Everyone is talking about the sell-off in bonds these days. Yields on the US 10-year benchmark is up nearly 150bp since April, within touching distance of 5%, and 30-year yields are now just over 5%, up from 3.7% in April. With the two-year yield up just 100bp over the same period, the curve has bear steepened by 50bp, and is now looking to un-invert due principally to a sell-off in long bonds, contrary to widespread expectations of bull-steepening via a rally in the front end. The 2s10s is still inverted by around 17p , but the 2s30s is now—as far as I can see from the close on Friday the 20th of October—just about positive. No wonder that the long bond is on everyone’s mind. Sustained bear-steepening during inversions are rare sights in G7 bond markets, so when they are spotted in the wild, they tend to grab the attention and imagination of investors and analysts. But what does it mean? Put on the spot, I’d say that bond market volatility is underpriced.
Read MoreI have a few speaking engagements coming up, prompting me to update my view on the world beyond the borders of the Eurozone, which makes up the day job. One trend that I am looking forward to present to, and discuss with, investors and capital allocators is the tension between signs that the inflation and interest rate shocks are now fading, in a cyclical sense, and the risk that inflation will stabilise above 2%, posing a challenge for monetary policymakers. Will they channel their inner Volcker or fudge the 2% inflation target?
Read MoreSomeone has to say it, and it might as well be me. Markets have a distinct goldilocks feel about them at the moment, or in the words of the FT’s editors; markets are beginning to eye the “immaculate disinflation”, which is a prerequisite for a soft landing. This is a story about two trends; easing inflation and economies which are, well… neither too hot nor too cold. Soft US and UK inflation reports for the month of June have been key catalysts for the change in mood. Headline CPI inflation in the US fell to a two-year low of 3.0%, with core inflation dropping by 0.5pp, to 4.8%, a 20-month low. In the UK, meanwhile, headline inflation slipped to 7.9%, from 8.7% in May, while core inflation dipped by 0.2pp, to 6.9%. These numbers don’t exactly scream goldilocks, but markets trade at the margin of the economic data; it is the direction of travel that matters.
Read MoreI think Simon Ward is right to predict that a downturn in investment will be the next shoe to drop in developed market business cycles, even as easing inflation offers respite for households’ inflation-adjusted disposable income and spending. This has been a key theme for me and my colleagues at Pantheon Macroeconomics for a while. In the U.S., Ian Shepherdson believes that this will drive the economy into a mild recession, while we are a bit more sanguine in Europe for the simple reason that the euro area economy effectively has been close to recession since the end of last year. Simon Ward notes that the capital goods component of the global PMI hit a new low in April, that inflation-adjusted profits in G7 slowed sharply last year, and that nominal money is contracting. Crucially, he adds that credit standards are now tightening significantly in Europe, as well as across the pond. Flat-lining profits in inflation-adjusted terms, a contraction in nominal deposits, the lagged effect of higher interest rates and tightening credit standards is bad news for private capex, including inventories, as measured by the national accounts. The silver lining is that a slowdown in investment should, combined with softening inflation, persuade DM central banks to kick back from the table on rate hikes. The key question, however, remains whether a slowdown in investment and aggregate demand is adequately priced-in by equities. I doubt it.
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