Danger Here, Danger There, Danger Everywhere
Until Tuesday, the bond market was looking for rising inflation as a reflection of “better” economic conditions. Our economy is still anemic after more than six years of central bank meddling, but traders don’t trade on truth — they trade on perception.
Reports still seem solid. Inflation is ticking higher as consumer prices rose last month to 1.8% on an annualized basis. The Fed’s target is 2%. Unemployment is down to 5.4%, participation in the labor force rose to 62.8%, and even wages have risen a bit.
In fact, job openings have surpassed the level they were before the financial crisis in 2008. As Harry and Rodney have noted many times over the years, consumers drive 70% of economic activity here in the U.S. So, when the labor market finally tightens to the point that wages move higher, economic growth follows. When our economy grows, inflation follows.
But while bond traders were keeping their eyes on wage growth, inflation, and economic growth, they weren’t waiting on those things. They were already pricing that future growth in. Yet, bond yields dipped lower Tuesday.
