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The economic fundamentals in the United States are strong. Growth is steady, the labour market is near full employment, consumer spending is on an uptrend and confidence is robust. Not only does the picture look rosy in the United States, but there is a synchronized upswing in economic growth around the world. At Davos, the International Monetary Fund (IMF) lifted its forecasts for global growth by 0.2 percentage points to 3.9% this year and next.
Normally, the unwanted byproduct of this solid backdrop, according to economic theory, is inflation. Higher employment means more bargaining power for workers, pushing up wages and prices. However, 2017 was categorized by good growth and low inflation, creating the perfect conditions for equities. In the Treasury market, the curve flattened in 2017. Firstly, because low inflation expectations kept long-end yields subdued. Secondly, because short-end yields moved higher on increased Federal Reserve (Fed) rate hike expectations. Marc Ostwald, global strategist at ADM Investor Services International, said the so-called ‘bear flattener’ trade (buying the long-end and selling the short-end) was vogueish in 2017.