Will this yield continue to rise?

INVESTORS seem to be questioning the synchronous global growth narrative, given the recent data surprises and rising uncertainties surrounding the global trade.

The Fed, again, appears to be on a lone path in terms of tightening policy when other central banks are stepping back and this was made worst with the recent elevated trade disputes between US and China.

News reports suggest that the latest trade talks ended without any agreement and this has exacerbated the situation.

The US has asked China to cut the trade deficit by US$200 billion by the end of 2020, reduce support for high tech industries, and avoid any retaliation.

On the other hand, China has asked the US to stop investigations into IP issues, drop its planned tariffs, and give equal treatment to Chinese companies in terms of national security reviews.

Given these major differences, negotiations are unlikely to lead to quick results, keeping alive the uncertainties around the trade market, in our view.

In the US, the labour market continued to move along with little signs that a pick up in wage inflation is around the corner.

The April payroll report showed non-farm payrolls rising by 165,000, which was a touch softer than consensus’ expectations but that was offset by up- ward revisions to the previous months’ prints. The unemployment rate dropped to 3.9 per cent, only a touch above the low of 3.8 per cent in 2000.

The underemployment fell as well, to 7.8 per cent; below the levels reached in 2006 but still one percentage point above the levels reached in 2000.

The decline in these two measures in April were driven by the fall in the labour force participation rate.

The May Federal Open Market Committee (FOMC) statement also suggests that the Fed has not altered its outlook on the hiking cycle despite the fact that inflation is now close to the two per cent target.

The Fed borrowed the phrase regarding the symmetric inflation target from its longer-run policy strategy and put it in the statement in multiple places.

The statement said that “inflation on a 12-month basis is expected to run near the Committee’s symmetric two per cent objective over the medium term” and “the Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal”.

It reiterated that “marketbased measures of inflation compensation remain low; surveybased measures of longer-term inflation expectations are little changed, on balance”.

Hence, despite the fact that realised inflation is moving higher and the unemployment rate is drifting lower, anchored inflation expectations should allow the Fed to remain gradual, in our view.

Therefore, the Fed may be on path to tighter rate circles in the coming FOMC meetings which may elevate the dollar ‘bulls’ and that would translate an impact on most commodities instruments especially gold.