As we continue to see nominal interest rates melt away, we are also seeing a continued rise in inflation expectations and thus a further decline in real yields. After rising by 3 bps on Friday, the implied inflation rate in 10 yr TIPS rose another 3 bps yesterday. At 1.58%, that is the highest since late February when the conventional 10 yr yield stood at 1.70%. Thus, if correct, sovereign bonds on an inflation adjusted basis is becoming more an economic wasteland in that buyers continue to lock in real losses. These buyers are the sacrificial lambs that are being called upon by the Fed and other central banks to bail out the over indebted and no one more so than the US government. How else would we finance this I guess, //www.usdebtclock.org/ The move higher in inflation expectations, along with the dollar weakness in rally in gold I continue to believe is sniffing out an eventual stagflationary environment, likely in 2021 but I hope I’m wrong because it’s a challenging scenario. I’ll ask this rhetorically, what kind of damage do you think will happen to the world’s bond markets when we get a workable vaccine?
10 yr INFLATION BREAKEVEN
10 yr REAL YIELD
Speaking of monetary confiscation of people’s savings, Chicago Fed President Charlie Evans last night said “Unless inflation starts heading up to like 2.5%, I’m not going to really see a need for the funds rate to be increasing as long as we can still drive unemployment lower.” This was the monetary strategy of the 1970’s and reminds me of what John Maynard Keynes once said, “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”
A place in the world where its central bank has been desperate for inflation, Japan, saw CPI rise .6% y/o/y in Tokyo in July. Not much but double the estimate and up from .4% in July. That is also ex food and energy. Notwithstanding the upside surprise, inflation expectations are still non-existent in Japan at -.01% looking out 10 yrs but that is still up from -.30% back in mid March.
Japanese 10 yr INFLATION BREAKEVEN
Here is Germany’s 10 yr inflation breakeven, now at .80%. All still very low no question but still rising in the face of falling conventional yields.
The RBA kept rates unchanged as expected at the record low of .25% as there is not much left for them to do. They are already engineering a form of yield curve control (they want the 3 yr yield no higher than 25 bps) and conducting QE to get there.
After Germany reported an upside surprise in jobs number last week for July, Spain did today. Unemployment fell by 89.8k, well better than the estimate of an expected rise of 20k. This is what happens when an economy reopens so I’m surprised estimates were for a rise. There is still a lot of work ahead though as unemployment rose by 616k over the prior four months. The euro is little changed but still well bid just below $1.18. European yields though continue lower while stocks are mixed with the Spanish IBEX higher.