Another Summer Swoon?
Evidence of slower global growth continued to build this week, with declining industrial production in Europe and several disappointing reads on the U.S. economy being the latest culprits. May retail sales undershot expectations and contracted, representing the second consecutive month of declining U.S. sales. Given a U.S. economy still leveraged to consumer spending, amid further signs of a weak job market, economists are reducing their estimates for second quarter GDP. With industrial production also falling short in May, expectations are building for the Federal Reserve to announce another round of monetary stimulus when the Federal Open Market Committee meets next week.
Inflation Pulls a Disappearing Act
Disinflation is the silver lining of an economic slowdown both here and abroad. To that end, investors absorbed news that the consumer price index has dipped for the eighth consecutive month to 1.7 percent domestically, a level now below the Fed’s 2 percent target. What about inflation fears overseas? The trend is our friend there too with European consumer prices up 2.4 percent annually and only 3 percent in China. For the spending power that remains, it will increasingly drive real as opposed to nominal economic growth.
Europe, Ad Nauseam
Spain announced a 100 billion euro bailout package for its under capitalized banks and investors were disappointed to discover that the euro zone bailout will not flow first to the banks but rather to the Spanish government. Heaping more debt onto Spain’s already large pile while subordinating Spanish bondholders to the bailout loans went over like a lead balloon, pushing Spanish benchmark 10-year bond yields there to nearly 7 percent. Before we even see details of the Spanish bank bailout program, investors are already beginning to discount a Spanish government bailout, which would certainly be even more costly. Contagion has also spread to Italy where similar duration sovereign yields again breached the 6 percent level. Amidst the gloom and doom, equity markets confounded conventional thinking and rallied another 1.2 percent domestically, while remaining largely stable in Europe. However, in contrast to recent risk-on, risk-off trades, benchmark 10 year-Treasury bonds failed to confirm the rally in stocks, closing the week up from where they started, while pushing yields down to a thrifty 1.58 percent. In a nutshell, we appear to be at that point again where bad news is good news, leading investors to discount more monetary stimulus both here and abroad.
Our Takeaways from the Week
- Amid slowing economic growth, investors appear dependent on further policy action to support additional near-term stock gains
- The Greek elections, U.S. Federal Reserve policy, and G-20 meetings in Mexico next week all loom LARGE