Economic growth could be lower than we initially expected this year, which could weigh on long-term rates.
We’ve seen enough evidence recently to think 2019 gross domestic product (GDP) growth is likely to be closer to 2.5%, the lower end of our original 2019 forecast, with risks balanced to the upside and downside. Given our lower expectations for U.S. GDP and deteriorating global conditions this year, we expect the 10-year Treasury yield to trade in a range of 3-3.35% at the end of 2019.
As shown in the LPL Chart of the Day, our forecast is about 30-50 basis points (0.30-0.50%) higher than current levels and implies that the 10-year yield may not materially breach the highs of 2018.
We still expect the core Consumer Price Index (CPI) to grow 2.25—2.5% in 2019. Core CPI growth of 2.5% would be the fastest pace of price growth in the economic cycle, but we think a slight increase in inflation would make sense given the firm U.S. labor market and the possibility that economic activity could stabilize after trade headwinds subside. We also predict the Federal Reserve (Fed) will pause on interest rate hikes through the rest of 2019, with the possibility of one rate hike in the second half of the year if inflation picks up too quickly.
“U.S. government debt is attractively valued for global investors, even with a Fed pause,” said LPL Research Chief Investment Strategist John Lynch. “Healthy inflation and moderate growth could lift the 10-year yield slightly higher, but weakening global conditions could cap further rate appreciation this year.”
Even though we’ve adjusted a few forecasts, our overall belief that the U.S. economy is on solid footing hasn’t wavered. We don’t expect a recession in 2019, and we have yet to see the red flags that in the past have signaled a large increase in recession risk.
For more details on our revised forecasts, check out this week’s Weekly Economic Commentary.
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