US: Late-cycle fiscal adventure - AmpGFX

US yields are kicking to new highs as the US late-cycle fiscal adventure and America First (tariff and sanction) policy effects seep more clearly into the economy and markets, suggests Greg Gibbs, Analyst at Amplifying Global FX Capital. 

Key Quotes

“They tend to both boost growth and inflation expectations in the near term.”

“They may have longer-term damaging effects on the US economy that is causing some hand-wringing; evidenced by a flattening in the US yield curve. But that doesn’t appear to be troubling US consumers, businesses and predominantly bullish equity investors.”

“Jobs are abundant, wage pressures are emerging, and if and when tariffs are broadened on Chinese goods, they will add to already increasing inflation pressure.”

“The Rise in US rates and yields is generally increasing the USD yield advantage and supporting the USD.  The USD has not exactly been closely correlated with its rising yield advantage over recent years.  But higher US yields have contributed directly and indirectly to tighter credit conditions abroad, contributing to weaker EM currencies and some contagion to the EUR and commodity currencies.”

“We expect that the upward pressure on US yields will tend to support the USD, potentially driving it to new highs in coming months, notwithstanding increasing political risk in a polarised US electorate, approaching November mid-term elections and an ongoing Mueller investigation.”