Movements in the bond and currency markets are a barometer of investor expectations about a country’s economic prospects.
Since the most recent US election, the bond market has reflected a consensus that the US economy faces an inauspicious future of lacklustre growth and muted inflationary pressures.
The strengthening jobs market has been core to the Federal Reserve’s debates on whether to raise interest rates.
As the economy approaches full employment, officials believe wage growth will start getting driven up and that inflation could accelerate above the central bank’s 2 per cent target, arguing for rates to be lifted further.
A measure of how much economic output is generated for a unit of input, rising productivity is seen as one of the only ways to improve living standards, at a time when advanced and some emerging economies are seeing ageing populations and a rapidly increasing retirement rate.
Growth in the US though, along with many other western economies, has been alarmingly slow since the financial crisis.
The Federal Reserve looks closely at its inflation target of 2 per cent, using it as a metric policymakers must feel ‘reasonably confident’ about before raising interest rates.
A stronger economy has given the Federal Reserve cover this year to accelerate its pace of interest rate increases. Prior to 2017, the Fed had increased rates only twice over the course of two years.
As the labour market has strengthened, so has US consumer spending. Wage growth has remained subdued, however. There are few signs of runaway spending growth, with consumers staying in a cautious mood.