Chart of the Month
Germany, which implemented the Hartz reforms more than a decade ago, has achieved an impressive increase in labour participation from 65.2 per cent 2005 to 75.7 per cent in the first quarter of 2018. In stark contrast, the employment rate in France (65.2 per cent) and Italy (58.2 per cent) has stagnated over the past 15 years. This is clearly an unsustainable situation and both governments must seek to increase the youth (15-24) and elderly (55-64) workforce participation ratio in order to regain some productivity and higher growth expectations. Both France and Italy need to overcome significant obstacles in coming years if they are to stabilize their government finances and reduce their debt-to-GDP ratios.
Looking at the aggregate non-commercial net positions on US Treasury (2Y, 5Y, 10Y and 30T) futures contracts, we notice that speculators have never been more bearish on the outlook for US sovereign debt. Net short contracts have reached an all-time low of -1.27M on July 24th, mainly concentrated in the 5Y (-716K) and 10Y (-509K) maturities. With the 10Y yield currently flirting with the 3 per cent psychological barrier, it looks like the market is well-positioned for a potential breakout to higher yields in the short to medium term.
With the ECB exiting QE and starting normalizing its policy in the end of 2019, the 2-percent inflation target remains questionable in the Euro area. One striking observation emerges when we overlay the YoY change in Brent prices with the 5-year, 5-year forward inflation swap. Market pricing has been almost non-reactive to the rise in oil prices, and inflation expectations have remained steady at around 1.7 per cent over the past 18 months.
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