Wait, what just happened?
Posted on 16 March 2015
"Wage growth of roughly 2% in the UK appears sustainable"
Looking at the path of fixed income returns for the year through early March, we can see something is happening that, under the popular market narrative of low rates for longer, should not be possible. Consider the performance of the Barclays 7-10 year and the 20+ year Treasury indexes. While each of these indexes logged healthy gains in the early days of the year, since February they have relinquished most if not all of that rise. With longer-dated bonds, the sell-off has accelerated in March, likely a result of the ongoing exceptionally strong employment growth in the United States.
Furthermore, interest rates are rising against the backdrop of a rapidly appreciating dollar. Indeed, the trade-weighted dollar stands at a level not seen since early 2003. Combine currency strength with fetching interest rate differentials among the developed economies, and the country with the appreciating currency and higher interest rates should attract capital to its debt market. There are some market participants who are suggesting that a rise in interest rates is nearly impossible because of the deflationary trends swirling around global economies, the elevated debt levels that countries carry in the Post-Crisis Age, and finally, the central bank exertions from the European Central Bank, the Bank of Japan and others. Yet this is exactly what is happening.
The financial commentariat has been humming with conversations about the apparent resilience of the US labour market, as made manifest through rising employment. The focus should rather be on an obscure data-set that analyses the rate at which people who have jobs leave them to find another. This data, called the quits rate, offers one of the more informative lines of sight into the US labour market available to investors. The rate is calculated by the number of people quitting their jobs divided by total employment. It provides soundings on the tone and tenor of the labour market, since a rational person will likely quit their job only if they either have another one to go to or they believe the environment is so healthy that they will quickly find another appealing post. The latest release of the quits data suggests that increasing numbers of workers are confident enough to make the leap: the quits rate is at levels not seen since mid-2008.
The pressure on interest rates and central bankers is not limited to the US. The drop in UK unemployment and the growth in the economy have been equally as impressive as those in the US. Moreover, wage growth of roughly 2% in the UK appears sustainable, as the economy continues to expand. No wonder the Bank of England Head, Mark Carney, averred before a House of Lords committee that it would be “extremely foolish” to counter the drop in oil prices with an even easier monetary policy.
The bottom line in all of this appears to be that markets are beginning to price the diverging monetary policies of the world’s central banks. This was one of the central themes of 2015 that we asserted investors would need to heed.
 Trade-weighted dollar data measured by the DXY index via Bloomberg. An investment cannot be made directly in a market index.
 Bureau of Labor Statistics Job Openings and Labor Turnover Summary.
 “Carney claims cuts in rates would be foolish,” Financial Times, March 11, 2015.
Hans Olsen, CFA Global Head of Investment Strategy