Headline producer prices surprised to the downside, falling 0.1% in December, while core price rose 0.1% in the month. Looking ahead, we expect headline PPI inflation to persist around 2.0% in 2018, moderating slightly as energy-related contributions gradually fade.
World GDP growth is on course to strengthen in the coming months, based on our analysis of central banks’ credit standards surveys, which show looser corporate credit conditions in the G7 countries and emerging markets. US banks’ attitudes toward corporate lending have improved, though they are tightening standards in some riskier sectors. The picture looks more broadly positive in the Eurozone and Japan, where the credit cycles are less advanced.
We foresee the US economy growing 2.8% in 2018, following a 2.3% advance in 2017. Consumer spending and business investment will be supported domestically by strong fundamentals and a fiscal stimulus package and externally by ongoing strength in global activity. On the monetary policy front, we continue to expect three interest rate hikes in 2018, accompanied by ongoing passive and predictable balance sheet normalization.
Eurozone GDP growth looks likely to have picked up even further in Q4 given today’s strong industrial production figures. And with sentiment levels remaining elevated, it looks likely that the momentum is to be carried through into 2018.
Official estimates show that Germany’s growth in 2017 was the strongest since 2011, driven by a pick-up in global trade and investment. In France, the Bank of France have raised growth estimates for Q4 to 0.6%, however, our indicator suggests this is too pessimistic, with growth of 0.8% a real possibility.
The sell-off in long-term US Treasuries that started late last year has
intensified in the New Year as expectations for economic growth, inflation and
the deficit have ratcheted higher due to stronger economic activity and the prospective
impact of tax cuts. Overlaid on these fundamental drivers, a Bloomberg article
has ignited concern that the People’s Bank of China (PBOC) will reduce or stop
its purchases of US Treasuries at a time when the Fed has started paring its holdings
of Treasury debt as it begins normalizing the size of its balance sheet.
rise in long-term rates, while rapid, is in line with our forecast of a
year-end 10-year Treasury note yield of around 2.85%. Our outlook for higher
rates has been based on a combination of additional Fed tightening this year,
higher Treasury borrowing needs, reduced Fed long-term Treasury holdings, and
a gradual pick-up in inflation. Moreover, we continue to expect a resumption of
the flattening in the yield curve as the Fed tightens.
The market has some experience with China selling its Treasury holdings. China's holdings fell sharply from mid-2015 through late 2016 as it addressed weakness in the Yuan. However, the impact on the Treasury market could be different in this environment.
we have noted previously, the upside risk to our
forecast depends on how the bond term premium, which has been exceptionally
low, evolves in the face of reduced Fed holdings of Treauries, a cyclical upswing in
activity and wider deficits. In particular, the inflation term premium is of
key importance since it has been compressed by ongoing sluggish inflation
readings and low to declining inflation expectations
A blockbuster streak of jobs gains, solid economic activity and firming inflationary pressures will lead the Bank of Canada (BoC) to raise interest rates at its upcoming January policy meeting. Downside risks from NAFTA renegotiation, debt and housing persist, but the uncertainty alone will not prevent the BoC from tightening policy.