Interest rate outlook: US inflation should peak this summer, resulting in one more 2018 hike and then a pause

Invesco Fixed Income shares its views on rates around the world

Rob WaldnerTime to read: 3 min

US:

Neutral. US growth remains strong, accelerating in the second quarter versus the first quarter’s lackluster 2.2% performance.1 We expect 2018 growth of around 2.8%, with strong contributions from capital expenditures and consumption. Core inflation continues to be benign, and we see it peaking in the next two months at around 2.2%. After that, softer rental and service costs should drive it back below 2%. In our view, the US Federal Reserve will hike one more time this year before pausing in response to declining inflation. Strong growth and lower-than-expected inflation point to a 10-year Treasury yield of around 3%. However, supply dynamics will likely begin to shift in the third quarter as the Treasury begins to issue more long-term debt. This may pressure the Treasury yield curve steeper.

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Fed raises rates for the second time this year

Summary of economic projections anticipates improved growth and a lower unemployment rate

James OngTime to read: 2 min

The Federal Reserve (Fed) hiked rates by 0.25% for the second time this year, lifting the range for the federal funds rate to 1.75% to 2.00%. The statement that accompanied the meeting reflected a strengthening of the economy. The Fed also increased the rate of interest on excess reserves by 0.20% with the intent of moving the effective federal funds rate closer to the middle of the band.

The Fed’s summary of economic projections (SEP) showed improvement in its forecast of growth and a lower expected unemployment rate. The most surprising change in the SEP was a

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Interest rate outlook: Volatility in US rates is likely to persist

Invesco Fixed Income shares its views on rates around the world

Rob WaldnerTime to read: 3 min

US:

Neutral. We expect increased Treasury supply to begin pressuring yields higher into year-end though fundamentals are supportive of lower yields. Inflation is likely to begin softening in the second half of 2018, and we believe US growth expectations have peaked. Volatility in US rates is likely to persist near-term as geopolitical concerns (such as in Europe, North Korea and the Chinese trade negotiations) remain in the spotlight. As a result, we are neutral on US rates.

Europe:

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Interest rate outlook: Falling US inflation may become a Fed concern by late 2018

Invesco Fixed Income shares its views on rates around the world

Rob WaldnerTime to read: 3 min

US:

Neutral. Inflation trends are showing no signs of a significant pickup, and economic data over the coming months should support a Federal Reserve (Fed) rate hike in June (currently expected by the market). We think slowing inflation will become a concern for the Fed later in the year, especially as the housing component slows. Over the longer term, we believe risk/reward dynamics favor US Treasuries, especially if geopolitical uncertainty begins to increase. However, with the market correction pushing yields higher in April, we remain neutral on US rates in the near term.

Europe:

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Interest rate outlook: Weaker-than-expected data lower US inflation expectations

Invesco Fixed Income shares its views on rates around the world

Rob WaldnerTime to read: 3 min

US:

Neutral. Compared to the start of the year, short-term growth and inflation expectations are lower due to weaker-than-expected consumption data and easing inflation. We expect the US Federal Reserve to hike rates twice more this year following its latest increase of 25 basis points in March, with a risk of an additional hike if inflation accelerates (not our base case). We continue to expect above-trend growth at around 2.75% and inflation to remain moderate at around 1.9%. We expect lower inflation expectations to reduce Treasury market volatility in the near term.

Europe:

Underweight. European Central Bank (ECB) President Mario Draghi maintained

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