In this Issue:

Strong US Economy Showing Few Signs of Trade Concerns
The US economy has continued to perform well on many fronts, with positive readings for growth, employment and inflation. In terms of growth, the stimulus effect from tax cuts was clearly visible in second-quarter 2018 data, and could be maintained for at least another quarter, in our view. We would expect to see a gradual rise in both wage growth and the rate of inflation, as companies respond to labor market shortages and try to push through price increases. We believe the main uncertainty facing the economy remains the ultimate impact of the Trump administration’s trade policies. As the mid-term congressional elections approach—and with little sign of negative economic or political consequences domestically from President Donald Trump’s actions thus far—any tempering of his administration’s unilateral agenda on trade seems unlikely.

The Bank of Japan’s Move Could Indicate a More Significant Monetary Shift
The monetary policy changes announced by the Bank of Japan (BoJ) in July may have appeared minor, but we would argue their significance should not be underestimated. Understandably, the Japanese central bank remains keen to avoid sparking the market volatility that an overt move toward a less accommodative stance would likely trigger. But a widening of the trading band for Japanese government bond (JGB) yields could indicate the BoJ is not impervious to the moves of its peers, and indeed that its broader aims may have changed. From a wider perspective, any such change of stance by the BoJ—albeit at the margin—could spill over into other markets, possibly reducing the impetus toward flatter yield curves that has been such a feature of global interest rates in recent years.

Domestic Strength Underpins Growth in Eurozone despite Trade Headwinds
With growth in the eurozone still at a reasonable level, the path for the European Central Bank (ECB) to cease its bond purchases at the end of 2018 looks relatively clear, in our view. Domestic fundamentals are strong in several countries, most importantly Germany, and a slight lessening of trade tensions between the European Union (EU) and the United States—which had been creating something of a headwind—may help to bolster sentiment among European businesses. But we think the ECB is wise to retain some flexibility over the timing of its transition to more conventional monetary policies. The central bank has voiced concerns about the impact of the Turkish crisis on some European lenders. Additionally, volatility can be exaggerated at this time of year, as shown by the extent of recent moves in Italian bond markets.