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Fed Rate Hike, Bond Yields and GDP – US Economy Expands….for now

Fed Rate Hike, Bond Yields and GDP - US Economy Expands....for now

Despite the fact that we are overwhelmed with articles that warn of various layers of economic damage from the impending trade war with China – the skirmish phase has clearly passed – the US economy continue to produce impressive readings.

As such, the Federal Open Market Committee increased the fed funds rate by 25 basis points to a range of 2 percent to 2.5 percent. Now after 3 hikes in 2018, most are expecting one more by the end of the year. And note that in the statement issued on Wednesday, there was some language changed as “the stance of monetary policy remains accommodative” was dropped. Investors are preparing for a longer Fed tightening cycle. So we can start to focus more on volatility, sector names and more complex trades as the equity market starts fade – with the strong names of course outperforming.

This month the 10-year Treasury yield rose above 3 percent for the first time since May, while the 30-year treasury yield, the long bond, rose to a 4-month high of 3.22 percent. The Fed officials are, as a group estimating GDP to rise to 3.1 percent for the year of 2018 and 2019 level to remain in the 2.5 precent range. The Fed gave guidance in terms of its economic view for this year and next and gave a road map of expectations for future growth. 

But there are some economists and strategists the feel the US economy is on a “sugar high” and that the Trump tax cuts will soon fade in terms of economic energy. Although blue collar jobs have increased at the fastest pace since 1984, the trade war and its possible fallout remains a key topic. Of course the interest rate hike trajectory is an important factor – we at Classiarius believe that 4 hikes is likely – have had this view since May of 2018. 

The 4.1 percent GDP expansion was an eye opener this year but this pace of growth is likely to fade. We agree with the 2.5 to 3.0 percent growth range until late 2019. The expansion is mature, and we will surely adjust our strategies and tactics accordingly.

Team Classiarius 


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