Yesterday’s markets were a rather sudden trip down memory lane for us macro watchers as echoes of 2011 and 2012 hammered prices. What I will say is that these moves do look like an over-reaction in the short term but as the famous saying goes, ‘the market can stay irrational a lot longer than you can stay liquid’.
We told you yesterday of the three main trends in markets at the moment; collapsing energy prices, bond yields getting stuffed and general concerns about the state of the global economy. Nothing was added to this yesterday but a fire sale of some assets quickly took hold of markets. The largest and most important mover was the yield on the U.S. 10-Year treasury market.
Since mid-September the yield on US 10-year debt has decreased from around 2.65% to, at one point yesterday, 1.85%. While this may not sound like a lot, the moves of the past 10 days were the largest fall since 2011’s debt ceiling crisis that had commentators worried over whether the United States would default on its enormous national debt. The yield has been falling following increased doubts over just when the Federal Reserve will begin to raise interest rates. Higher interest rates lead to higher yields so the marginal attraction of investing in bonds is maintained but this only tells half the story.
Inflation, or the lack thereof, is the economic head scratcher for developed and large economies. Europe’s disinflation issues are well known but subsequent falls in price indices from Sweden, China, the UK and – yesterday – from the US in monthly producer prices are increasing concerns.
Expectations of lower inflation or outright deflation lead to investors buying bonds and driving yields lower as they, in real terms, receive more bang for their buck. Put that together with a generalised run for safe haven cover after equity markets took a 3% bath and you have the makings of a real run in bond markets. Of course, without the yield support, the USD was very much in the firing line and this morning sits close to 1.60 in GBP/USD and over 1.28 in EUR/USD terms.
Debt and equity markets have recovered somewhat – as I said, I believe this to be an over-reaction – but the impact on policy could be a lot longer lasting. I would be very surprised if, at the Federal Reserve’s October meeting, the FOMC was not in some way united around emphasising the continued support that the current guidance plan affords the US economy.
Risks were also starting to heat up in a place that we have not talked about for a long time; Greece. Greek 10-Years have seen yields rise by 56bps – 7 times the daily average – this morning as political wrangling over the Greek bailout program increases. Greek politicians believe that the economy is ready to leave the bailout program while EU finance ministers remain doubtful. Yields of 7% are not in the realm within which a government can sustainably finance itself and these doubts are only kicking borrowing costs ever higher. An overnight Cabinet meeting has dismissed reports of a snap election. The newly resurgent Syriza party will be disappointed.
There was some good economic news yesterday amid all the wind and rain. UK unemployment once again fell in the past month, this time to 6.0% from 6.2% in July. ILO unemployment is at the lowest level since October 2008 and brings the number of people employed within the UK economy to 30.8 million, a new record. Likewise the claimant count fell to 2.8%, the lowest since 2008. Wage settlements are also starting to move in the right direction, especially given the fall in inflation to a 5-year low seen yesterday.
Average earnings were 0.7% higher in the past month and real wage increases, while far off at the moment, represent a silver bullet for the global recovery. Real wage increases come from optimistic employers happy with business conditions, they allow consumers to re-balance spending figures from credit uptake and promote growth in generalised output with a central bank more comfortable to normalise monetary policy. The Bank of England will be a lot happier with yesterday’s run of data than they would have been with Tuesday’s.
This morning’s markets seem to be calmer with the final reading of September’s Eurozone inflation number at 10am the obvious highlight. Such is the negativity around the European inflation picture it is very possible that an on-consensus print of 0.3% would be viewed as a near-term positive for the single currency. The US session opens with the latest jobless claims numbers at 13.30 BST before September’s industrial production numbers at 14.15 BST.
