|GDP||1.8% growth for the year, down from 2.4% in '15 More »|
|Jobs||Hiring slowing to 150,000/month by end '16 More »|
|Interest rates||10-year T-notes at 1.8% by end '16 More »|
|Inflation||2.1% for '16, up from 0.7% in '15 More »|
|Business spending||4% gain in '16, after drop in '15 More »|
|Energy||Crude oil trading at $40-$45/bbl. by July 4 More »|
|Housing||Prices up 5% on average in major metro areas More »|
|Retail sales||4% growth in '16, compared with 4.8% in '15 (excluding gas) More »|
|Trade deficit||Widening 4% in '16, after a 6.2% increase in '15 More »|
Though long-term interest rates continue to be affected negatively overall by uncertainties surrounding the global and U.S. economies, they’ll get a bump-up from Britain staying in the European Union, as we expect, healthier U.S. GDP growth in coming months and a coming hike in U.S. short-term interest rates.
See Also: All Our Economic Outlooks
Investors will see the move by the Federal Reserve to raise short-term rates by one-quarter of a percentage point this year as a vote of confidence in the U.S. economy.
Meanwhile, investor nervousness about the outcome of the British referendum on whether or not to leave the EU, which will be held June 23, has the bond market in a churn. The recent decline of the 10-year bond rate below 1.6% is clearly due to investors fleeing to the safety of U.S. Treasuries in the face of polls showing a majority of British voters favoring Brexit (an abbreviation of British exit). Should the United Kingdom vote to leave the EU, U.S. interest rates would likely fall further: The 10-year bond rate could go to 1.2%.
In the immediate wake of the Fed’s just concluded June meeting, we still think there will be just one hike in short-term rates this year. Given the number of times Fed Chair Janet Yellen used the word “uncertain” in her press conference on June 15, chances of a rate hike in late July appear to be diminishing. Yellen & Co. want to see more evidence of strengthening employment and other positive economic data before making the move, especially after data showed hiring slowing in April and May.
Because the Fed dislikes getting entangled in presidential election politics, we think it will be reluctant to green-light the short-term rate increase at its meetings in September and early November, while presidential election campaigning is in full swing. That leaves December as the most likely month in which to pull the trigger.
Look for the Fed to keep replacing maturing securities in its $4.5-trillion portfolio. Our bet is that the Fed will wait until 2017 to stop replacing them. Since 41% of the Fed’s portfolio is in mortgage-backed securities, delaying the move should be beneficial for mortgage rates this year.
By the end of 2016, we see the 10-year Treasury bond rate at 1.8% versus 1.6% now. The 30-year mortgage rate will go to 3.7% from 3.5%.
Come 2017, we expect to see more-frequent increases in interest rates as the economy shows further improvement. Moreover, growing tightness in the labor market in the form of a very low unemployment rate and the beginnings of wage pressures will cause inflation expectations to rise, boosting the push for higher rates.