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It was the best of times, it was the worst of times…
Don’t worry, I’ll stop there.
Around the world things are looking up. Several developed economies (including the UK) are running at full employment, or as near as you can get.
Yet I think it’s fair to say that everyone is grumpy. More than that, they’re fearful. They’re scared of missing out. But they’re scared of getting sucker punched again.
And it’s giving rise to some pretty odd things happening in markets.
Don’t let your confirmation bias blind you – this is a good report on jobs
Jobs data for the UK in the final quarter of 2018 came out yesterday. Given the constant litany of grim headlines, it was staggeringly good.
The employment rate is at 75.8%. That’s the highest since comparable records began in 1971. The overall unemployment rate fell to 4%, the lowest since 1975. For women, it fell below 4% for the first time ever.
The percentage of “economically inactive” (those aged 16-64 who are not working nor seeking work) came in at 20.9%, another record low. The number of people on zero-hours contracts fell too.
Meanwhile, the most important measure from a “big picture” point of view – wage inflation – headed significantly higher. Weekly pay (both including and excluding bonuses) rose by 3.4% compared to the same time the year before.
This means that real wages – wages after inflation – are rising at their fastest rate in two years. They are also rising more rapidly than house prices.
Wage inflation matters, because if anything is likely to push both growth and wider inflation higher, it’s people being paid more. And finally, it seems that the labour market is sufficiently tight that wages are indeed picking up.
Incidentally, if you’re sitting there furiously looking for “ah, buts”, I have some advice for you. Picking holes in these releases is commendable. It’s good to be sceptical. And all of this data is historic; it says nothing about what will happen tomorrow.
But also remember that you have to deal with the world as it is. You may not like the Tories; you may not like Brexit. You may feel that this statistical release must surely be covering up some great yawning chasm in the social fabric.
But the data collection methods haven’t changed much, and for now, the data points to an economy which has a high level of employment and rising wages. And importantly, Britain is not unique.
Who will win the tug of war in markets?
These are good numbers by anyone’s definition. And they highlight an absolutely fascinating tug of war going on both here and in the wider world.
It’s hard to describe global labour markets in most developed countries as anything other than “hot”. Britain is not the only one, for all the cries of “despite Brexit!” or “we haven’t left yet!”
Lift your eyes from our current parochial obsessions and you will find that not only the US but also Japan – the land that pay rises forgot – are seeing ever-tightening labour markets combined with slowly but steadily growing wages.
This really should be toxic for bond markets. Bonds are mostly fixed-income instruments (ie, they pay you a specific interest payment that does not rise or fall). As such, they hate inflation. If you know a bond is going to pay you £50 in a year’s time, then you want prices to be lower, not higher. If prices are expected to go up, the value of that bond will fall.
But that’s not happening right now. Instead, as Daniel Kruger pointed out in the Wall Street Journal a couple of days ago, bond yields have been sliding since October (which of course, is when stocks fell out of bed).
This has resulted in the proportion of bonds which offer negative yields (where bond owners are effectively paying the issuers – mainly developed world governments – for the privilege of lending to them) rising yet again.
The proportion of global debt offering negative yields (according to BoA Merrill Lynch) was virtually zero until 2014. It peaked at just under 30% in September 2016, around about the time we hit “peak deflation” fear. Since then, it has managed to dip below 19% in July 2017, and October 2018. But now it’s back up above 22%.
As David Rosenberg of Gluskin Sheff pointed out on Twitter yesterday, it’s no wonder that stockmarkets have been surging in the last month – it’s because low bond yields mean that “TINA” (“there is no alternative” if you want to make a “real” return) – is back.
So what’s going on? On the one hand, investors seem to have grown certain that we’re facing a global downturn any minute now. So that might explain why bond yields are low. Employment is a lagging indicator, after all – it doesn’t peak until after the tough times are already clearly on the horizon.
On the other hand, the mass retreat of central banks could have something to do with it. If you think they’re all going to start buying bonds again, then you want to get in ahead of them.
I suspect it’s a mix of both. The financial system and the “real” economy have always been “reflexive” (moves in one affect the other). But the era of quantitative easing and the increasingly uncertain nature of money have exaggerated this reflexiveness.
It’s a little bit Orwellian. Investors look at the sky and see sunshine, but bond yields tell them it’s raining. They’re no longer entirely sure what to believe.
The good news is that this isn’t 1984. At some point, the evidence will swing hard one way or the other, and we won’t be able to ignore it. I’m still betting we’ll get inflation. You may disagree – but that’s why we make sure we have diversified portfolios, so even when one of us is wrong, neither of us ends up being ruined.