US yields: 10-yr seen above 3.15% by year-end - NBF

Paul-André Pinsonnaul, Senior Fixed Income Economist at the National Bank of Canada, see U.S. core CPI averaging 2.5% in the second half of 2018. In their view, this will be insufficient to prompt the FOMC to normalize its policy more aggressively than currently projected. They see the 10-year yield trading around 3.17% by year-end.

Key Quotes:

“The U.S. stock market had a rough time in March, and by month end the main global stock indexes were also down. FAANG stocks (Facebook, Amazon, Apple, Netflix, Google) were under pressure from fears they would be hit by more regulation. With broad equity indexes under pressure and market volatility rebounding, some flight to the safety of Treasuries should not have been surprising, though we noticed that the initial reaction was slow to materialize.”

“The current tea leaves for the U.S. make tricky reading. For many years the seasonal pattern has been one of first-quarter GDP lagging what appeared after the fact to be an underlying trend of economic growth. That said, high-frequency data such as jobless claims still point to a robust economy. The latest numbers show fewer claims than at any time since 1969 — and that’s in absolute numbers, while the working-age population has grown substantially since then. The leading economic indicator remains strong, affording some comfort about the outlook for the next six months. Yet on the inflation front, the Fed’s reading of expected inflation over the five
years beginning five years from now has faded from its February high, suggesting that market participants are fretting less about inflation than they were a month ago.”

“In our current forecast, core CPI will average 2.5% in the second half of 2018. In our view this will be insufficient to prompt the FOMC to normalize its policy faster than projected by the median of the current dot plot (two more hikes in 2018 followed by three in 2019). We see the 10-year yield drifting above 3.0% in the second half of 2018, and since long rates have more effect on the economy than short rates, we see the FOMC shying away from a more aggressive policy stance in view of the headwind to growth that can be expected from rising long-term rates.”