The Bond Bull Market is NOT Over
Written by Richard Hokenson
The “Race to Zero” is not over. The fundamentals that we identified 25 years ago that produce very low nominal interest rates have not changed. Of course, there have been cyclical interruptions which have led many to state that the bull market in bonds is over. The secular story, however, remains intact with the result that these disruptions end up producing better buying points for the next rally.
The current angst reflects the concern that the core PCE deflator is poised to move higher due to tighter labor markets, increased government spending on infrastructure and tax cuts. Wage inflation, however, refuses to cooperate with this scenario – the pace remains moderate, in line with our analysis that there is more slack in the labor markets that most believe.
Analysis of core CPI inflation suggests that the anxiety regarding price inflation is overblown. The only reason that it is above 2% is because of a higher rate of inflation for owner’s equivalent rent, i.e. what someone believes that they could charge for someone to rent their owner-occupied house. Excluding shelter, the rate of inflation is not only well below 2% but has drifted lower in recent months (see Chart 1). With most of the rest of the world exporting deflation, with the U.S. economy still in the sweet spot of faster growth in the number of producers versus demand (see Chart 2), we reaffirm our view that the “surprise” in 2017 will be lower than expected wage and price inflation in combination with faster growth.
Richard Hokenson is a pioneer in the application of demographics to economic and financial market forecasting.