Confidence still high but cooling

Pundits, stockbrokers and financial journalists like milestones. They offer a topic of debate, and usually focus minds on the markets. Yet the threshold that was broken last week — a 3% yield on the 10-year US Treasury, a level last hit four years ago — is not important in itself. What is important is the confluence of trends of which that milestone is a part.

Yields on short- and long-term US bonds have been rising by fits and starts since the end of 2016. A striking feature has been that short yields have risen faster than long ones, suggesting that the long-term outlook for growth and inflation remains subdued. The step-up in the 10-year yield in recent weeks suggests that this may be changing. Nominal and real (adjusted for inflation expectations) yields are up.

Coinciding with this, there are hints that the economic cycle may be peaking. Confidence surveys in the US and Europe remain high, but have cooled slightly.

The first-quarter corporate earnings season has been a feast of higher profits, from tech companies to banks. But share prices have failed to respond to the bounty: investors, it seems, believe things are as good as they are going to get.

However, it is far too early to call a turn in the economic cycle. That said, the recent rumbles do underline the need for investors and policy makers to be prepared should the market fall. London, April 25