The yield on the 10-year Treasury note is often a reliable indicator of how Wall Street views the prospects of economic growth — especially when other data points send confusing signals.
There are many ways to assess the prospects for economic growth — from the performance of the stock market, to the latest unemployment data, to inflation. But when none of those send a clear signal about the state of the economy, there’s one reading that investors, traders and economists often rely on: The yield on the 10-year Treasury note.
On Wall Street, the yield on this heavily traded United States government bond — often called the T-note — is a closely watched gauge of sentiment in financial markets. Generally speaking, when yields on the T-note rise, it means expectations for economic growth and inflation are rising.
That’s because when investors are bullish, they sell bonds — which are generally deemed safe investments — and buy stocks, which are riskier. That pushes bond prices down and yields up. Conversely, yields fall when investors grow concerned about the economy because they buy more bonds, which pushes up their price. So bond yields provide a shortcut to the thinking of investors.
And recently, they’ve been falling.
Early this month, the yield on the T-note fell below 1.20 percent, reaching as low as 1.13 percent, the lowest since early February. It has slowly crept up to about 1.35 percent since then.
“The markets are very focused on the 10-year note,” said James Bianco, president of Bianco Research, a financial market research firm in Chicago. Mr. Bianco attributed the attention to investors who were trying to get a read on the direction of the economy. “The market seems to be worried that growth is at risk because Covid is going to lead to restrictions,” he said.
It’s a very different scenario from just a few months ago, when the prognosis for recovery was strong. In March, the yield on the note was rising quickly, suggesting that investors expected the U.S. economy to rebound swiftly from the pandemic. Vaccinations were rolling out, and stimulus payments to Americans were pouring in. Job growth appeared steady, with nearly 800,000 jobs created in March. President Biden outlined an infrastructure plan that called for trillions in government spending, adding another boost.
The yield on the 10-year note rose to about 1.75 percent, the highest since January 2020, before the pandemic hit. In those weeks, the conversation among traders and economists focused on the risk that sizzling economic growth and additional stimulus could set off an inflationary spiral, push up prices and force the Federal Reserve to raise interest rates relatively soon.
Then came the Delta variant. As the highly contagious version flared across the United States, cities and states were forced to slow down their reopening plans, even as the rate of vaccinations slowed. And, as renewed worries about Covid overtook fears of runaway inflation, the return on the T-note tumbled, too.
The bumpy ride in the bond market mirrors a broader one-step-forward, two-steps-back dynamic that has become familiar to investors over the past decade or so. Since the slow recovery from the 2008 financial crisis — annual growth has averaged roughly 2.3 percent since 2010 — the economy has frustrated forecasters who predicted a return to the fast economic growth and higher inflation that prevailed in earlier decades.
At points when the economy has stumbled, bond yields have often come into focus as the surest sign of investors’ thinking.
In 2012, yields on Treasuries plunged to record-low levels as investors rushed to buy bonds after a sharp cutback in federal spending — along with slowdowns in China and Europe — that weighed on growth. And in 2016, when the economy suffered a growth slowdown that some now refer to as an “invisible recession,” bond yields tumbled sharply, hitting record lows that July.
When both the Trump and Biden administrations poured trillions of dollars into the economy during the pandemic, some expected that the fire hose of deficit spending would provide a short-term lift to growth and help the economy build up enough steam to eventually break the pattern of slow growth. But while government spending did juice the recovery — the economy has already rebounded from the sharp but brief recession last year, and is expected to grow more than 6 percent this year, the fastest pace since 1984 — the bond market is telling a less upbeat story.
Dan Ivascyn, group chief investment officer at PIMCO, a giant manager of bond funds, said that the drop in the T-note yield partly reflected investors’ pessimism about a recovery, even after the historic stimulus efforts.
“I do think that the markets are looking at the situation, you know, looking at cycles since the early 1980s and saying, look, if this is insufficient to meaningfully change the growth and inflation process, what will?” Mr. Ivascyn said.
On Wednesday, the latest data on inflation did little to change that view. Consumer prices increased 0.5 percent from June to July, a slowdown from previous months, suggesting that the surging price gains seen earlier this year aren’t going to last.
“You just have a lot of sand in the gears that’s slowing or reducing the recovery momentum,” he added, pointing to vaccine requirements at restaurants and other measures. “We believe a lot of that’s reflected in the recent pricing,” he said of the decline in yields.
Delta’s impact — which is far greater outside the United States — is also weighing on the global growth outlook. Resurgent rates of infection in Japan, South Korea, Indonesia and Vietnam have prompted new restrictions, possibly setting back the recovery of the global supply chains.
“Setbacks in Asia could spill over to the U.S. at a time when supply chain disruptions are already the most severe and widespread in decades,” analysts at Goldman Sachs wrote in a note published last week. They added that such supply chain struggles were a key reason that economic growth in the United States was slower than they had expected in the second quarter.
But Delta isn’t the only economic disappointment in recent weeks. Investors now see that the flow of federal government spending, which propped up the economy last year, is slowing fast. Income growth and consumer spending, which surged last year thanks to giant government transfer payments, are flattening out. Savings rates, which were also lifted by stimulus payments and unemployment benefits, have tumbled as government stimulus checks have been spent.
The government’s central role in keeping the economy going was in focus again on Tuesday, when the Senate passed a roughly $1 trillion bipartisan infrastructure bill. The yield on the 10-year note rose to its highest level since mid-July, roughly 1.35 percent, well below the highs of earlier this year.
But not everyone agrees with the story the bond market seems to be telling.
“I just don’t buy it,” said Lisa Shalett, the chief investment officer at Morgan Stanley Wealth Management. She pointed out that trading activity usually declines sharply in August, when many Wall Streeters go on vacation. When trading is thin, prices in the bond market can move to extremes that might exaggerate how much of a downturn in the economy investors see in the future.
At the same time, the stock market has continued to perform well, with the S&P 500 up about 18 percent in 2021. Although stock market investors don’t appear overly concerned about slowing growth, some of the activity in that market is partly a result of the lower yields in the bond market. Low bond yields translate into skimpy interest payments for bond investors, driving some to invest their money elsewhere. The stock market is the most obvious option.
“You’re seeing a lot of people just say, I can’t buy bonds, so I have to buy equities,” said Amy Raskin, chief investment officer at Chevy Chase Trust, an investment management firm based in Maryland. “Equity allocations are moving up and up and up.”
Analysis | Cost of Victory: Converting a Wartime Economy to Peace – The Washington Post
Strained supply chains, inflationary pressures in the pipeline and worries about the health of the labor market. Sound familiar? This is the US in 1945 as President Harry S. Truman tried to engineer an end to World War II and minimize disruptions that would accompany peace.
The role of the atomic attacks on Japan, fears of Russian encroachment and the collapse of Japanese industry are well charted in discussions surrounding Tokyo’s capitulation on Aug. 15, 1945. Less well known is the impact of financial and commercial tensions developing on the home front. I spoke to Marc Gallicchio, professor of history at Villanova University and author of “Unconditional: The Japanese surrender in World War II,” which dives into the debates within Truman’s team about ending the war, including fears of an impending economic calamity.
These concerns didn’t stop at America’s shores. What did planners envisage for Japan’s economy and did they drop the ball by not thinking more about the prospect that China — a wartime ally — would one day challenge the US? The conversation has been edited for clarity and length. DANIEL MOSS: Describe domestic economic conditions and how were they shaping Washington’s decisions in 1945?
MARC GALLICCHIO: From early that year, with the impending defeat of Germany, people were beginning to look past the war. Not only the general public, but also business leaders, who were concerned that not enough emphasis had been placed on reconversion to a peacetime economy. If peace burst upon the US suddenly, the economy would be unprepared. Manufacturers were still in wartime mode, primarily producing goods for the military. There were restrictions on consumer activity, there was food rationing, price limits imposed. There was anxiety that if the war ended suddenly, all these soldiers and sailors would come home and the domestic economy would be in no shape to absorb them into the workforce.
There was this rising chorus of complaints among executives and legislators — you begin to see it in the newspapers — that the army is absorbing too much manpower and material. Now that they have a one front war to fight, the questions were increasingly about why so much was needed to fight just Japan when they had been fighting both Japan and Germany? The worry was all these wartime jobs and contracts would end and business would not be ready make the transition to domestic production.
There was great fear of unemployment. That turned out to be less of a problem than expected, but access to consumer goods and worries about inflation were real issues. By the early summer of 1945, the coal industry was warning that unless it could get more miners, there would be shortages. For that they needed personnel released from the army, which was reluctant. Moving people and goods across the US was becoming more difficult after four years. There was a lot of track maintenance that needed to be done. So there were petitions for the early release of people from various professions and the military just didn’t want to do that.
DM: What priority did Truman give these economic pressures, given the development of the atomic bomb and worries about the implications of Russia’s entry into the war against Japan?
MG: Before Truman went to the final summit of the war at Potsdam in July, he sided with the army. But Treasury Secretary Fred Vinson, in whom Truman had great confidence, opposed the army’s position. It’s not clear what Truman would have done if he didn’t have the bomb.
Truman receives these extraordinary cables from Vinson at Potsdam telling him there will be a serious crisis if the US doesn’t move more forcefully toward reconversion. Vinson starts to suggest that surely the army doesn’t need all these resources. We need unconditional surrender, but maybe we can get there through blockade and bombardment, which would allow for fewer men. The military was against that view because they believed it would lead to a protracted war, the American public would lose interest and the Japanese would use that to their advantage. What Vinson was proposing in order to avoid disaster was a modification of unconditional surrender. He didn’t outright say that, but that would probably have been the result.
Truman learns in Potsdam that the bomb can be deployed months before the scheduled invasion of Japan and probably before Russia came in. I don’t think he thought the bomb would keep Russia out, necessarily. His first reason for using it was to bring about the defeat of Japan, though he may have viewed the possibility that the war could be over before Russia got too far into Northeast Asia as a bonus.
The bomb made invasion unnecessary. It also meant this slow-moving crisis in the US economy could be addressed.
DM: There was intense debate over whether to modify the demand for unconditional surrender in hopes of coaxing Japan to lay down its arms. What kind of compromise, if any, was made?
MG: The idea that an imperial institution would remain never made it to the statement issued at Potsdam. But there was this idea of a liberal peace that would allow the return of soldiers to Japan, allow the country to re-enter the world community, have access to raw materials abroad — as opposed to control of them. Japan would be incorporated into a liberal postwar international economy. They could have a government of their choice once they have convinced the peace-loving nations of the world that they would no longer be a threat. You could read between the lines and say that if the emperor shut things down quickly, he would be someone who could lead Japan toward that state described in Potsdam.
DM: The struggle against Covid has often been framed in martial terms. Did the US have what amounted to a wartime economy during the peak of the pandemic?
MG: We didn’t get extensive regulation of the overall economy. There were big restrictions on bars, restaurants, airlines. State support was there, but it wasn’t as omnipresent during people’s lives as during WWII. What didn’t surprise me one bit was the enormous demand to lift restrictions on social lives and the economy.
We have this collective memory of WWII as being a time when there was unity, where everyone was willing to sacrifice and that’s contrasted with later wars like Vietnam, where there was a lot of controversy. But by 1945, that just wasn’t the case. There was growing dissent, a great deal of anger, directed particularly at the army.
DM: Did US officials give much thought to what Japan’s economy might look like after the war?
MG: There was clash between New Dealers and business-friendly planners and advisers to Truman. People like Henry Stimson, Secretary of War, and Joseph Grew, Undersecretary of State, saw Japan as having done a remarkable job of industrialization since the late 19th century. They didn’t see the monarchy as an inherently dangerous institution, as far as the US was concerned. All you had to do was sweep away the militarists. Their fear was that if you did away with the emperor and undertook deep, extensive reforms, that would sow the seeds for revolution and communism.
Then there were New Dealers who saw the problems as much deeper. They felt that in the process of modernization, Japan never moved beyond a feudal structure. They thought the emperor’s status enhanced the power of the military and the big industrial conglomerates. In order to get a really democratic Japan, you have to do away with the emperor, do away with big trusts and democratize Japan socially and economically. Liberate women, allow unions to properly organize and so on.
A lot of critics of unconditional surrender said after the war that Truman should have told Japan it could keep the emperor, since that is what ended up happening anyway. But it’s important to note that after unconditional surrender, the emperor did not have the same authority that he would have had if Truman had committed to keeping Hirohito on the throne. In the end, the US was able to implement a host of significant reforms because Truman insisted on unconditional surrender and occupation. One of the biggest reforms was a new constitution that reduced the emperor to the figurehead that Grew and Stimson mistakenly claimed he had always been.
DM: In 1945, what would they have thought if told that China would emerge as the key rival to the US?
MG: There was not much anticipation of China playing a leading role in the Far East for quite some time. That was in part the reason why people like Stimson and Grew thought it necessary to build Japan back quickly so it could be a force for stability. None of them foresaw a juggernaut emerging in China.
DM: Was it a mistake to pay insufficient attention to what China might become?
MG: China kind of gets pushed off the page. American military thinking was sequential in that the goal was defeat Japan first and then look over the horizon and see what is out there. It might seem like short-sighted policy, but the view was “look, if we have Japan, we can keep the rest of the world out of the Pacific and we will be able to defend the US come what may in China.”
People just wanted to be done with it, to bring the boys home. Even though American power was at high tide, that tide was also starting to run out. The staying power wasn’t there.
More From Bloomberg Opinion:
• 1947, 1970s, 2008. Take Your Pick, Inflationistas: Daniel Moss
• What the World Got Wrong About Shinzo Abe: Gearoid Reidy
• WWI History Is Wrong, and Skewing Our View of China: Hal Brands
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was executive editor of Bloomberg News for economics.
More stories like this are available on bloomberg.com/opinion
©2022 Bloomberg L.P.
Charting the Global Economy: US Inflation Comes Off the Boil – BNN Bloomberg
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Inflationary pressures in the US simmered down on the heels of cheaper gasoline and other fuel costs, which may help persuade the Federal Reserve to ease up a touch on the monetary policy brakes.
In the UK, the economy shrank in the second quarter for the first time since Covid-19 lockdowns more than a year ago. Singapore reduced its growth forecast for this year after its economy contracted last quarter, while rapid inflation encouraged steep interest-rate hikes by monetary authorities in Mexico and Argentina.
Here are some of the charts that appeared on Bloomberg this week on the latest developments in the global economy:
Inflation decelerated in July by more than expected, reflecting lower energy prices, which may take some pressure off the Federal Reserve to continue aggressively boosting interest rates. Consumer prices increased 8.5% from a year ago after hitting a more than 40-year high of 9.1% a month earlier.
Ending emergency unemployment benefits had a significant impact on boosting employment, according to a St. Louis Fed working paper that may underline Republican criticism of a 2021 program.
Rental costs are soaring at the fastest pace in more than three decades, surpassing a median of $2,000 a month for the first time ever.
The UK economy shrank in the second quarter for the first time since the pandemic, driven by a decline in spending by households and on fighting the coronavirus. Gross domestic product fell 0.1% after an 0.8% gain in the first quarter. The Bank of England expects that inflation raging at a 40-year high will tip the economy into a recession later this year.
Spain is opening its doors to foreign workers to fix labor shortages and ease a demographic slump threatening its future prosperity. In contrast with more anti-immigrant politics in much of Europe, the government has loosened rules to allow the recruitment of employees in their countries, mostly in Latin America, for both skilled and unskilled jobs that are hard to fill.
Singapore trimmed its 2022 growth forecast to reflect an increasingly challenging global environment, after the economy slipped into contraction in the second quarter. Final data for the June quarter Thursday showed gross domestic product shrank 0.2% from the previous three months, and worse than the zero growth estimated by Ministry of Trade and Industry earlier.
A global spell of high inflation, aggressive monetary tightening and the risk of a recession are prompting economists to revise Indonesia’s economic forecasts for the remainder of the year. Analysts raised inflation projections for the third and fourth quarters by almost a full percentage point to 5% and 5.15%, respectively, median forecasts from Bloomberg’s latest monthly survey showed.
Argentina’s central bank raised its benchmark Leliq rate to 69.5%, representing the largest hike in almost three years and signaling a more aggressive stance against surging inflation. Mexico’s central bank boosted its key rate to an all-time high of 8.5%.
Brazil consumer prices tumbled by the most on record in July after President Jair Bolsonaro slashed utility taxes to tame the soaring cost of living and lift his re-election chances.
Kenya’s presidential election took place Tuesday as East Africa’s largest economy grapples with surging living costs and rampant unemployment. Deputy President William Ruto and Raila Odinga, a former prime minister who’s running for president for a fifth time, were the clear front-runners to succeed incumbent leader Uhuru Kenyatta. Final results are expected by Aug. 16.
When Group of Seven leaders gathered in the Bavarian Alps in June, they pledged to stand with Ukraine for the long haul. Their Group of 20 counterparts are proving less supportive. Only half have joined the international sanctions imposed on fellow member Russia over its invasion of Ukraine.
Chinese exports to Russia are back near levels seen before the Kremlin’s invasion of Ukraine, propelling a rebound in trade that’s helped cool off a historic rally in the ruble. Russia bought $6.7 billion of goods in July from China, an increase of more than a third from the previous month and up by more than an annual 20%.
Bloomberg interviewed several families — in Nigeria, India, Brazil and the US — various times between June and August last year about the swaps and sacrifices they were making in order to keep food on the table as prices rose. It turns out, chronicling what was then eye-popping food inflation wouldn’t capture the depths of what was to come.
©2022 Bloomberg L.P.
Victoria looks to be a national leader in the circular economy – Saanich News
When athletes stood on the podium during last summer’s Tokyo Olympics, the medals hanging from their necks were made from melted-down metals in six million old cell phones and other discarded electronics.
Others, nowadays, enjoy having their home moderated by insulation made from the excess scraps of denim that don’t get to become jeans.
Those are two examples of the circular economy that researchers say could recover $4.5 trillion worth of otherwise wasted resources by 2030. Keeping materials out of the landfill in the market is something the City of Victoria hopes to capitalize on as it adds a circular lens to its 20-year economic strategy.
Spurred by a motion from Coun. Jeremy Loveday, the city will now add a section to Victoria 3.0 on becoming a national leader in the circular economy.
“Making sure our economic priorities align with our goals regarding climate action and waste reduction, I think this helps us also to be in a better place to capitalize on the economic benefit of the circular economy which is predicted to continue to grow,” Loveday said before council approved the motion this month.
The action will include ensuring there are zoned areas for circular businesses and non-profits to operate within the city. Those will include light industry spaces, which Victoria-based Project Zero says reduces a key barrier for entrepreneurs trying to scale up their up-cycle or repair businesses.
“There isn’t anything right now that’s on that smaller scale or that’s financially accessible,” said Georgia Lavender, who leads Project Zero’s circular economy program.
The non-profit has been running a local entrepreneur incubator for five years, but the term “circular economy” was still new to people a couple of years ago, she said. But Lavender has been inspired lately by all sectors and levels of government seeing the approach as a way to support local innovation, job creation and supply chain resiliency.
“We’ve seen a really big shift toward regions wanting to implement a circular economy model and really seeing the opportunities it holds, not only from an environmental perspective but also an economic development perspective,” she said.
Some of Project Zero’s Victoria start-ups now commercializing include the cup-share service Nulla and BinBreeze, which uses waste wood to improve compost bin productivity and pest deterrence.
Lavender said the innovators are helping to cut emissions while creating jobs, and Vancouver Island as a whole has the opportunity to position itself as a leader in the circular sector. The focus could help the supply chain be more resilient, Lavender said, by using local manufacturing to reuse resources instead of shipping waste off the Island for processing.
The Victoria direction also commits to business space in the coming Arts and Innovation District, the creation of a circular economy hub, exploring partnerships for a zero waste demonstration site and launching an innovation grant.
“Things like that just create more opportunity for these ventures to keep their operations within Victoria and not have to move to other regions,” Lavender said.
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