Don’t Rock the Boat
The U.S. economy has shown clear signs of accelerating in the second quarter. Tighter labor market conditions have given way to firmer consumer spending and elevated confidence. Recent tax cuts are also working their way through the financial system, providing a significant tailwind that may drive growth through the second half of 2018. Economists project the economy to have grown 3.0% in the second quarter, up from 2.0% the prior quarter.
The June employment report showed continued strength with payrolls increasing by 213,000. Although an increase in the participation rate caused the unemployment rate to tick up from 3.8% to 4.0%, this may reflect the economy’s ability to grow at an above-trend pace without generating inflationary pressure. To wit, inflation metrics have only recently hit the Federal Reserve’s 2.0% inflation target.
Minutes from the June FOMC meeting reflect confidence in the economy and progress towards stated inflation objectives. The committee appears comfortable with its intention to gradually raise the Federal funds target rate over the next year or two. The Fed is clearly cognizant that long periods of accommodative monetary policy have historically led to excessive risk taking and leverage, typically ending poorly when conditions are eventually normalized.
A central theme to most economic forecasts is the growing risk of a trade war with China. On July 6, 2018, the U.S. implemented significant tariffs on goods imported from China. This was immediately and equally reciprocated by the Chinese. While the markets are currently discounting the odds of an all-out trade war between the U.S. and its largest trading partners, elevated tensions are likely to persist for the foreseeable future. With the U.S. economy performing well, many market participants are imploring President Trump to not “rock the boat.”
Commercial Paper Yields (A-1/P-1)
Current Economic Releases
|GDP QoQ||Q1 ’18||2.00%|
|US Unemployment||Jun ’18||4.00%|
|ISM Manufacturing||Jun ’18||60.20|
|PPI YoY||May ’18||4.10%|
|CPI YoY||May ’18||2.80%|
|Fed Funds Target||July 2018||1.75% – 2.00%|