Last week’s wobbles on global markets were explained as investors reacting to comments from a trio of central bank governors about their bond buying (quantitative easing) programs and took them to signal the start to the end of these programs.
Shares fell, especially in Europe and the US – but what was also at work, especially in America, was the growing concern about the market valuations of giant tech stocks such as Apple, Amazon, Facebook, Alphabet and Netflix.
But with the likes of Fed chair Janet Yellen, European Central Bank head Mario Draghi and Bank of England Governor, Mark Carney, all commenting in a way that indicated to many in the markets that rate rises (more in the case of the US) could be around the corner, so sharemarkets and bonds took several wounding hits.
But Friday saw data releases in the US, EU and Japan add more doubt to the justification for the rate cut, end of easing talk – inflation is not rising. In fact it is again falling in the US, EU and Japan and while the Fed still thinks that is transitory, inflation has undershot its target for nearly five years which millions of jobs have been added and the jobless rate has plunged!
Only in the UK is inflation a growing concern and rate rises possible – but that is linked to the sharp fall in the value of the pound since Brexit and the slowing pace of economic activity.
The spectre of 70s-style stagflation is starting to haunt Britain.
In America we saw the 59th month in a row that US core inflation (nor headline) had again undershot the Fed’s 2% target, once again providing more evidence that despite falling unemployment, wage growth remains weak and cost pressures are non-existent.
In fact the Fed’s preferred inflation measure, the core personal consumption expenditures price index, which excludes food and energy prices rose at an annual pace of 1.4% in May down from 1.5% in April the previous month, and the most recent high of 1.8% in February. The headline index dropped sharply to 1.4% from 1.7% as weakening oil, gas and energy costs again proved to be a major influence.
With unemployment at 4.3% in May (and an update out this Friday) and wages only growing at 2.5% or so a year, down from 2.9% in December, labour market cost inflation is just not happening.
Despite the weak inflation report, US bonds sold off on expectations that Fed policymakers still think the weak inflation is transitory (for 59 months in a row!) and continue tightening monetary policy (Minutes from the last Fed meeting are out midweek).
That belief saw big move in bond yields – in Europe the yields on german, UK and French securities all rose last week, dragged up by a combination of the talk about a possible end to the cheap money and what was going on in the huge US and Japanese markets.
On Friday, the 2-year US Treasury yield (which is the most sensitive to policy talk around the Federal Reserve—rose 1.2 basis point to 1.385%, the highest since June 2009 and up 19.3 basis point in the six months to June 30. And yields on 10 year bonds hit 2.30% on Friday – down from 2.48% at the start of the year.
In Europe it was a similar story with inflation last month easing again and raising more questions about whether the market response to those comments from Mr Draghi were a tantrum/over reaction. While EU employment continues to improve, it is not sparking a wages explosion or inflation.
Annual inflation in the eurozone sank to 1.3% in June from 1.4% in the year to May and like in the US (and Japan) well below the 2% target of the central bak – in this case the ECB.
Some analysts question if Mr Draghi had a full grasp of what was happening in the EU economy after he said that “reflationary pressures” had replaced deflationary ones as the eurozone’s recovery progressed.
While core inflation — which strips out volatile energy prices —rose from 0.9% in May to 1.1% last month, energy costs are falling and that is impacting expectations.
And in Japan comprehensive evidence that solid employment is not impacting inflation (the Bank of Japan and the national government want it to) or costs generally.
While the unemployment rate unexpectedly rose 0.3 percentage points to 3.1% in May (which is close to the record low of 2.8% in April), the ratio of open jobs to job seekers hit a 43 year high as the number of unfilled places continues to grow. The rise in the unemployment rate was put down to more people looking for work in May.
Headline consumer prices rose at an annual rate of 0.4% in May, unchanged from April, while ‘core-core’ inflation was also unchanged month on month at 0.4%, meaning there remains no upward pressure on prices in Japan, especially for locally made goods and services.
But the Bank of Japan wants price pressures to emerge to push inflation to its target rate of 2%) which has not been hit for years, excluding the impact of tax rises).
