Bond market price falls spread to equity markets last week as investors feared that the US would act more aggressively towards interest rates, as stronger inflation figures and wage pressures continued to mount. Bond markets have come under rising pressure so far, this year as rising optimism over the strength of the global economy has fuelled expectations that inflationary pressures are building. This comes at a time when central banks are already unwinding some of the post-crisis monetary stimulus, and the US deficit is expected to balloon due to the recent tax cuts.
Markets have raced ahead too aggressively in January, with equity funds enjoying their biggest monthly inflows on record, attracting about $100bn, over the month. Letting some of the air out of the tires at this stage of the cycle is a natural and appropriate practice and one would expect to see further short-term volatility, particularly within bond markets over the course of the year.
US wages expanded in January at the fastest annual pace since 2009, increasing expectations of higher inflation as the global economy strengthens. Average hourly earnings rose 0.3 per cent last month bringing the year on year gain to 2.9 per cent. The unemployment rate held steady at 4.1 per cent for the fourth consecutive month.
Although the Federal Reserve held interest rates steady at its meeting last Wednesday, the relatively confident accompanying statement reinforced expectations that policymakers will tighten policy in March and perhaps move more aggressively than previously forecast later this year.
You now have the perfect storm of events happening. You have a Fed that is now changing leadership, higher inflation expectations, and a massive amount of Treasury issuance which perhaps is not necessary priced into markets yet.
In corporate news, healthcare shares fell after Amazon, Berkshire Hathaway and JPMorgan said they were joining forces, announcing plans last Tuesday to create a healthcare company with the aim of cutting healthcare costs and improving services for their US employees.
Europe benefited from positive economic news. Manufacturing figures in Italy were the strongest in seven years, while business sentiment in in France hit a record high. The Eurozone unemployment rate held steady at 8.7 per cent in December, remaining at the lowest level since January 2009.
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