“Nothing fits together,” commented Axel Botte, market strategist at French investment company Ostrum Asset Management, on conflicting data points from the United States: While household incomes have risen sharply, demand is weakening – on the contrary. .
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“The ISM Services Index also allays fears of disruption in growth, but the inconsistency of the surveys is puzzling. The same goes for the accounts of national accounts. This unreasonable discrepancy was noted by attendees at the previous FOMCs. Employment and profits cannot grow rapidly without expansion in demand.
The labor market remains tense in view of the increasing number of vacancies. In June, the US economy added 372,000 jobs, corresponding to the first five months of the year and is still ahead of the growth trend in the working-age population (a trend of 100–150,000). Annual hours worked are up 4%, a far cry from the GDP forecast from the Atlanta Fed, which expects second-quarter GDP to decline by 2%. Here the inconsistency of the figures is obvious.
Central bankers seem to be ruling out slowdown. The 90 mentions of the word “inflation” in Fed minutes leave little doubt as to what is their biggest concern at the moment.
This assessment is supported by the bond market. The bearish threat story seems inconsistent with the stability of real bond yields. Also, the spontaneous disappearance of inflation risk, described by a forward structure contrary to inflation expectations, may prove to be wishful thinking. In our view, with a break-even inflation rate of 2.22%, 30-year TIPS are perhaps the most attractive asset class in the current environment.