After soaring in late 2016 and early 2017, global bond yields have been falling fast in recent weeks.
The yield on the 10-year US note recently hit a low of 2.165%, well below the multi-year high of 2.64% struck in December during the peak of the “Trump trade” frenzy.
Yields in other nations have followed a familiar path.
While some of it may be explained as risk aversion created by Syria, North Korea and the upcoming French presidential election, along with concern that Donald Trump will be unable to push through the tax cuts and fiscal stimulus many banked on, there’s another reason why yields are falling yet again.
The latest upswing in the global inflationary cycle looks like it’s already over, and it’s resulting in expectations for inflation in the future lowered as a consequence.
This chart from ANZ shows how the annual inflation rate in the US, China and the Eurozone — the largest economies in the world — appears to have already passed its cyclical peak.
“Inflation in advanced economies appears to have peaked,” say Tom Kenny and Giulia Lavinia Specchia, economists at ANZ.
“In March the US CPI eased to 2.4% from 2.7% in the previous month, while in the euro area inflation slowed more sharply, falling to 1.5% from 2.0% in the previous month. The same looks to be true for emerging market inflation.”
And while that can be largely explained by weaker energy prices, along with a higher base effect from previous energy increases that began in early 2016, it’s not only headline inflation that slowed, but also core inflation measures, those targeted by central banks.
“Somewhat surprisingly there was a moderation in core inflation in advanced economies in March,” say Kenny and Specchia.
“In the US the core CPI fell by 0.1% month-on-month, which was the first monthly decline since early 2010. Meanwhile, in the euro area core inflation came in at just 0.7% year-on-year, the slowest pace in nearly a year and not far from the cyclical low of 0.6%.”
ANZ says that a key factor driving this modest underlying inflation story is tepid wage growth as a result of still-elevated levels of labour market slack.
“Headline unemployment rates seem to be overstating the degree of tightness in labour markets across many economies, with broader measures of underemployment not having declined nearly as much and having larger gaps to previous cyclical lows,” Kenny and Specchia say.
And given the recent moderation in global inflationary pressures, it’s also seen inflation expectations also start to roll over.
Kenny and Specchia say this reflects a reassessment of the global reflation story, noting that hopes of a sizable US fiscal stimulus have been either dented or deferred owing to an absence of specifics from the Trump administration or a realisation that having a Republican-controlled Congress doesn’t mean plain sailing.
That has ramifications for the outlook for monetary policy, investment returns and wage growth, among others, and suggests that the optimism over the prospect of a pickup in inflationary forces could unwind just as fast.
Should this latest inflationary impulse fizzle out, leading to households and businesses to position for a slow-growth, low-inflationary environment once again, it could also see expectations for monetary policy tightening from major central banks diminish just as fast as they increased.
Kenny and Specchia say that developments in Chinese producer price inflation will be influential given its prior relationship to globally traded prices and global inflation pressures.
One to watch closely in the months ahead.
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