Investors betting on rising bond yields just threw in the towel in a big way, according to Bank of America Merrill Lynch.
Inflows into fixed-income funds as tracked by EPFR Global totaled $16 billion in the five days ending June 8, the “biggest inflow to bonds in well over two years,” according to strategists Michael Hartnett and Jared Woodard. This bond-buying binge came ahead of a calendar jam-packed with event risk that’s so far failed to meaningfully dent risk assets.
A heavy appetite for bonds — particularly investment-grade credit, which received nearly $10 billion in inflows — provide a more benign explanation for the apparent disconnect between stock investors’ optimism and the drearier view of the U.S. economic outlook from the Treasury market.
This gap that’s opened up between Treasury yields and the S&P 500 Index over the past month has caused some strategists to worry that equities are due for a dip to resolve the difference between the two asset classes.
The performance of credit and equities are “highly correlated” and both sit near record highs, they conclude.
The truth of the matter is that, as many commentators are highlighting, Monetary policies around the world are way too accommodative and flushing the world with cash and negative interest rates.
Individuals have piled up debt again and the leverage of the US economy is reaching dangerous levels again. And this at a time where the economic agenda of Donald Trump is far from being guaranteed and where his political status is in danger.
Overall, short term and long term real interest rates are in negative territory and this is an unsustainable situation.
Canada may be pointing to the road ahead.
Canada’s labor market continued surprising in May, with a greater-than-expected 54,500 jobs gain that also finally came with signs of a pick-up in wages.
The employment gain — the third biggest one-month increase in the past five years — was driven by the addition of 77,000 new full-time jobs, which offset falling part-time employment. Economists had forecast a 15,000 increase in employment.
The employment gains bode well for the continuation of the country’s expansion, which is the fastest among the Group of Seven, as Canada emerges from the oil price collapse and benefits from a soaring real estate market. It also could raise pressure on the Bank of Canada, which has been citing worries about slack in the economy for being cautious, to increase rates sooner.
“Job growth is astoundingly strong in Canada and the data-quality critics face an uphill battle in choosing to ignore what is now a quite long-lived trend,” Derek Holt, economist in Toronto at Bank of Nova Scotia, wrote in a note to clients.
- The 316,800 new jobs over the past year is the biggest 12-month gain since February 2013 — and levels the economy has seldom produced since the 2008-2009 recession.
- The pace of annual wage rate increases accelerated to 1.3 percent in May, after falling to a record low 0.7 percent in April. That may begin to clear up one of the most puzzling recent developments of the country’s labor market — slumping wage gains in the face of sharp increases in employment.
- Another sign of potential tightness is that wages for temporary workers are up 4.8 percent year-over-year.
- Manufacturing added 25,300 jobs during the month and the embattled sector has produced a 43,000 employment increase so far this year. The increase in May is the biggest since 2002. Still, services have done the heavy lifting over the past year, accounting for 295,200 of the new jobs
Canada’s currency appreciated after the report, rising 0.3 percent to C$1.3462 at 9:56 a.m. Toronto time. Benchmark two-year government bonds yielded 0.75 percent, up 3 basis points from Thursday. Odds of a rate increase this year climbed to 37 percent, according to Bloomberg calculations on overnight index swaps. They were 7 percent a month ago.
Nick Exarhos, CIBC: “It’s a pretty clear cut message from today’s employment report for Canada: the labor market is in good shape. Over the past year, the Canadian economy has added 317K jobs, equivalent to 1.8% growth.
That pace is roughly one-and-a-half times as fast as we would have expected if output in Canada was growing at its economic potential.
That’s clearly more good news for the Bank of Canada, which is eyeing how quickly we can close the slack that opened in the wake of the oil shock. That timeline now suggests tightening from the BoC by early 2018—something that isn’t yet priced by the bond market.”
Nathan Janzen, Royal Bank of Canada: “Strengthening in labor markets and stronger recent GDP growth numbers increasingly argue that current ultra-low interest rates may no longer be needed to support the economy.
We nonetheless, continue to expect slow wage growth, lack of upward pressure in consumer prices, and uncertainty about U.S. trade policy during the upcoming NAFTA renegotiation will keep the Bank of Canada cautious and don’t expect a rate hike until the first half of 2018.”
A separate report released Friday by Statistics Canada showed utilization of industrial capacity at the highest since 2007. Data show manufacturers were operating at 83 percent of their potential level of output, also the highest level since 2007.
- Canada’s unemployment rate increased to 6.6 percent in May, in line with economist expectations, from 6.5 percent in April. The increase in unemployment was due to the entry of 78,400 Canadians into the labor force in May.
- One negative from Friday’s release was a slowing in total actual hours worked, to 0.7 percent annual from 1.1 percent in April. Also, the gain in hourly wages is still well below historical averages — 2.6 percent over 10 years — and it’s still lower than inflation.
- Adjusted to the way calculations are made in the U.S., Canada’s unemployment rate was 5.6 percent in May, compared with 4.3 percent in the U.S.
- Quebec’s unemployment rate fell to a record low of 6 percent. Manitoba has the lowest unemployment rate in the country, at 5.3 percent.
- The number of jobs in the finance, insurance and real estate sector dropped by 17,000.