048w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/p>\n<p><em style=\"font-size: 10px;\">Shaded regions represent periods of US recession; source: Guardian Capital based on data from Bloomberg to June 2023<\/em><\/p>\n<p>Add in the housing price drop \u2014 which only gets reflected in consumer price metrics with a sizable lag \u2014 and underlying inflation looks like they could well continue to moderate to more palatable, though likely still relatively elevated, levels by year-end.<\/p>\n<p><strong>Taking shelter<\/strong><\/p>\n<p><span style=\"color: #9e886a;\"><strong>CPI shelter &amp; national house prices<sup>6<\/sup>, Canada<\/strong><\/span><br \/>\n(year-over-year percent change)<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-6581 size-large\" src=\"https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart14-1024x570.png\" alt=\"Graph of CPI shelter &amp; national house prices\" width=\"1024\" height=\"570\" srcset=\"https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart14-1024x570.png 1024w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart14-300x167.png 300w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart14-768x428.png 768w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart14-1536x855.png 1536w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart14-2048x1140.png 2048w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/p>\n<p><em style=\"font-size: 10px;\">Shaded regions represent periods of US recession; source: Guardian Capital based on data from Bloomberg and the OECD to Q2 202<\/em><\/p>\n<p>That said, any renewed verve in economic activity, particularly in services and housing, could have the impact of providing some offset to this desired progress \u2014 and the risk here is likely to keep central banks from pivoting soon.<\/p>\n<h2><strong>The going rate<\/strong><\/h2>\n<p>The gap between the central bank guidance and financial market expectations has narrowed considerably over the last three months as concerns over a potential banking crisis came and went, and the left tails of the growth distribution got trimmed, that is, growth expectations were revised upwards.<\/p>\n<p>The net result has been a general upward shift in market yields across the curve back toward the higher end of the ranges that have prevailed over the last year \u2014 notably for investors, though, the higher coupon to clip now has cushioned the impact.<\/p>\n<p>There remains potential for some further upside pressure on rates, particularly at the front end of the curve, should central banks follow through with their more hawkish guidance \u2014 for example, the market is not convinced that the US Federal Reserve will add the further 25 basis points its June Summary of Economic Projections<sup>7<\/sup> indicated.<\/p>\n<p>With that said, there is little expectation rates will break out of their recent comfort zone. The consensus remains that 10-year sovereign yields will continue to effectively tread water for the foreseeable future around the last year\u2019s ranges.<\/p>\n<p><strong>Rates remain rangebound<\/strong><\/p>\n<p><span style=\"color: #9e886a;\"><strong>10-year sovereign bond yields &amp; forecasts<\/strong><\/span><br \/>\n(percent)<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-6579 size-large\" src=\"https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart15-1024x570.png\" alt=\"Graph of 10-year sovereign bond yields &amp; forecasts\" width=\"1024\" height=\"570\" srcset=\"https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart15-1024x570.png 1024w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart15-300x167.png 300w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart15-768x427.png 768w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart15-1536x855.png 1536w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart15-2048x1140.png 2048w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/p>\n<p>&nbsp;<\/p>\n<p><em style=\"font-size: 10px;\">Source: Guardian Capital based on data from Bloomberg to July 28, 2023; dashed lines represent Bloomberg consensus forecasts as at July 28, 2023<\/em><\/p>\n<p>A less volatile rate environment, combined with a continued moderate pace of economic expansion supporting earnings, easing inflation and limited further upside from central banks, would suggest that returns for bondholders in the near term are likely to echo their yields, which offer the best return prospects in over a decade \u2014 high-grade credit is particularly compelling in this regard, as are highly liquid and short-term Treasury bills that offer a notable premium given the shape of the curve.<\/p>\n<h3><strong>Yielding results<\/strong><\/h3>\n<p><span style=\"color: #9e886a;\"><strong>ICE Bank of America bond index yields<sup>8<\/sup>, Canada<\/strong><\/span><br \/>\n(percent)<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-6577 size-large\" src=\"https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart16-1024x570.png\" alt=\"Graph of ICE Bank of America bond index yields\" width=\"1024\" height=\"570\" srcset=\"https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart16-1024x570.png 1024w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart16-300x167.png 300w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart16-768x428.png 768w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart16-1536x855.png 1536w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart16-2048x1141.png 2048w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/p>\n<p><em style=\"font-size: 10px;\">Shaded regions represent periods of US recession; source: Guardian Capital based on data from Bloomberg to July 28, 2023<\/em><\/p>\n<p>Further, the now higher rates available on longer duration debt also provides opportunities from a risk management perspective for balanced portfolios as it increases their value as a diversifier.<\/p>\n<p>The yield provides decent return prospects with limited valuation risk (i.e. there appears to be more scope for rates to decline over time than to rise further) while they also provide insurance against a marked deterioration in conditions that precipitates the pricing in of rate cuts, suggesting that the breakdown of the historically strong positive correlations between stocks and bonds seen last year should continue.<\/p>\n<p><strong>Finally breaking away<\/strong><\/p>\n<p><span style=\"color: #9e886a;\"><strong>Stock* and bond** correlation, Global<\/strong><\/span><br \/>\n(rolling 26-week correlation of returns)<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-6575 size-large\" src=\"https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart17-1024x570.png\" alt=\"Graph of Stock* and bond** correlation\" width=\"1024\" height=\"570\" srcset=\"https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart17-1024x570.png 1024w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart17-300x167.png 300w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart17-768x427.png 768w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart17-1536x855.png 1536w, https:\/\/www.guardiancapital.com/investmentsolutions\/wp-content\/uploads\/2023\/08\/fix-chart17-2048x1140.png 2048w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/p>\n<p><em style=\"font-size: 10px;\">*Stocks=MSCI World Index<sup>9<\/sup>; **bonds=Bloomberg Global Aggregate Inde<sup>10<\/sup>,shaded regions represent periods of US recession; source: Guardian Capital based on data from Bloomberg to July 14, 2023<\/em><\/p>\n<h3><strong>Scaling the wall of worry<\/strong><\/h3>\n<p>The global economy and financial markets have performed better than anticipated this year.<\/p>\n<p>Rather than this underpinning a marked rise in optimism, however, focus remains on the downside risks to the outlook that keep the spectre of an economic downswing and consequent reversal of market momentum looming over the horizon.<\/p>\n<p>While these risks clearly cannot be dismissed, it remains the case that the foundations that have underpinned growth over the last three years largely remain intact while the headwind of higher cost pressures is increasingly ebbing \u2014 which stands to ease pressure on policymakers to take interest rates higher \u2014 setting up the prospect of the global economy again surprising those waiting for the other shoe to drop.<\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<p><em style=\"font-size: 14px; line-height: 1.5;\"> <strong>This commentary is for general informational purposes only and does not constitute investment, financial, legal, accounting, tax advice or a recommendation to buy, sell or hold a security. It shall under no circumstances be considered an offer or solicitation to deal in any product or security mentioned herein. It is only intended for the audience to whom it has been distributed and may not be reproduced or redistributed without the consent of Guardian Capital LP. This information is not intended for distribution into any jurisdiction where such distribution is restricted by law or regulation. <\/strong><\/em><\/p>\n<p><em style=\"font-size: 14px; line-height: 1.5;\"> The opinions expressed are as of the date of publication and are subject to change without notice. Assumptions, opinions and estimates are provided for illustrative purposes only and are subject to significant limitations. Reliance upon this information is at the sole discretion of the reader. The opinions expressed are as of the published date and are subject to change without notice. Assumptions, opinions and estimates are provided for illustrative purposes only and are subject to significant limitations. Reliance upon this information is at the sole discretion of the reader. This document includes information concerning financial markets that were developed at a particular point in time. This information is subject to change at any time, without notice and without update. This commentary may also include forward-looking statements concerning anticipated results, circumstances, and expectations regarding future events. Forward-looking statements require assumptions to be made and are, therefore, subject to inherent risks and uncertainties. There is a significant risk that predictions and other forward-looking statements will not prove to be accurate. Investing involves risk. Equity markets are volatile and will increase and decrease in response to economic, political, regulatory and other developments. Investments in foreign securities involve certain risks that differ from the risks of investing in domestic securities. Adverse political, economic, social or other conditions in a foreign country may make the stocks of that country difficult or impossible to sell. It is more difficult to obtain reliable information about some foreign securities. The costs of investing in some foreign markets may be higher than investing in domestic markets. Investments in foreign securities also are subject to currency fluctuations. The risks and potential rewards are usually greater for small companies and companies located in emerging markets. Bond markets and fixed-income securities are sensitive to interest rate movements. Inflation, credit and default risks are all associated with fixed income securities. Diversification may not protect against market risk and loss of principal may result. Index returns are for information purposes only and do not represent actual strategy or fund performance. Index performance returns do not reflect the impact of management fees, transaction costs or expenses. Certain information contained in this document has been obtained from external parties, which we believe to be reliable; however, we cannot guarantee its accuracy. <\/em><\/p>\n<p><em style=\"font-size: 14px; line-height: 1.5;\">Guardian Capital LP manages portfolios for defined benefit and defined contribution pension plans, insurance companies, foundations, endowments and investment funds. Guardian Capital LP is a wholly owned subsidiary of Guardian Capital Group Limited, a publicly traded firm listed on the Toronto Stock Exchange. For further information on Guardian Capital LP, please visit <a href=\"www.guardiancapital.com\">www.guardiancapital.com<\/a>. All trademarks, registered and unregistered, are owned by Guardian Capital Group Limited and are used under license. <\/em><\/p>\n<p><em style=\"font-size: 14px; line-height: 1.5;\">Published: August, 2023<\/em><\/p>\n<style>\nul.bullets { list-style-type: disc;} .single-insight-page .wrap .main-content li {margin-left: 3rem;}<br \/><\/style>\n","protected":false},"excerpt":{"rendered":"<p>Summary The global economy has shown unexpected resilience Both consumer spending and corporate profits have held up contributing to the [&hellip;]<\/p>\n","protected":false},"comment_status":"closed","ping_status":"closed","template":"","insight_tags":[146],"class_list":["post-6574","insight","type-insight","status-publish","hentry","insight_category-insights","insight_tags-portfolio-investment-strategies"],"acf":[],"lang":"en","translations":{"en":6574},"pll_sync_post":[],"_links":{"self":[{"href":"https:\/\/www.guardiancapital.com/investmentsolutions\/wp-json\/wp\/v2\/insight\/6574","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.guardiancapital.com/investmentsolutions\/wp-json\/wp\/v2\/insight"}],"about":[{"href":"https:\/\/www.guardiancapital.com/investmentsolutions\/wp-json\/wp\/v2\/types\/insight"}],"replies":[{"embeddable":true,"href":"https:\/\/www.guardiancapital.com/investmentsolutions\/wp-json\/wp\/v2\/comments?post=6574"}],"wp:attachment":[{"href":"https:\/\/www.guardiancapital.com/investmentsolutions\/wp-json\/wp\/v2\/media?parent=6574"}],"wp:term":[{"taxonomy":"insight_tags","embeddable":true,"href":"https:\/\/www.guardiancapital.com/investmentsolutions\/wp-json\/wp\/v2\/insight_tags?post=6574"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}