Continued debates and questions about the health of the US consumer. Falling rates revive demand for new one family houses. Since 2013 is the correlation very close between falling long term mortgage rates and demand for new houses. This clearly shows, how rates can directly influence purchasing decisions especially for long-term goods. Fed decision yesterday to extensively communicate that the rates will be on hold for the foreseeable future can clearly add to the housing demand in coming months. Low and stable rates can clearly support US consumer thus providing new impulses to the economy.

US New Family House Sold Annual Total and 30 year US government bond yield (here shown inverse)


Source: Bloomberg, US Census Bureau

About inflation. It appears that the deflation discussion of the yesteryears left such strong marks on the politicians, central bankers and market participants that nobody cares about the current inflation trends. The discussion moved comfortably from “we want to fight deflation” to “we have a very moderate core inflation so….”. Core inflation shall be the topic of one of the upcoming deliberations.

Now every normal consumer and business person does understand inflation as rising prices. Obviously rising prices are here and everyone will be able to easily show that from butter to oil any prices we can think about increased. The younger may rather point to the stellar price increases of the new iPhone.

Now central bankers appear to be very content with the running rate of consumer inflation as long as the core inflation is not rising. Just by the way, the vast majority of the consumer will not really understand the concept of the core inflation. The prices which touch our daily life are obviously rising.

Now even conservative central banks of Norway and Sweden abandoned their long standing conservative stand on interest rates and inflation. Inflation does not matter. It now moves into the realm of aberration and will come back soon enough to some kind of “normalised” level. Even if not we clearly can rely on past experience. Central banks can use their historically proven ability to quash inflation by using a wide arsenal of monetary instruments.

Inflation trend in USA, Germany, Japan, Sweden and Norway

CPI 2018-09-25

Source: Bloomberg

10 year government bond yields (generic) in USA, Germany, Japan, Sweden and Norway

10 Year yields 2018-09-25

Source: Bloomberg

Federal Reserve appears to be exception as the sanity of the market maintained its focus on inflation and normal relationship between long-term interest rates and inflation. Apart from short-term blips the real rates stayed positive.

Real interest rates (CPI minus 10 year government bond yields (generic)) in USA, Germany, Japan, Sweden and Norway

Real rates 2018-09-25

Source: Bloomberg

Once the normalisation of real interest rates in Europe and Japan will begin, the pain could become extraordinary. In some respects the 10 year interest rates would need to rise by 140 BP in the case of Germany or even by 300BP plus in case of Norway. The time will tell how those countries can stomach such major interest rate increases. So far the markets enjoy the ride and destruction of value for any bond investor in Europe and Japan.


There were numerous views on Friday’s unemployment and jobs numbers. Mostly it was expected that jobs data do not move markets in the current environment unless they will be very bad.

Well it appears that most get this part pretty wrong as the bond market and the USD move strongly following the Jobs report. The 2 year yield reached a new decade high (see following chart) and the 10 year tries to finally bust the consolidation zone (see chart)

Generic 2 year yield of US government bonds (weekly)

USGG2 2018-09-10

Source: Bloomberg

Generic 10 year yield of US government bonds (weekly)

USGG10 2018-09-10

Source: Bloomberg

Change in nonfarm payrolls was expected at 190k and was reported at 201k. Underemployment rate fell to 7.4% from 7.5% and hourly earnings increased to 2.9% from 2.7% higher than expectations. Highest level since 2009.

US average hourly earnings all employees

US hourly wages 2018-09-10

Source: Bureau of Labour Statistics, Bloomberg

The following chart shows that US worker makes more money which he or she can spend on goods adding to the already well running economy. Still the corporate fundamentals may not deteriorate as much as some may worry. Just on Thursday it was reported that unit labour costs actually fell by 1%.

US Unit Labour Costs Nonfarm Business Sector QoQ in %

US Unit 2018-09-10

Source: Bureau of Labour Statistics, Bloomberg

Isn’t it a great world? Companies are paying more to their worker as hourly earnings are rising and at the same time the costs of labour are actually falling which should contribute to improving margins and little if at all costs pressures.

Some Federal Reserve member call this economy “Goldilocks”. From the past we all know this is dangerous moment to use such a phrase but looking at the numbers just presented, it is rather a fair statement.