EUR 79.80 For Business Accounts Only

Caution: Steeper Yield Curve Ahead

This week was once again marked by sluggish economic data. The FOMC remains watchful, but not worried, about slowing economic momentum. The Fed seems willing to look past recent weak data as long as job creation remains strong and labor markets remain tight.

The spat of soft data has caused markets to adjust downward sharply their expectations for the economy and policy. MIG believes there are now compelling reasons to expect the yield curve to steepen over coming months:

• Growing prospects for upside surprises to US inflation and growth
  

Market expectations for inflation and growth have declined significantly given the recent soft data. MIG expects both inflation and consumer spending to regain their footing over the summer and to trend higher by fall. The prospects are now quite good for even mediocre data to exceed the new lower expectations. An upside surprise in data would buoy long-term US rates.

• Less policy divergence as other central banks signal a tightening bias
  

The gradual pivot away from extreme monetary policy is underway. Central bankers in Canada and England have notably softened their rhetoric in support of ultra-accommodative policy. Even the ECB offers less than full-throated support for more bond buying. As global investors recalibrate their expectations for monetary policy in developed economies, long-term rates will need to rise.