US Bond Yields Rise

Following a steady rise since September, US bond yields took a leap higher last week. The closely watched 10-year treasury yield reached 2.85% on Friday, the highest level since 2014 and an increase from 2.05% in September 2017. The improvement in the US and global economy and the low unemployment rate has increased concerns over higher inflation and therefore interest rates. If inflation were to accelerate the Federal Reserve would be compelled to increase rates faster than currently expected in an attempt to suppress prices. Higher US borrowing costs will have crucial implication for economic growth and asset prices globally.

Equity Markets Selloff

The selloff in bonds finally flowed over into the equity markets last week, with markets around the world falling. In the US, the S&P 500, after posting the best January performance since 1997, fell 3.5% over the five trading days last week. The FTSE 100 posted a similar fall and is now down over 5% since its peak in mid-January. The high volume of annual reports being released over the coming weeks will also be critical to the future direction of markets. The high valuations that equities are trading on leaves little scope for disappointment in company performance. Economic performance is also being closely monitored as any deterioration will also signal weaker potential profits going forward and less justification for high valuations.

US Labour Market Remains Strong

The US labour market added another 200,000 jobs in January, maintaining the unemployment rate at 4.1%. Furthermore, there was an acceleration in earnings growth to 2.9% on the year before, a notable increase from the upwardly revised rate of 2.7% recorded in December. Much of the growth may be attributed to the introduction of higher minimum wages in 18 states as well as some high profile pay increases from large employers such as Walmart. Nevertheless, the figures are likely to be used by the Federal Reserve as proof that the US economy can sustain more interest rate rises. Furthermore, if there continues to be an acceleration in the rate of salary growth, additional tightening of monetary policy may be required.

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