Konstantin Boehmer’s Post

Missing: Charismatic Fed Chairman  Reward: Market Stability  Get the scoop on Powell's testimony and bond forecasts in my latest BNN Bloomberg interview! As we approach the next set of inflation and labor market reports, we will get a clearer picture of future policy rates. If it wasn't clear before the testimony, it should be now: data, not Fed officials, are driving decisions. Fed Chairman Jay Powell's dull remarks and non-committal answers left even bond enthusiasts like me switching off the TV. Looking ahead, the US election and its market impact will become increasingly important. Although betting odds have shifted, we're not yet seeing the political changes reflected in trading. Developing an informed view now will be advantageous as this becomes a major focus for the bond market in the months ahead. Meanwhile, Canada is on a path to lower rates, with current data supporting a more prolonged rate-cutting cycle. As always thanks to Andrew and the BNN Bloomberg team for a great discussion and the opportunity to share our perspectives. https://lnkd.in/g2zrwxJX #BNNBloomberg #Fed #Powell #BoC

Every quarter, our fixed income team gathers the best minds in the industry to discuss what we believe are the most relevant and intriguing market topics. With a team spanning credit, macro, and trading, we try to find insights to deliver outperformance. This remarkable initiative, launched almost 2 years ago by Dustin Reid and Hadiza DJATAOU, continues to elevate our process.     Yesterday, we had an excellent discussion on credit with Oleg Melentyev. My key takeaways were the following: - A significant portion of the high yield market displays remarkably sound fundamentals, emboldening credit investors to find quality higher yielding opportunities without sacrificing quality. - Liability Management Exercises, when a company “creatively” source capital and manage maturity risk, are on the rise, and while certain impacted sectors offer impressive spreads, the trend remains in early innings with further headwinds likely. - In a higher for longer interest rate environment, diligence in credit selection remains key. While default rates remain low, recovery values have fallen below historic averages, particularly in the leveraged loan space.     Next, we explored Canadian housing and immigration trends with Ben Rabidoux. Here are the key insights: - Canadian economic growth has heavily relied on immigration, with non-permanent residents accounting for up to 70% of annual population increases. However, the government's new targets indicate a significant slowdown, posing a threat to the current (already shaky) economic status quo. - Reductions in international student visas will most significantly impact Ontario and British Colombia, where mass inflows of post-secondary school students meaningfully outpaced country averages. - The upcoming deceleration of population growth will coincide with record completions of rental units - in the world of pre-build condo deposits, the old equation of “buy at a premium, receive at a discount” is broken, with many buyers about to receive units which meaningfully underwater.    We wrapped up the day with fellow German, Peter Schaffrik, who flew in despite Germany playing in the Euro 2024 while he was in the air. My key takeaways are: - Elections are aplenty, with the volatility surrounding the UK overshadowing the rapid return to 2% inflation on the recent print. The BoE is primed to begin their easing cycle in the meetings ahead. - The ECB may not be as quick to cut as many imagine, with growth and inflation exceeding expectations in Germany and across much of the Eurozone. Whether driven by an impressive tourism season, consumption may be driving expectations upwards. - Southern Europe looks to be the place to be, with Italy riding the wave of a dominant EU parliamentary showing and the publicity of the G7 summit. While France may be juggling priorities between a snap-election and the incoming Olympics, separating the signal from the noise may present opportunities.      #FixedIncome #AlphaDay 

Yesterday, I joined BNN’s “The Close” with andrew bell. We discussed how some of the best Fixed Income opportunities might be right here in Canada. While Nvidia and AI stocks are still grabbing headlines, the Canadian Bond Market is quietly performing in the background. We covered topics like inflation outlooks and curve steepening and even highlighted a top pick in emerging markets. This chat has insights for many investors. Most importantly, I emphasized why Canadian fixed income is set to continue to deliver solid performance in the coming months. Thanks to Andrew and the BNN Bloomberg team for an engaging discussion. While everyone’s focused on the Euro Cup (go Germany!), in the World Cup of Fixed Income investing, Canada could bring home the trophy! https://lnkd.in/gV6JDJnV #euro24 #bonds #Canada #SouthAfrica #fixedincome

Will tomorrow (CPI + Fed) ruin summer? No – but…  It could be a large event for months. Why? With CPI in the morning and the Fed meeting in the afternoon, two blockbuster market movers are coming together.  Not only this – but Wednesday offers the last major macroeconomic data release for several weeks, providing key insight into the impulse that drives the narrative for a sustained period.  Inflation has been the reason for all the rate hikes - it continues to play the leading role in determining direction in markets. Both the market and the Fed hope to overcome inflation, but so far this year, progress has been slow. What’s going to happen?  Hard to say for certain – but here are my thoughts: CPI:   I am not in the business of predicting data releases – but sometimes it is worth trying to detect which way to lean. The success of that is minimal – so treat this with caution.   - There are multiple different CPI metrics: Headline, annual, monthly, core, supercore, etc. The most important one is the Monthly core.  - Kalshi.com is a fantastic website to get an estimate what is “priced-in” or expected by the market: That number stands at just below 0.3%, bang in line with the Bloomberg estimates (0.28%).   - A decade+ long favourite of mine: PriceStats – a daily online pricing model is also putting Core CPI at 0.3%.   - Bottom line: Everyone is expecting a 0.3% - which is good and bad at the same time. A minor difference might mean bigger moves as no one is expecting fireworks.   Fed:   The Fed has been incredibly dovish all year – defying economic reality and sticking to a script that became outdated. In other words, the Fed has been lagging data and has been slow to adjust.  The question is, why would the Fed change its approach now? With US economic data slowing down slightly ("soft patch" narrative), the Fed might not need to take significant action in terms of changing their tune. The economy is moving closer to the Fed's dovish stance. If I were the Fed – which so far only happened in my imagination, I would keep the message broadly the same, making only necessary adjustments. Those are: the number of predicted rate cuts for this year and economic projections for 2024 – almost half a year has passed, and some earlier predictions seem unattainable. These adjustments seem inevitable and unlikely to cause major market changes. The (in my opinion awful) dot-plot seems to be one of the most contentious issues – will it go from 3 projected cuts to 2, or even 1.  Last week's 2x2 matrix is a wonderful tool to use – in this case we will expand it to a 2x3 matrix. Check the chart below .  Bottom line: We do not have a massively different view from the market – and as such, I also do not think Wednesday will ruin summer. Given that everyone thinks that way – there is a risk of a surprise. Owning volatility might not be a bad thing to do it is cheap and will let you breeze through Wednesday.  #Fed #CPI

“Let’s Just Enjoy the Moment” Canada is the first G7 country to cut interest rates – but what comes next? A key question here is how low the Bank can go before divergence with the Fed threatens the Canadian dollar. Today’s decision has already pushed the difference between BoC's policy rate and that of the Fed to match the highest levels seen since the Great Financial Crisis, and front-end bond yields display a similar story.  Convention would dictate that constraints are coming, but the largest opportunities emerge when convention is defied. In Governor Macklem’s own words – there is a limit to how far the neighbouring central banks can diverge, but we are “nowhere near that limit”. While the Canadian economy has been steadily decelerating for the past year, the US has only begun to show cracks recently in what looks to be a stable foundation. Canadian inflation has fallen further and faster, while its labour markets are increasingly reliant on part-time workers and public sector hiring. Housing remains vulnerable with shorter Canadian mortgages rapidly coming due as economic strain persists. When risks diverge – so too should policy. Now all eyes are on the July meeting and while back-to-back cuts look like a toss-up at this juncture, the Bank will witness a data double feature with two key CPI and labour market reports prior to their decision. A continued deterioration of data could inspire the Bank of Canada to defy the norms and signal a significant opportunity in Canadian Fixed Income. My ears will be on the ground to hear how housing and consumption are responding and if we can witness any meaningful positive relief response... It’s evident that every meeting from here on out is live – and no path is out of the picture. #BoC #FixedIncome #Bonds

Will the Bank of Canada cut on Wednesday? Yes. This Wednesday, the Bank of Canada is widely expected to deliver the first rate cut of the policy cycle. The Bank is expected to reduce rates by 25 basis points, bringing rates to 4.75%. This decision comes after a nearly year-long pause following a rapid nearly 5% increase in rates over the prior 18 months. This upcoming meeting could signal the next big move for the Bank, and everyone is rightfully watching closely. - Out of Bloomberg’s 29 recorded predictions, 21 (72%) say there will be a cut, while 8 say there won't be. Interestingly, the top two ranked economists are in the no-cut camp. - Hold-The-Line: National Bank and Scotiabank believe there won't be a cut. - Cut: BMO, CIBC, TD, and RBC predict a cut to 4.75%. Another way to gauge expectations is by looking at the markets. People trade specialized derivatives to express their views and manage risks related to monetary policy; currently these swaps show that an 82% chance of a rate cut is already priced in. For comparison, the ECB meeting this Thursday has a 96% probability priced for a rate cut, driven by the ECB’s transparency about their intentions. It’s fair to say that putting those two pieces together the market currently perceives about an 80% chance of a rate cut, similar to Germany defeating Hungary in the opening game of Euro 2024. It's likely, but not guaranteed. Earlier today I was chatting with my colleague Dustin Reid; the chart shared below is where we landed. Given that we care mostly about how the market will react, not necessarily whether the Bank will cut or not - it includes the communication (dovish yes/no) piece as well: In summary, the most likely scenario is a moderate rate cut (60%) with no guarantees of future cuts. This is followed by a more dovish cut (30%) that clearly indicates more cuts are coming. For the "no cut" scenario: we see an 8% chance of a dovish hold, suggesting a cut in July, and a 2% chance of a hawkish hold, indicating no cuts in the near future. This leaves us with a 90% chance of a cut and a 10% chance of no cut. The biggest market reaction would come from a hawkish hold, as it's outside most expectations and could lead to fears of a policy mistake. While I don't expect or hope for this, it could make for some interesting short-term trading opportunities. This is a big meeting - I cannot wait until Wednesday. #Boc #bankofcanada #Bonds #fixedincome