CIBC Asset Management Perspectives Inflation Outlook Calls the Shots

The distinction between a gradual normalization of monetary policy and a more abrupt tightening is critical to the market outlook. For bonds, both scenarios should lead to higher yields. For equities, the distinction could mean the difference between positive and negative returns. Ultimately, inflation pressure, or its absence, will dictate how quickly central banks must remove accommodation.

Key Insights:

  • Fixed Income vs. Equity: If inflation remains under control, bond yields will rise gradually, risk appetite will remain high and equities will be further supported by robust earnings.
  • Equity: Cheap equity valuation represents a potentially lucrative opportunity in emerging markets (EM), especially since EM currencies are attractive as well.
  • Fixed Income: U.S. and Canadian bond yields are likely to edge higher—but the upside remains limited in the context of subdued and well-anchored inflation expectations.
  • Currencies: The Canadian dollar is facing an uncertain outlook given the NAFTA negotiations and recent hikes from the Bank of Canada (BoC).

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