Photo: Ltd

By Michael O’Neill

To paraphrase politically correct activists everywhere, “Financial markets are speaking their truth.”

The collective wisdom of such august institutions as the European Central Bank (ECB), Federal Reserve (Fed), Bank of Canada, (BoC) and the Organisation for Economic Cooperation and Development (OECD) are telling financial markets a robust global economic recovery is on the horizon

Equity traders are singing Bobby McFerrin’s “Don’t worry, Be happy,” and driving US stock markets to record highs.  Not only is the punch bowl still full, but the Fed has spiked it with 200 proof hootch.

Graph: Year-to-date performance:  DJIA, S&P 500, Nasdaq


 Bond traders are not getting any respect. They should.

Last week’s fears of a fiscal-stimulus-fueled spike in interest rates has been dismissed as the rantings of disgruntled portfolio managers and perennial naysayers.

The issue is:  what some traders believe is their truth,  is necessarily a fact.  Even worse, financial market facts are hard to find as many global economic statistics incorporate different parameters to calculate a specific event. 

For example, the heavily watched US nonfarm payrolls number is calculated from a survey of 160,000 businesses and government agencies representing 400,000 individual employees, a mere 0.25% of the 157 million Americans in the workforce.  The average number of new jobs created each month, between February 2019 and January 2020, was 185,000.  The survey has a margin of error of +/- 105,000.

Nevertheless, billions of dollar trade hands on the first Friday of every month when the data is released.  That’s just one example.  There are plenty more.

The OECD interim report, released March 10, is optimistic for a robust economic rebound.  They upgraded their 2021 global GDP forecast to 5.6% from Decembers 1.4% increase.  The United States is expected to lead the G-7 with annual GDP growth of 6.5%.  Canada’s growth rate forecast is 4.7%.

The OECD wrote, “Global economic prospects have improved markedly in recent months, helped by the gradual deployment of effective vaccines, announcements of additional fiscal support in some countries, and signs that economies are coping better with measures to suppress the virus.”

They said that US fiscal stimulus would boost the global economy.  The following chart shows that Canada gets a decent boost as well, which is also underpinning the Canadian dollar.

Source: OECD.

So, what is the reality?  

The Central Bankers are not ready or willing to turn off the easy-money tap, far from it.  Fed Chair Jerome Powell testified to Congress that “the economic recovery remains uneven and far from complete, and the path ahead is highly uncertain.”  He went on to say, “The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved.”

If Congress didn’t get the message, it was obvious to the BoC.  Deputy Governor Lawrence Schembri regurgitated Mr Powell’s concerns about the labour market which he said: “remains a long way from a full recovery.”  The monetary policy statement noted, “there is still considerable economic slack and a great deal of uncertainty about the evolution of the virus and the path of economic growth.”

The Reserve Bank of Australia is also concerned that the economy is operating well short of capacity.  The ECB went a step further with their monetary policy statement on March 11.  They increased the pace of Pandemic Emergency Purchasing Program ( PEPP) bonds because “While economic prospects have improved, the Governing Council judges that the recovery continues to require extraordinary monetary policy support.”

In a nutshell, from the markets perspective, there is a risk of short-term gain with the promise of a long-term pain.

None of the Central Banks believe they will be increasing interest rates soon.  The BoC doesn’t expect to hike rates until “into 2023,” the RBA will wait until 2024, and the Fed maintains a rate hike is a long way off.

Bond traders are the vegans at a steak house.  They are not buying what the central bankers are selling, and they let their wallets do the talking.  10-year Treasury yields have risen over ½% since the beginning of February.


Bond traders fear the Biden administration’s $1.9 trillion stimulus package, combined with Trump’s $900 billion relief funds, will fuel a steep spike in inflation.  They do not believe the central bankers have any better handle on inflation in 2021 than they have had for the past five years or more. 

The Fed, ECB, and BoC have utterly failed in managing inflation, and now they will do everything in their power to maintain inflation at current levels.  The evidence is clear.  The Fed has adopted a vague “average inflation targeting regime”, and the Bank of Canada is using three measures of inflation to determine if prices are going higher or lower. That’s because government deficits have exploded higher. 

The politicians are addicted to low rates and need them to service the debt and support pet spending projects.

At the same time, near-zero interest rates have fueled a housing boom in the US and Canada.   The median price of all homes in the Vancouver area surged 36% since the middle of December.  The Greater Toronto area is experiencing a similar phenomenon.

The media has plenty of stories about how consumers will unleash a frenzy of demand as retailers and service sectors normalize.

The BoC concurs, saying that Canadians spent about $4,000 less in 2020 because of the pandemic.

He doesn’t say if the post-pandemic buying power of that $4,000 will be the same as it was pre-pandemic.  Think about it.  The service sector has been crushed.  Barbershops, hair stylists, nail salons, and fitness facilities have been closed for nearly six of the last twelve months in many areas.   If they manage to reopen, they will want to recoup their losses.  The same holds true for restaurants, hotels, and the entire hospitality industry.  Prices are going higher.

The bond market know inflation will be a problem.

That’s reality and reality bites!