April 2018 Economic Review

Trade Wars and Twitter

The U.S. economy ended the first quarter on a subdued note as weaker consumer spending, escalating trade war tensions, and disruptive winter weather have diminished growing expectations this year. While the Federal Reserve (Fed) remains committed to two additional rate hikes this year, inflation will need to continue to firm towards two percent for the Fed to follow through on its projections.

The labor market remains on solid ground creating 202k jobs per month this year, well above the estimated 100k required to stabilize the unemployment rate. In addition, corporate fundamentals are strong and should continue to benefit from last year’s tax reform bill. Despite this healthy backdrop, the stock market has experienced a renewed bout of volatility as President Trump has ramped up his fair-trade rhetoric. Though much has been made of the President’s pro-growth initiatives, a prolonged trade war could derail the health of the U.S. economy.

The yield curve is currently discounting the course of future rate hikes from the Fed over the next few years. While the labor market remains an important data point for economists, inflation metrics will likely take center stage as the market’s outlook for the Fed takes shape during the second quarter. Recent history has repeatedly shown the U.S. economy stumbling out of the gate in the first quarter, only to regain its composure as we progress through the calendar year.

Market sentiment is fickle and has been deteriorating as of late.  Last year, many investors were ready to take a leap of faith assuming the global economy was poised to accelerate. Although the news has been somewhat somber as of late, it would be foolish to throw in the towel so early this year.

Treasury Yields
Maturity 4/9/18 3/9/18 Change
3-Month 1.694% 1.659% 0.035%
6-Month 1.903% 1.867% 0.036%
1-Year 2.055% 2.019% 0.036%
2-Year  2.278% 2.258% 0.020%
3-Year  2.411% 2.430% -0.019%
5-Year 2.598% 2.650% -0.053%
10-Year  2.779% 2.894% -0.115%
30-Year  3.012% 3.158% -0.146%
Agency Yields
Maturity 4/9/18 3/9/18 Change
3-Month 1.698% 1.749% -0.051%
6-Month 1.809% 1.825% -0.016%
1-Year 1.954% 1.972% -0.018%
2-Year  2.355% 2.335% 0.020%
3-Year  2.497% 2.499% -0.002%
5-Year  2.695% 2.741% -0.046%
Current Economic Releases
Data Period Value
GDP QoQ Q4 ’17 2.90%
US Unemployment    Mar ’18 4.10%
ISM Manufacturing    Mar ’18 59.30
PPI YoY    Mar ’18 3.00%
CPI YoY   Feb ’18 2.20%
Fed Funds Target   April 10, 2018 1.50% – 1.75%

Source: Bloomberg
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