As reported by Bloomberg, broader market participants are expecting a full stop on rates from the US Federal Reserve this year, to be followed by a reversal in 2020, 2021, and key primary drivers of the dichotomy in expectations includes a Fed that can be bullied by markets and worries that politics will interfere with growth.
Structural upside to the U.S. economy: With the jobs report showing a 0.2 percentage uptick in the labor participation rate (to 63.1 percent from 62.9 percent), combined with higher wages and ample job opportunities (the JOLT data of vacancies came in again at about 7 million), such supply-side improvements would allow low interest rates to prevail with strong growth.
The discrepancy between the market expectations of future Fed policy leniency and the strength of the economy is the result of what markets have gotten used to, continue to demand, and are confident they will get again: ample liquidity from central banks.
The ongoing government shutdown, the longest in U.S. history, feeds worries that the divided Congress resulting from the November midterm elections will bring greater political polarization that undermines an otherwise healthy economy.
Europe's economic numbers are turning even more worrisome, and there is little evidence yet of the beneficial impact of more Chinese stimulus measures. This analysis reflects concerns that it may be just a matter of time before weakness in these two major economic areas drags down the U.S. and starts bringing to a close an impressive period of American economic divergence and consistent outperformance. To support this stance, some point to the yield difference between 10-year U.S. and German government bonds, which has narrowed in recent weeks from a high of 280 basis points to now below 250 basis points.
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