Bond Outlook September 13th

Support is available from pundits for all four of the scenarios we painted last week:

1. “Goldlocks”, essentially no change
2. “Soft landing”, a slowdown compensated by higher consumption outside the USA
3. Recession, with a serious drop in US consumption not compensated elsewhere
4. Collapse

Apparently number 4 is supported by a chartist cum astrologist and may be expected in a few days! Despite such warnings, for the moment we remain wedded (well, maybe “engaged”) to scenario 2, with further Fed rises awaited around the end of the year. Data releases like that on wage inflation in the USA may be pushing opinion from 1 to 2 and from 2 to 3. Wage data also suggest a kind of “workers’ revenge” after years of stagnant real earnings. Just possibly the phenomenon of wage arbitrage (China’s low wages keeping US wages in check, while allowing big corporate profits) is approaching its end. Our view of inflation being “cost-push”, and therefore not susceptible to rapid control by GDP slowdown, now has to shift somewhat from exogenous factors (energy and commodity prices) to more home-bred inflationary forces.