Week of March 17, 2025
Dec Mullarkey, Managing Director, Investment Strategy and Asset Allocation
It’s hard to listen to an economic brief today and not hear the word “uncertainty” in the opening pitch. Many long established measures of economic policy uncertainty are at all-time highs. And to no surprise, one of their inputs is media coverage and word counts.
At the U.S. Federal Reserve’s press conference this week, Chairman Jerome Powell underscored that tariff uncertainty was clouding the outlook for consumers, businesses and the Fed. This is the first meeting where he has been this direct about tariff concerns. When pushed to opine if tariffs could stoke inflation, he cautioned that it was too soon to tell.
While Powell and his team left rates unchanged, they did tweak the outlook. The Fed trimmed this year’s growth forecast and bumped up expectations of the inflation and the unemployment rate. Lower growth, higher inflation and fewer jobs are a challenge for most central banks, which primarily rely on rate shifts to calibrate the economy. If growth drops, the typical reaction is to cut rates to spark a recovery. But if inflation is already high, it limits how aggressive it can be.
Right now, the Fed is not in that bind but there is a hint we could be heading there. Markets were happy with the Fed’s tone and continue to expect two rate cuts this year. More clarity on reciprocal tariffs is expected in the next few weeks. This could hopefully help cool the uncertainty index.
Sources: Bloomberg, Financial Times, 2025.
Andrew Kleeman, Senior Managing Director, Co-Head of Private Fixed Income
Valter Lourenco, Managing Director, Private Fixed Income
As more investors enter the investment grade private credit market, we are seeing some transactions that are deviating from traditional structures. Financing disciplines such as securitizations, project finance or corporate credit structures – historically kept within their own silo – have increasingly converged. Borrowers can achieve highly tailored financing structures by combining elements from multiple financing strategies, but this also presents new risks that investors must carefully assess.
One key challenge is ensuring a disciplined underwriting approach is maintained as these “crossover” deals are evaluated. In particular, some of these structures, on paper, show a low probability of default (PD), but that comes at the cost of weakening covenant protections. Such PD-beneficial structures may include payment-in-kind structures or soft mini-perm structures. This latter structure effectively provides optionality to extend the maturity of a transaction to reduce the likelihood of a payment default. Although a softer covenant framework may have a positive impact on the credit rating, it has the opposite impact on the investors’ rights and ability to manage declining credit quality. While this could make sense in certain situations, like accommodating a long ramp-up phase, it certainly has to be analyzed cautiously on a case-by-case basis.
As private credit continues to evolve, we believe success in this space will require a balance between innovation and disciplined underwriting.
Matthew Boehner, Associate Director, Derivatives & Quantitative Strategy
The Canadian Consumer Price Index (CPI) increased by 1.1% in February, which was well above consensus and brought the year-over-year rate up by 70 basis points (bps) to 2.6%. The average of the Bank of Canada’s (BoC’s) two preferred measures rose to 2.9%. The GST/HST pause ended in mid-February and continued to add noise to the data, this time to the upside.
The main drivers were recreation services, food purchased from restaurants, clothing and alcoholic beverages. On the positive side, shelter inflation continues to show signs of deceleration on a year-over-year basis. Given shelter’s large weight, this puts downward pressure on inflation. Uncertainty among businesses and consumers, due to tariff concerns and other factors, could also have a disinflationary effect that could partially offset future price changes.
Source: Statistics Canada, 2025.
Melissa Boulrice, Senior Director, Asset Management, Public Fixed Income
What a quandary for the BoC to be in. On one hand, we have a softening economic outlook because of tariff uncertainty. On the other hand, there are concerns over having to rein in inflation again. While a jump higher was expected as the GST/HST holiday rolled off mid month, when you dig deeper under the hood, the rise was also broad-based.
Help appears to be on the way, at least from a pocketbook perspective, with Prime Minister Mark Carney’s announcement to scrap the consumer carbon tax on April 1. According to economists, this may trim the CPI over the rest of this year by about 0.5%–0.7% as the tax elimination comes into effect. It could also mean more murky times ahead for CPI data, adding a new layer of inflation complexity for the BoC to maneuver around. More tariffs are set to come into effect April 2 that could push inflation higher, while at the same time negatively impacting economic growth.
Source: Bloomberg, Statistics Canada, 2025.
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