It is a good number by any measure, but in this instance there is the added interest that it takes US employment back above its previous, pre-crisis peak. For the first time in nearly six years, more people are in paid work in the US than ever before.
Almost every other key US economic statistic backs up the employment picture. Job openings rose sharply in May. Domestic transport data are at all-time highs. Cars are selling briskly and shops are seeing a rise in sales. Restaurants are busier than they have been in years. Business managers, in both services and manufacturing, anticipate growth.
There is possibly some risk of a downturn in housing, but for the moment we seem to have achieved a steady state, with home values significantly higher than where they were a year ago.
The emergency is over. Whatever you call it, the great recession or the great financial crisis, it is over. The Federal Reserve recognises the change. There is no longer any debate about tapering. The end of quantitative easing is so generally accepted that it is hardly even discussed. The final purchases are due to come to an end in September, but the market will break free before then.
We need to start looking forward to the next phase of the cycle. There will no longer be a market-manipulating, price-insensitive buyer. Investors will need to go back to assessing evidence, and the evidence points to a strong economy.
Performance of indices since Lehman crash
Source: FE Analytics
In the past, in such an environment, we might have expected the US 10-year treasury yield to fluctuate around 4 per cent. On the basis that history repeats itself first as tragedy and then as farce, we might accept that yields in future may be lower than in past cycles, but it is hard to see why they should remain at their current supremely low levels.
The eurozone has the opposite problems to the US. The economy is fragmenting. Germany is doing well, but other markets in the currency area are struggling. It was always going to be a struggle for Spain, Italy and France – let alone Portugal, Ireland and Greece – to compete with Germany on productivity.
If price competition is also removed, as has happened through the imposition of a common currency, what is left? Instead of the periphery being drawn into the core, the core, ex Germany, is being drawn to the periphery. France and Italy are being undercut by Spain within the union, while Spain is undercut by Poland and the Czech Republic outside the union.
The European Central Bank looks on and makes threatening noises, but it is not in any practical sense a central bank at all and there is little it can do. Its latest manoeuvre, the targeted long-term refinancing operation (TLTRO), does little more than extend policies that have already failed. Its cut in interest rates is likely to have equally little effect, given that government bond yields are below those in the US even on the periphery.
The euro has lurched about from one crisis to the next, from the financial crisis of 2008 to the successive eurozone crises of 2010 and 2011. What it has yet to do is reflect the radically different prospects evident for the US and the eurozone. That is something, in our view, which must eventually follow.
While the US is bringing QE to an end and the eurozone authorities are struggling to launch their own brand of surrogate-QE, the Japanese have declared something akin to monetary warfare. Their $1.4trn QE programme is the equivalent of nearly a third of the total economy, compared to the three programmes in the US, which have amounted to the equivalent of 20 per cent of the economy.
Investors have done well to steer clear of the yen, which has fallen 30 per cent since late autumn 2012, all but drowned under the Bank of Japan’s flood of money. Curiously, bond yields have gone in the opposite direction, from 0.8 per cent at end-September 2012 to 0.6 per cent at end-May 2014.
Given that QE has pushed Japanese inflation to 1.6 per cent (2.9 per cent in Tokyo), this is not a situation that can last by standards of normal logic.
But the Japanese government bond market is not run on logic. It is deeply integrated into the apparatus of government and the main holders, the insurance companies, are only likely to sell as part of a coordinated move sanctioned by the authorities. This may not happen for some time, with the Bank of Japan and the government equally keen to maintain the stimulatory effects of negative real interest rates.
Low interest rates combined with inflation and economic stasis have been a bonanza for companies, reducing their costs while pushing up their prices. They have been able to increase margins to all-time highs, hoarding their increased cash flows. At least until now, employment markets have been too weak to put pressure on wage costs. Default rates have fallen to historic lows.
Until now, investors in the ‘cross-over’, in bonds rated at the bottom end of investment grade and/or the top end of sub-investment grade, have had the double benefit of good yields and capital appreciation. We have enjoyed the ride as much as anyone, but with yields at the BB-rating level coming down to 4 per cent, we are increasingly sceptical of how much further there is to go.
Japan is not the only market to defy logic. If everything moved in predictable patterns markets would be redundant. There is no perfect knowledge. But neither can valuations remain forever suspended in air. At some point, the truth will come and reason will prevail.
Stewart Cowley is an FE Alpha Manager, and heads up the £787m Old Mutual Global Strategic Bond fund. The views expressed here are his own.