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"Subdued Inflation Data Ease Market-Volatility Worries"
U.S. economy shows few signs of overheating despite tight labor markets
By Daniel Kruger
The Wall Street Journal
U.S. government-bond prices bounced Tuesday after closely watched data on consumer prices signaled inflation remains muted (faible), easing concerns among investors that rising prices could spark a fresh wave of volatility in financial markets.
The yield on the benchmark Treasury 10-year note, which serves as a reference rate for corporate debt, mortgages and consumer loans, shot up by roughly half a percentage point in about five weeks earlier this year as investors piled into bets that prices were primed to rise. Many anticipated that a $1.5 trillion tax-cut package and a budget agreement expected increase spending by roughly $300 billion would help lift prices and could cause the Federal Reserve to accelerate the pace of interest rate increases.
Tuesday’s data were the most-recent sign that those expectations, which helped spur swings in financial markets earlier this year, may have been premature.
The Labor Department said the consumer-price index, which measures what Americans pay for everything from washing machines to hotel stays, rose 2.2% in the 12 months to February, below the 2.3% estimated by economists surveyed by The Wall Street Journal. Core prices, which exclude energy and food, rose 1.8% for a third straight month, also below economists’ expectations, suggesting that inflationary pressures are still soft.
Bonds strengthened following the report, with the yield on the benchmark 10-year U.S. Treasury note dropping to 2.848% from 2.870% Monday and notching its lowest close since March 1. Yields fall as bond prices rise. Soft inflation is good for the value of bonds because it helps preserve the purchasing power of their fixed payments.
“We’ve been expecting inflation pressures for some time,” said Tom Stringfellow, chief investment officer at Frost Investment Advisors. “They’ve not lived up to expectations.”
The price data came after last week’s jobs report showed tepid wage gains, suggesting that while the economy is continuing to grow, tight labor markets aren’t generating signs of overheating.
Throughout the year, investors and analysts have been asking whether signs of a pickup in inflation could push the Fed to raise short-term interest rates four times this year, rather than the three it has penciled in. Minutes of the central bank’s January meeting, which suggested policy makers were becoming increasingly hawkish, helped send the yield on the 10-year note to a multiyear closing high of 2.943% toward the end of February.
Created with Highcharts 6.0.4Market-implied probability for four interest-rate increases in 2018Source: CME Group
But by Tuesday afternoon, federal-funds futures, used by traders to place bets on the course of interest rates, showed a 32% chance of the Fed raising short-term interest rates four times by year-end, according to CME Group, down from 35% Monday but up from 17% one month ago.
And the 10-year break-even rate, a gauge that measures the bond market’s expectations for inflation over the next decade, edged lower: The difference in yields between Treasurys and the equivalent maturity of Treasury inflation-protected securities fell to 2.1081% on Tuesday from 2.1177% Monday, according to Thomson Reuters.
In another sign of investor doubts about inflation picking up, bondlike stocks—which have been among the worst-performing sectors in the S&P 500 in 2018—rose Tuesday, bucking a broader market decline.
Shares of utilities, regarded as bond proxies because of their relatively hefty dividend payouts, edged up 0.2% Tuesday, while the S&P 500 fell 0.6%. Meanwhile, shares of financial companies, whose net-interest margins rise with interest rates, slid with bond yields, with the S&P 500 financial sector ending the day down 1.1%.
Despite the day’s data, some investors warn that numerous factors could still fuel inflation, including a weaker dollar, which affects prices for commodities including oil, and rising tensions over trade.
“What we’re most worried about right now is a trade war,” said Maura Murphy, who manages inflation-protected bond portfolios for Loomis Sayles. Ms. Murphy said she is betting that inflation-protected Treasurys will outperform conventional government debt.
Investors and analysts say they are cognizant that inflation tends to accelerate early in the year, carrying yields higher with it, and that they need to remain on guard.
Related
· U.S. Dollar Edges Lower on Soft Inflation, Tillerson Exit
· Heard on the Street: When the Fed Wishes for Inflation
· Inflation Cooled in February
“That spike in inflation expectations is enough to do some damage to your portfolio,” Mr. Stringfellow said. “I don’t think you can be too aggressive” and take risks betting on longer-term bonds to hold their value in this environment.
Fiscal coverage has thrown hearth on what is already an awfully extended fiscal upturn.
With ability tight and structural growth restrained, there are some indicators of a viable overheating of the economic climate.
Nevertheless, given excellent company gains development, for this to purpose main injury to the fairness markets this system must accelerate and enhance.
As of yet, there are few signs that is happening.
While you throw oil on an already good lit fire, you threat overheating and this seems exactly what is starting to happen proper now in the united states economy.
The us restoration from the financial crisis was already one of the vital longest submit-war upturns in fiscal undertaking, even if it was disparaged through some as a susceptible healing.
That weakness is simply the influence of the next:
conveniently put, the U.S. Give part progress, the growth at which
the production ability can grow is a operate of the development in
the labor drive and the development in labor productivity.
As you can see in the graph, both have declined markedly this century. We simply had an unsightly productivity quantity out the day gone by. At the same time that does not imply all that so much as these quarterly figures are alternatively volatile, the pattern isn't encouraging.
Whilst the development in the labor force is largely determined by means of demographic developments which might be past the immediate purview of insurance policies, there is some mileage feasible from increasing labor force participation.
As you'll discover, the a part of the populace in employment (or actively watching for work) has fallen sharply within the wake of the economic main issue, but it has recovered one of the most misplaced territory. It remains to be obvious if, and if sure how so much of the decline may also be reversed.
However, the administration's immigration policies are a complicating factor:
Torsten Sløokay, the chief global economist at Deutsche bank,
thinks the U.S. Labor market is hot - might be too scorching.
In a notice on Monday, Sløok took exception to the inspiration
that there's underlying labor market slack in a pool of workers
waiting outside of the labor market. Federal Reserve Chair Janet
Yellen has even noted that there is also a bunch of men and women
who're listed as outside the labor market that wish to find a job
however had been discouraged.
"it is tougher to fill a job today than in 2006 when the economic
system was once overheating, see the primary chart below," wrote
Sløk. "If there rather is a huge number of employees on hand
external the labor market to come back in and take jobs why are
corporations then saying that they can't in finding staff?"
(emphasis his)
Sløokay noted that the number of job openings means the united
states is "already at full employment." moreover, Sløokay noted
that the number of people maintaining multiple jobs can be at its
best factor in view that the recession.
"in a similar fashion, the quantity of workers holding two or more
jobs is at a cyclical excessive, this is generally also a
reflection of an overheated labor market," concluded Sløok.
To be reasonable, the report number of unfilled job openings has
also been blamed on a possible mismatch between the training and
talents that on hand employees have and what organizations are
looking for. Essentially, there are more persons to hire but they
shouldn't have the proper skills.
Whilst this is not always a nasty factor, as a tight labor market
usually results in increases in wages for workers, it does have
implications for future Fed movements.