Long-term rates stabilized this week as events, puzzles, forces, and conflicts scattered all over the world canceled each other.
We focus on the yields of long debt because they are the result of real-time voting on economic prospects. Belief in improved growth and its companion inflation push upward on rates. Poor or weakening prospects push down. Political instability pushes down, relief pushes back up.
We stabilized this week, but in a down pattern. The bond market has traded daily on Ukraine, but in a displaced way. The risk of conflict there is remote to the rest of the world (for now), but if Europe at last pulls up its socks and inflicts real sanctions on Russia, that will slow the whole world. Thus when Europe makes courage noises (think Cowardly Lion of Oz), rates go down; when it whimpers, markets relax, rates back up.
In the background in Europe: the still-deteriorating financial structure. European flinching from sanctions is not entirely a lack of intestinal fortitude; the place is such a mess that sanctions could tip over its pretense. German 10-year Bunds pay 1.15%, Spain’s 2.52%, and Italy’s 2.71%. Italy’s sovereign debt is now 135% of GDP and rising; falling yields are a sign of disaster, banks and investors piling into the safest possible investment while other credit dries up. Russia is weaker. Its central bank today again raised the overnight cost of money, now 8% to try to stop cash from escaping.
Uncertainty is driving us battier than a lot of the possible outcomes. The one-Europe fantasy is a bust, but could take a decade or a month to unglue. Ukraine-Gaza-Syria-Iraq-Afghanistan today collectively is nothing compared to Cuba ’62, or to Berlin ’48 or ’61, or to either ’73 or ’80 oil crisis — let alone to actual wars. But today’s world is different: pathetic Europe is no longer a stabilizing force; the US can’t do it alone; and the fastest-rising great power is preoccupied with its navel. Anybody hear anything from Xi Jinping on the need for a cease-fire in Gaza?
Here in the US, one of the all-time puzzles. We could be right on the edge of a terrific expansion born of 25 years of wage-suppression and renewed competitiveness. The one missing piece: rising incomes. Get that, and everything else falls into place.
This week initial claims for unemployment insurance fell to 284,000. The four-week moving average is only 302,000. Going back to the early 1970s, US population only two-thirds of today’s, every time the claims number fell as low as 300,000 the economy was overheating and inflationary. So much so that each Fed had to react and recession ensued. Not claims on a percentage basis, population-adjusted, but 300,000 raw.
How is it possible to drop so low now, a super-duper-cyclical drop in layoffs, and not mark the beginning of employer competition for workers? What kind of new age economy is this, in which record-few people get fired, but businesses can’t or won’t pay up to get new workers, or even hire them on a full-time basis?
Is global substitution that strong? Or has global commerce altered the business cycle? All prior US expansions and most foreign ones, the national and central bank problem has been the strong tendency of economies to enter reinforcing spirals, either up or down. See claims numbers like this, unemployment falling, new hires even if shaky jobs, every Fed would rush to pre-emptive action. But that doesn’t feel right, not to me and mercifully not to Chair Yellen. It feels as though some force of cosmology, some dark energy has tamped down US acceleration.
I hear all the violin-screeching that it’s the fault of ObamaCare, or debt, or not enough debt, or Congress, or too much government or too little, but none of that truly fits the data. Very much like the geopolitical scene, the uncertainty is worse than the likely outcomes.
Next week we’ll get some clarity. Friday brings July payroll data and Institute for Supply Management (ISM). If acceleration is not evident, then we donāt have it. I had an English prof who said of hidden meaning in poetry, “If it’s hidden, it’s not there.” And we’ll know if Europe will engage Czar Putin. If you’re going down, might as well go down with your head high.
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10-year T-note last six months. MH-17 effect is clear in the last 10 days, but we’ve gotten soggy economic data, too.
Oil in the last year. Nervous, but not really going anywhere.
Corn in the last year. Corn moves the prices of most staple foods. Put a decimal after the first digit in the price axis (right side), get dollars per bushel. Inflation? Hardly.
Going nowhere, possibly tailing. Not enough supply in hot markets, but overall demand behaving unlike any prior cycle.
Sales of existing homes are churning, distressed inventory and sales way down, market sales replacing them, but not a healthy pattern.
Note the length of history here, and claims raw numbers versus vast increase in population. This time it’s different. Very.
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