042318 CGI Global Fixed income Strategy Update
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In the Americas, US bond yields rose sharply last week with 10-year Treasuries hitting a closing high of 2.96% on Friday; the highest since January 10th 2014 after reaching an intra-day high of 2.98%. The 2-year yield, meantime, hit 2.461%, its highest level since September 8th 2008. Fresh worries about inflation were the main driver of this move. Although the Fed Beige Book reported that price gains were seen as moderate, the Philadelphia Fed Business survey was much less benign. "Price increases for purchased inputs were reported by 59% of the manufacturers this month, up notably from 44 percent in March. The prices paid diffusion index increased 14 points to its highest reading since March 2011. The current prices received index, reflecting the manufacturers' own prices, increased 9 points to a reading of 29.8, its highest reading since May 2008."
There is an FOMC meeting on Wednesday, May 2nd, though financial markets ascribe a very low probability to a rate hike at a meeting for which no Press Conference is scheduled and at which no new economic forecasts will be presented. Futures-derived calculations put just a 1.8% probability of a hike at the upcoming meeting but a 98.4% likelihood of a move on June 13th. Markit's version of the PMI surveys is usually ignored by investors who prefer to focus on the ISM number. With the current nervousness about inflation, however, the 'flash estimate' of the PMI today will be watched closely for any clues it may offer about price pressures. The USD index opened up and remained strong in Europe this morning at 90.16.
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For now, we maintain our US GDP growth of 2.4% in 2018, and 2.1% in 2019. We believe President Trump has it wrong on tariffs, to the point that tariffs will not do much to fix the trade deficit, like prior tariff implementation by Reagan, Bush Sr. and Bush Jr. have not done a thing to reduce the US trade deficit epidemic. We are not saying that the US isn’t being played by some countries. However, there is little good in imposing tariffs to fix it. Markets now have to determine whether Trump is bluffing with his $100 Bn in additional tariffs. The tariffs increase the equity premium by about 0.5%, which should result in lower prices, a selloff of 3% to 4%. We want to point to a chart that Donald Trump should take a good look at, before making more statements about trade tariffs and import taxes. |
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