EC Monthly Macro Monitor – June 2020

The housing market has also held up quite well so far as mortgage rates have hit historic lows. The most current reading comes from the Housing Market Index, essentially a sentiment survey of builders, which rebounded to a 58 reading in early June. That is down from 76 at year-end 2019 but back over the 50 level that indicates expansion.

Other than that, the good news is hard to find. Which I think is why we don’t see any other markets exhibiting the exuberance of stocks. Long term nominal Treasury yields have risen very modestly but real rates (TIPS) haven’t budged off their lows. In other words, inflation expectations have risen slightly but real growth expectations are still as bad as they were in early March.

Other market indicators of growth are also less than enthusiastic about future growth. Gold is near its highs, the dollar has been trending lower and commodities have recovered only slightly. Even crude oil, which has made a huge comeback from negative prices, is still down 44% year to date. And there is a long line of shale producers down at the bankruptcy court.

The economy is working its way out of a giant hole so the rates of change look impressive but getting back to anywhere close to where we were is going to be a long slog. I often say that it isn’t our job to predict the future but merely to accurately interpret the present. Today that interpretation is that things are mostly better than they were in March and April but still pretty bleak. And some things, like employment, are still getting worse, just at a slower pace. As for the future, let’s just say I don’t think I’ll be needing any shades anytime soon.

It is hard right now to be positive about the economy given the data and the message of the markets that aren’t trading stocks. But I wouldn’t get too pessimistic. The wonder of our economy is that it allows people to change, to adjust to new conditions, and find new ways to succeed. It just takes time and patience to see what emerges, to see how creative people will innovate and thrive amidst difficult circumstances.

Right now, everyone wants to believe that we will recover quickly, that we’ve beaten the virus and all the government programs will work as advertised. So much confidence in government is hard to square with the historical performance of emergency government programs. So, my suggestion is to be patient, let the recovery happen naturally and respond as it does rather than trying to anticipate what is impossible to anticipate.

Market Indicators

10-Year Treasury Yield

10-year Treasury yields are off their lows but still very depressed. There is a consensus that yields are being held low by Fed buying but I have my doubts. If bond traders start to anticipate growth or inflation or both, the Fed won’t be able to stop rates from rising. That has always been a contradiction in QE. It is designed to reduce rates to stimulate the economy but evidence of its success would be higher yields. If the market thought what the Fed is doing was going to be successful, yields would already be higher.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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Edward Simon 5 months ago Member's comment

No safe haven or are US Treasuries still it?