March 31, 2022

So far, 2022 has been full of surprises. Russia invaded Ukraine. In response the rest of the western world-imposed sanctions aimed at crippling the Russian economy. Build Back Better and the Biden economic agenda has come to a halt. The surge in the US inflation rate to a 40 year high prompted the Fed to shift its focus to - inflation - instead of attempting to stimulate the real economy: It has begun a series of interest rates increases and is threatening to reduce its balance sheet. If Mr. Powell is successful , the inflation rate will decline. Also, if the real GDP growth rate returns to trend , the real interest rate will decline too. Finally, if the world situation stabilizes, the flight to quality will reverse the recent surge in the US dollar raising the possibility of a yield curve inversion is an interesting one. The impact on the markets will depend on the sources of the inversion. If the Fed is successful and its real GDP forecast is correct, then both the inflation rate and the real GDP growth rate will decline relative to the current levels, making the inversion likely. The question is whether the slowdown will be large enough to push the economy into a recession ? The fixed income investment implications for a flat yield curve are straight forward. Select the part of the yield curve that deviates the most from the flat yield curve. The maturities with yields below the flat curve are likely to underperform and those with yields above the flat curve are candidates to outperform. During the State of the Union President Biden effectively declared the Pandemic to be over. While he paid lip service to bipartisanship, he went on to promote his Build Back Better program, no pivot there. All of these currents and countercurrents are impacting both the global and US economy outlook. These political and economic developments in the different regions of the world are quite uncertain making us reluctant to conclude that the environment we foresee favors the US relative to the rest of the world or vice versa.

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