Markets are nervously watching US rates. 10-year yields are now at 3.25% (climbing over 80 bps in a month) with little sight of weakening. 2-year yields are stuck around 2.87%. The economy is growing at 3.2-3.5% with no real loss of momentum. Solid wage pressures increase expectations for greater inflation.
Then there are politics. Our base scenarios remain that Democrats take control of the House and Republican retain the Senate. Yet the possibility of an electoral surprise is driving market volatility. Also supporting USD is optimism over a successful negotiation of NAFTA. The renamed US-Mexico-Canada Agreement (USMCA) could market a shift in President Trump’s battle with globalization. Should 2019 bring a gentler US trade policy, we could see a rapid change in risk appetite. In the context of higher US yields and wider US-JP spread we remain constructive on USD/JPY to regain 114.00.
By Peter Rosenstreich