Recent economic data for the first quarter of 2018 suggest the global economy cooled off from its red-hot pace of the second half of last year. However, economic activity remains well above its trend (or potential) growth rate, resulting in diminished excess capacity across most economies. This is reflected in declining unemployment rates and rising capacity utilization rates. As a result, inflation readings have ticked higher as tighter labour and goods markets result in stronger wage gains and quicker price increases. In response, central bankers, including those in Canada and the United States, have become more confident in tightening monetary policy. Strong growth, diminished excess capacity, and rising inflation and interest rates are all consistent with an economy in the later stages of its business cycle.
The 10-year U.S. Treasury yield rose above 3% earlier this week for the first time since early 2014. The news initially sent a chill through U.S. markets, stoking concerns over higher borrowing rates for companies already facing rising costs—and as early quarterly results in the industrials sector failed to deliver positive outlooks. U.S. stocks climbed higher on Thursday, however, after a strong round of corporate earnings reports, led by the technology sector. Also in the U.S., initial jobless claims, a measure of layoffs across the U.S., fell to their lowest levels since December 1969. The tightening job market increases the odds that the Fed will be considering additional rates hikes in 2018.