Global Financial Markets Unsettled by Shifts in Balance of Forces

Financial markets have been unsettled by a familiar cast of forces, but the balance among them has shifted. The climb in long-term interest rates is driven more by real yields than inflation fears.

The chart below shows the softening of US data surprises and the modest easing at the short end of the curve.

Japan's weak domestic demand complicates its currency defence, making it difficult for the Bank of Japan to raise rates aggressively.

Rearmament is adding a large and non-negotiable claim on public resources, with defence budgets across Europe climbing steeply.

The flow-of-funds accounts show that governments are in deficit across the advanced world, drawing on a finite pool of saving concentrated in China.