UK data released on Tuesday showed wage growth slowing slightly in March to 3.3%, from 3.4% in February. Meanwhile, the unemployment rate dropped from 3.9% to 3.8%, the lowest level now since the mid-1970s. As UK labour becomes more scarce, economics textbooks suggest that wages should be increasing, putting upward pressure on wages. Indeed, in the last few years, UK wage growth has picked up. However, the Bank of England’s (BoE) preferred indicator of medium-term wage growth (3 month average versus previous 3 month average, annualised) suggests otherwise. The pace at which wages have been acc ..read more

Bund yields (and bond yields in general) have defied bond bears for many years, and this year has seen more of the same: in March, 10-year bund yields reached lows of around -0.08%. There seems to be a consensus that Bunds are fundamentally overpriced, and that a 0% level is somehow unnatural. In this blog, I discuss why, in my view, this is not the case – and why the 0% level is not actually very relevant; it’s a barrier that appears real, but is in fact an illusion. I go through a number of different ways to think about this. Finally, now that bund yields are above 0% again, I look at what ..read more

Rates and FX markets have recently taken a divergent view on the global economic outlook. While the US yield curve recently began signalling that a recession may be on the horizon, currency markets are pricing the lowest amount of volatility ever – near to or below the record lows seen in 2007 and 2014. Below we’ve plotted the 1-year option implied volatility across a few popular FX pairs, as well as JPMorgan’s index of global FX volatility. Currency wars were previously the last round of ammunition for central banks confronted with a severe slowdown, when rates were already at or through the ..read more

We last wrote about Italian sovereign bonds in October 2018, when we highlighted that the market was overreacting to Italy’s deficit story, and overestimating the probability of an Italian default. Since then, while Italy 10-year yields are 1% lower, Italian sovereign bonds have continued to trade cheap versus other Eurozone sovereigns. In fact, comparing Italian sovereigns with European high-yield corporates, the differential is the same today as it was in the depths of the Eurozone crisis – a time when the Eurozone was on the brink of collapse. Italy is still trading as though the Eurozone ..read more

US data, very unusually for this time of year, is coming in below expectations Back in August 2017, I mentioned on this blog that US economic data had exhibited a strong and consistent seasonal bias since 2010. Relative to consensus forecasts, high frequency US data had a habit of starting the year above them, weakening sharply from April through to July, and then strengthening through the summer and particularly into year end. Since 2010, US economic data has not once come in above expectations in June, but has beaten expectations in December every year bar 2015. 2017 proved to be a textbook ..read more