WHAT WE THINK…

Inflation and Central Banks

“In response to deflationary pressures that North American economies were experiencing over the decade prior to the pandemic, both the Fed and the Bank of Canada enhanced their monetary policy frameworks by adding flexibility around inflation targeting and their gauges of unemployment. The Fed was the first to announce changes, when Fed Chair Powell introduced flexible average inflation targeting and continued the retreat from hard employment goals. In 2021, Bank Governor Macklem delivered similar changes for the BoC, indicating that the Bank would utilize the full flexibility inherent in its inflation target range and rely on a variety of labour market factors to pursue full employment. The net of these changes was that both central banks were formally permitting themselves more flexibility around how they would respond to inflation and tight labour markets. In hindsight, at the very worst time.”

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What We Think…Inflation and Central Banks

Lorica Focused Fixed Income

“The Canadian and US bond markets both returned 3% for January according to the FTSE Russell Canadian Universe and Bloomberg US Aggregate indices, respectively. The weak ISM and average hourly earnings data early in the month initiated the rally which was fuelled by weak inflation data. The Bank of Canada ratified investor optimism (both in the US and Canada) by raising policy rates by an expected 25 basis points, and more importantly, signalling a move to the sidelines for further tightening, unless inflation proves them premature. While bond market volatility has not disappeared, the direction for yields and yield spreads was undeniably down in January – two and ten-year yields declined by 30 and 38 basis points, respectively. Notably the first week in February, following an expectedly robust US payrolls report, has forced a dramatic rebound across the yield curve equivalent to about half of the January move.”

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January 2023 Commentary

Lorica Focused Corporate Bond

“Credit rallied in January amid disinflation, bond inflows and lower sovereign yields amidst growing expectations for pivots in Federal Reserve and Bank of Canada monetary policies later this year. The Bank of Canada ratified investor optimism (both in the US and Canada) by raising policy rates by an expected 25 basis points, and more importantly, signalling a move to the sidelines for further tightening, unless inflation proves them premature. The BoC’s stance also raised further doubts on the conviction of the Federal Reserve’s stated higher-for-longer preference. For the month, domestic investment grade yields fell by 44 bps, with financials and lower-rated, higher-beta debt generally outperforming.”

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January 2023 Commentary

Lorica Short Term Bond

“The Canadian and US short-term bond markets returned 1.36% and 0.52% respectively according to the FTSE Canada Short-term index and Bloomberg Short-Term U.S. Aggregate index. The weak ISM and average hourly earnings data early in the month initiated the rally which was fuelled by weak inflation data. While bond market volatility has not disappeared, the direction for yields and yield spreads was undeniably down in January – two and five-year yields declined by 30 and 38 basis points, respectively. Notably the first week in February, following an expectedly robust US payrolls report, has forced a dramatic rebound across the yield curve equivalent to about half of the January move.”

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January 2023 Commentary