Why Bond Yields Are Poised to Fall, Despite Market Hype

Summary

The current market sentiment is overly exuberant and not entirely rational, particularly regarding the S&P 500 being perceived as riskless. Economist David Rosenberg argues that inflation fears are largely unfounded, with core CPI running at 2.3% and his adjusted "core-core" measure at 1.8%. He points out that energy price impacts haven't seeped into wages, which are actually slowing, and real wages have contracted for three months. The labor market, despite headline job numbers, shows flat year-over-year employment growth and decelerating wage growth, indicating it's not as tight as perceived. Rosenberg believes bond yields have peaked and are likely to fall, especially in Canada, the US, and Australia, with the yield curve expected to steepen. He criticizes central banks, including the ECB and Bank of Canada, for potentially making policy errors by tightening too aggressively based on outdated inflation narratives, rather than focusing on the weakening labor market and real consumer spending which is being propped up by declining savings rates. He also highlights Canada's significant household debt bubble as a prolonged constraint on consumer spending.