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A daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

Expectations for a more rapid domestic rate hike cycle are already showing up in mortgage rates,

“After a clear hawkish shift within the halls of the Bank of Canada (and the Fed), 50-bp rate hikes now likely in the immediate future, and longer-term bond yields rising sharply in recent weeks, it’s straight up for mortgage rates. In Canada, five-year fixed rates have already pushed toward 3.5%; variable rates should be north of the 3% mark by mid-summer. And, don’t forget that U.S. mortgage rates have already jumped about 120 bps since the turn of the year. For Canadian home prices, which were priced off low-1% mortgage rates (first fixed, then variable as buyers shifted to the latter), this will be a stern test…”

“BMO: Mortgage rates start their climb” – (research excerpt) Twitter


The hottest topic among equity strategists is the flattening yield curve (the shrinking difference between two-year and 10-year yields and also the five-year yield versus 30-year yield) which has historically signaled recessions.

Morgan Stanley’s wealth management global investment committee believes the flattening curve poses particular risks for technology stocks,

“We are not sanguine about stocks at current valuations and level of earnings expectations, to say nothing of the execution risk in the Fed’s new policy path. Long-term prospects for an equity bull market are solid, but for the near term, expectations still need to recalibrate. Consider taking profits in passive funds and investing with active managers that use either a balanced and/or growth-at-a-reasonable-price investment approach. Treasuries are trading closer to near-term fair value … Investors seemed to expect a return to the “Goldilocks” story in which growth and inflation are neither too hot nor too cold and interest rates are lower for longer … Historically, there has been a strong correlation between the slope of the five-year/30-year US Treasury yield curve and relative performance of large-cap tech stocks versus the Bloomberg US Aggregate Bond Index”

Many investors roll their eyes at the recommendation towards actively managed funds, with good reason, but the correlation between technology stocks and the yield curve is interesting.

“MS: “Flattening Yield Curve Could Stall Tech Stock Rebound” – (research excerpt, chart) Twitter


Credit Suisse U.S. equity strategist Jonathan Golub doesn’t think the Federal Reserve will be successful in taming inflation and this helps support his bullish case for stocks,

“According to Fed forecasts, the funds rate should increase 7 times in 2022, resulting in an average rate of just 1% for the year. Their projections call for 4 additional hikes in 2023, bringing the terminal rate to 2.8%. While these actions might appear restrictive, they are unlikely to sufficiently tame the current torrid pace of inflation … The Taylor Rule is a framework for determining the appropriate funds rate based on current versus desired inflation, and the distance between actual GDP and its long term potential. According to Bloomberg, the Taylor rule implies a funds rate of 9.8% today … With the Fed raising rates and the yield curve flattening, it is no surprise that recessionary concerns are on the rise. However, with the ISM in strongly positive territory, and the funds rates far from restrictive, we believe the economy and corporate profits will continue to run hot, a supportive environment for stocks.”

“CS: “not only is the rate too low today, but it will likely be too low even after the Fed completes its projected rate hikes.”” – (research excerpt) Twitter


Diversion: “Marijuana fact of the day” – Marginal Revolution

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