This summer, historically low equity market volatility is grabbing all the financial headlines. What is less remarked on is the bond market. Treasury market volatility remains similarly constrained, with yields stuck at around 20 basis points (bps, or 0.20%) below where they started the year.
Back in early May I wrote about the yield “melt-up” that wasn’t. At that time the thesis was that a combination of steady but uninspiring growth, moderating inflation and lower yields elsewhere would keep interest rates contained. Three months later it looks like little has changed.
Inflation refuses to accelerate
Inflation expectations have rebounded over the past six weeks but remain well below the January peak. This reflects a further deceleration in realized inflation, particularly core. Since January, U.S. core Consumer Price Index (CPI) has fallen from 2.3% to 1.7%. At the same time, despite a strong labor market, wage growth remains stuck at around 2.50%.
Growth is solid but not breaking out
Second quarter gross domestic product (GDP) evidenced the now familiar rebound. That said, while the U.S. economy is on solid footing, it has disappointed relative to expectations. The Citigroup Economic Surprise Index, which measures how actual economic data releases compare to expectations, remains in negative territory, albeit above the June lows (see the accompanying chart). Economic data has been unable to match lofty expectations and the hoped for sugar rush from Washington via tax cuts is no closer to being delivered.
Citigroup U.S. Economic Surprise Index