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Good morning. Dollar Tree, the bargain-price retail chain, yesterday reported same-store sales growth of 6.5 per cent for its most recent quarter (by comparison, Walmart reported 4.6 per cent US same-store growth a few weeks ago). Dollar Tree also increased its targets for full-year sales and profits. The stock? Down 8 per cent. Investors appear to have been spooked by talk of tariffs pinching earnings in the third quarter. This is an unforgiving market, especially when those levies are involved. Email us: unhedged@ft.com.
Global long bonds
Long-dated yields across developed markets such as the US, UK, Japan and France all hit long-term highs this week. The yield on the 30-year gilt climbed to its highest point since 1998 on Tuesday; Japan’s 30-year government bond notched a record high yesterday; and the 30-year Treasury yield briefly touched 5 per cent.
There are of course unique circumstances in each case. France, for example, faces an upcoming no-confidence vote regarding its budget. But all of these countries suffer from high and rising fiscal deficits, which means the threat of more bond issuance in the future as well as higher borrowing costs — both reasons for investors in long-term bonds to demand higher yields today. The US and the UK are simultaneously dealing with a weaker dollar and pound — a pattern familiar in emerging market countries trapped in a fiscal crunch.
Unhedged’s fixed income consigliere, Ed Al-Hussainy at Columbia Threadneedle, notes inflation fears don’t appear to be a significant factor in the rise in long yields. The 30-year break-even inflation rate has been steady even as nominal yields have risen. It’s real rates that are rising. And options markets are pricing in a series of rate cuts over the next few years — hardly a sign of inflation panic.
If that’s right, the market is not saying countries will inflate their way out of debt, but rather sovereign borrowing requirements will be so high that higher interest rates will be needed to entice an adequate amount of money out of savers’ pockets.
Antulio Bomfim of Northern Trust told Unhedged: “I do think it’s more than a cyclical phenomenon, in the sense that it reflects concerns about deficits on a more persistent basis.”
Exacerbating the problem, many central banks are normalising their balance sheets and thus buying less long-dated government bonds. Pension funds and life insurers haven’t been able to fill the void in the same way, points out Thomas Mathews at Capital Economics:
That suggests to us that, at best, volatility is likely to remain high at the very long end as debt management offices attempt to adapt to the new demand reality. And at worst, yields of very long-dated bonds could rise quite a bit higher as price-sensitive buyers continue to play a greater role in the bond market.
Are higher yields at the long end an omen of problems in the rest of the global bond market? Al-Hussainy urges calm. The 30-year market has a relatively small core group of buyers who have long-term liabilities they must match. This group, out of necessity, buys bonds from across the whole developed world — which causes “contagion” across long bonds’ yields from different sovereigns. So one should not read too much into the apparently synchronised rise in long yields.
(Kim)
The Jolts report
Yesterday’s weakish Jolts (job openings and labour turnover) report, from the US Bureau of Labor Statistics, hit a nerve with markets. Interest rates fell notably all along the yield curve as markets priced in slower job growth and more rate cuts.
The report did not contain new news so much as it confirmed what we already knew — the US job market is cooling. The ratio of job openings to unemployment fell below one for the first time since 2021. Round numbers excite people, and the trend in this ratio is down, but it is worth noting two things. One: job openings data is of debatable quality. Two: the level of the ratio, as opposed to its trend, is not that bad. While the ratio is a bit below its level from immediately before the pandemic, it has been lower during periods when the market was perfectly healthy.
The Jolts report may have hit markets especially hard because it followed a manufacturing ISM survey in which the employment component registered its second straight terrible reading. Analysts responded to the ISM report with something resembling despair.
“The highly cyclical, interest rate-sensitive manufacturing sector is calling for Fed cuts,” said Troy Ludtka of SMBC Nikko Securities Americas.
Omair Sharif of Inflation Insights saw “broad-based weakness in factory activity”.
But the picture is not so clear. The new orders component of the ISM survey — considered a leading indicator — broke above 50, into expansion territory, after months in contraction. Smoothing the numbers with a three-month rolling average, it’s clear new orders and employment are, quite unusually, trending apart:
If this trend persists, that will support the idea that part of the labour slowdown has to do with a possibly temporary tariff shock, or with labour supply constraints, rather than being the pure product of sustained weaker demand.
We don’t want to read too much into a few months of survey data. The point is just to emphasise that, while there is sufficient reason to suggest US activity is slowing, the data remains ambiguous and there are bright patches. For other examples, look at Citigroup’s economic surprise index, which is trending up, or the Atlanta Fed’s perky GDPNow indicator.
Things, in short, ain’t all that bad.
(Armstrong)
One good read
On American billionaires.
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