August 7. Deflationary winds vs US wages
–Employment report today with NFP expected 225k, avg hourly earnings +0.2 from 0, yoy expected +2.3%
–Yesterday saw yields ease slightly as the Bank of England pushed back rate hike expectations on a subdued inflation forecast and US stocks wobbled with notable weakness in entertainment and broadcasting. Yields were down about 3 bps across the curve, with tens down 3.3 at 223.2. Ten year note to inflation index spread hit a new recent low of just 168.
–Bill Gross is warning of emerging market problems, saying “deflationary winds are becoming stronger” and Grantham says stocks could see a major decline in 2016. High yield spreads are moving higher. HYG and JNK are testing the lows of the year that were put in just a couple of weeks ago, and the emerging market etf EEM closed at a new low for the year and is nearing the bottom of the range since 2010. I am including a chart of Brazil’s dollar denominated 10 year yield, which has broken out of a 5 year range to the upside. Dollar strength and higher corporate yields have acted as a quasi tightening in the US already. I suppose that lower raw material input prices somewhat offset increased corporate funding costs, which leaves labor as a swing factor. In any event, profit margins will remain pressured, as already evident in this earnings season.
