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Anita Yadav - Head of Fixed Income Research
Published Date: 19 February 2019
US Treasury yields rose marginally last week though are still lower than where they were a month ago. The trend of declining yields is fuelled mainly by worries about weakening global growth. The dovishness reflected in the yield curve is troubling. The 3 Month/10 year curve has dropped from 105bps in February 2018 to negative -2 bps now and the 2yr5yr curve was inverted for much of January. Growth is certainly slowing around the globe including in the two largest economies of the world – the US and the China, however the slow down remains limited for now. We take a quick look at the key US economic data to assess how much of the current yield contraction is justified.
Global economic backdrop has become less robust over the last few months and financial markets are generally more volatile now than an year ago. Against this backdrop, recent economic data out of the US has also become little soft although still one of the healthiest ones in the developed world. The US Federal Reserve is forecasting GDP growth of between 2-2.5% in 2019 with unemployment at or below 4% and inflation near 2%. The economic cycle is in its 10th year but is still not displaying late-cycle characteristics, such as significant wage pressures, high inflation or elevated interest rates. So far domestic sectors, primarily those centred on personal consumption, continue to spur economic growth.
US GDP growth averaged over 3% in the first three quarters of 2018. The 4Q GDP growth estimate has been delayed due to the government shutdown. While the shut-down is expected to have had some dampening effect on the US economic growth in the 4Q18, we think it is the one that is likely to be reversed soon. The recent slump in industrial production as well as the softness in December retail sales data augurs for GDP growth in 4Q18 to be below 2%, alluding to annualised GDP growth in 2018 to have fallen to below the 3% mark.
Retails sales fell 1.2% in December with broad weakness, however, the rebound in the University of Michigan consumer confidence index in February suggests that the setback in December and January data was temporary. Nevertheless, for the year as a whole, market expects growth to decelerate to 2.4% in 2019 as the boost from individual tax cuts fades and aggregate income growth is not as robust as to be able to sustain a 3% pace. While business confidence remains elevated, political uncertainty seems to be limiting more rapid growth in business investment.
Source: Bloomberg, Emirates NBD Research
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