Economic and Strategy Viewpoint - April 2018

In the Economic and Strategy Viewpoint (available at the foot of the page) this month:

What will end the US expansion?

• We look at the factors which might bring an end to the US economic expansion which is set to become the second longest on record in May. The economy does not suffer from the imbalances seen in previous cycles and the greatest threat is posed by an increase in inflation.
• Barring external shocks, such as a trade war, the most likely time for the cycle to end would be when the economy feels the full impact of higher interest rates and the impulse from fiscal policy fades. In our view this is unlikely before 2020, indicating that the current cycle will become the longest on record by mid-2019.
• Good news, but less convenient for President Trump who faces the risk of fighting for re-election in 2020 during a recession.

What is driving US Treasury yields higher?

• Though the threat of protectionism is one reason for the soggy performance of risk assets so far this year, rising US Treasury yields are also a factor as they indirectly worsen equity valuations.
• Our Schroders US Real Yield Model helps explain why bond yields have been rising, and when combined with our baseline forecast for growth, inflation and interest rates, help us predict the future path of yields. 
• Overall, the model suggests 10-year bond yields are currently in fair value territory, but are set to rise over this year and next. However, market pricing of where 10-year yields will be is considerably below our estimates, suggesting significant upside risk to yields.

China's 2018 NPC: positioning for slower growth

• The 2018 NPC concluded, with a key takeaway that the Party is priming the populace and the economy for a transition to lower growth and a more mature economy, albeit in baby steps.
• As an offset to slightly tighter monetary policy, fiscal policy looks set to remain accommodative, looking past the headline reduction in the fiscal deficit target.