What’s the Message of the Bond Market? Why is it Different from the Equity Market?

Global Inflation or Global Deflation? Why is the Curve Flattening?

By Chris Watling, Global Economist & Chief Market Strategist, Longview Economics

“Prices “will be stickier for longer” and market expectations for Federal Reserve easing may be “overdone,” she added.”

Source: “BlackRock’s Kate Moore Sees ‘Sticky’ Inflation, Market Volatility Ahead”, 21^st November 2024, speaking at the annual University of Virginia Investing Conference; https://news.darden.virginia.edu/2024/11/21/blackrocks-kate-moore-sees-sticky-inflation-market-volatility-ahead/

It’s a popular mantra at the moment: ‘Inflation is going to be sticky’ (as Kate Moore alludes to in the above quote). It’s come down a long way from its 9% peak in 2022 but will struggle to fall further. That’s the general view on much of Wall Street, as the parallels with the 1970s are widely touted (along with the chart showing the reacceleration of inflation before it got below 2% in 1973 and 1977 - see FIG 14 in appendix). That, though, is lazy thinking. As we laid out in our Longview Letter No. 137 – ‘Is This The 1970s? Really? A.k.a. We’re all Monetarists now’ in May 2022 – see HERE, the parallels with the 1970s are limited. And the differences multiple. Money supply growth, for example, never slowed below 5% annual growth in the 1970s (while last year it was -2.7%). The 1970s also included several phases of price controls; while the Fed itself didn’t believe it could control inflation with monetary policy.

It’s logical, therefore, to question Wall Street’s thinking and ask ‘is the global economy inflationary or deflationary’ at the moment?

Certainly, there are some inflationary forces at work. Tariffs, on one level, will be inflationary (and should push prices higher); while Trump’s agenda is regarded as 'pro growth' (and therefore ultimately inflationary, especially if the fiscal stimulus is large).

FIG 1: Chinese & Japanese 10 year bond yields (%)

The bond market, however, seems to see things differently. Many longer duration government yields have been moving lower or rolling over recently.

Indeed, since US yields popped higher on Trump’s election, 10 year yields have softened, and moved further below their 200 day moving average yesterday (FIG 2); Chinese 10 year bond yields, meanwhile, have moved decisively below 2% in recent trading sessions (which is unprecedented, except for one day in April 2002), and are increasingly behaving in a manner similar to Japanese bonds in the 1990s (FIG 1). Added to which, German 10 year yields have been trending lower since October last year. Currently, they are sitting at the bottom end of that 12 month range (as are 30 year German government yields). Coupled with that, pessimism is widespread about the Eurozone economy. How is it going to cope with a Trump Presidency? How will it grow given its two main economies are currently in political turmoil? And, given Germany is now widely regarded as the ‘sick man of Europe’, which part of Europe will drive growth in the region?

FIG 2: US 10 year bond yields shown with moving averages

The Most Under-Discussed Chart in Global Markets