BMO Weigh In On The Outlook For Tsys

BMO note that “the Fed has accelerated tapering with designs to liftoff policy rates shortly thereafter and this move coincides with hawkishness on the part of many other major central banks. Inflation expectations are drifting lower (anchored, if nothing else), which puts the onus on real rates to lead the widely anticipated round of bearishness in the coming months as Q1 gets underway. We’re on board with this outlook and will add that it’s ultimately the extent to which equity volatility can remain contained (and financial conditions easy) that will dictate how far nominal yields increase during H2. This observation appears to imply that the Fed would be unwilling to abide by anything but the easiest financial conditions; a fact that simply isn’t true. Rather, the Committee is content to use extremely easy financial conditions at the moment to follow-through with the hawkish pivot - which has thus far worked to the Fed’s advantage. In the event conditions tighten as the Fed winds down QE and progresses toward liftoff, investors’ challenge will be in estimating the allowable degree of tightening in the FCI before the Fed pivots once again.”

• “Recall that much of 2021 was spent focused on timing the point at which Powell capitulated on the transitory language surrounding inflation. A similar process will be at play during the next phase of the cycle insofar as the Fed will be attempting to remove sufficient accommodation in an effort to reduce the odds of an extreme outcome on the reflation side (solid success in this regard has already been achieved). The flipside is that as the proverbial brakes are slowly(ish) applied, the risk becomes an outsized negative impact on the U.S. economy. Soft landing analogies aside, global central bankers will be squarely in the spotlight in the year ahead. It’s with this backdrop that the ability of stocks to retain the bounce and the correlated rise in 5-Year yields represents more than simply choppy price action on the shortest day of the year ahead of the long holiday weekend. Although these factors cannot be completely dismissed out of hand.”