CFO Focus: Equal, opposing market forces steady rates

Two more increases are still expected; trade policy could impact growth.

As we approach the end of the quarter three 2018, I can honestly say that I have never attempted a financial markets forecast with so many important economic, financial market and geopolitical uncertainties. However, for the coming quarter I believe that we have equal opposing forces that will most probably keep interest rates relatively steady.

The U.S. economy continues to impress as the slack in the labor market has all but disappeared.  Moreover, wage growth and worker productivity, the two items whose weakness had confounded the Federal Reserve for almost a decade, have finally begun to make noticeable improvements.

Reports from both the manufacturing and service sectors of the U.S. economy, such as the monthly reports issued by the Institute of Supply Management, paint the picture of an economy hitting escape velocity and perhaps overheating. This I believe, points to two remaining monetary policy tightenings by the Federal Reserve, most probably at the September and December meetings. When we view the Treasury yield curve, we can see that the market has priced in a very high probability for these two rate increases taking place.

The main force that could work to slow economic growth in the coming quarters is the growing trade war between China and the U.S. The Trump Administration has been aggressive in its dealings with the Chinese and the tariff walls piling up between the world’s two largest economies has begun to sting a number of U.S. industries that rely on China for their products.

 

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