Equity markets are flourishing as the perceived threat from geopolitical issues recedes in investors’ eyes, while optimism is spoon fed by fading fears over the meaning of an end to the bond tapering process. Adding to the positive turn of mood are fresh hopes on the direction in which Janet Yellen might steer her FOMC colleagues. At the end of the week she is expected to flesh out further analysis of the post-recession progress in the labor market at her appearance in Jackson Hole. The equity rally has thus far failed to push back against lower bond yields resulting from the changing geopolitical landscape. Yet some of the erosion of yields has been caused by occasionally tepid economic data. The Eurozone may be primed for a bout of ECB monetary stimulus, while the Japanese economy also contracted sharply in the first half of the year according to last week’s GDP reading. Not all pieces of news have been bad, including for the US labor market, which just put in a sixth above-200k reading for nonfarm payrolls.
As fresh data arise and as threats to global growth rear their head, economists have been busy rewriting their forecasts. As time erodes, the horizon becomes less foggy and according to the Bloomberg consensus forecast for year-end, economists last week notched down their prediction for where 10-year note yields will finish 2014. Last week the yield on the 10-year note fell to 2.30% reaching its lowest reading in 14 months. That collective prediction among forecasters is now 2.92% and down 15bps on the previous reading. That’s significant because the end-2014 prediction is now below where actual yields finished 2013. In one sense that’s a healthy apology for getting it wrong at the start of the year when together economists predicted falling bond prices would lift yields to 3.38%, but perhaps it does smack of capitulation. However, ahead of Ms. Yellen’s inaugural Jackson Hole delivery it should not yet mean that bond bulls have had their day in the sun.