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Economy

One Number to Gauge Where the Economy Is Headed – The New York Times

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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.

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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.”

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Economy

U.S. economic growth for last quarter revised up slightly to healthy 3.4% annual rate

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The U.S. economy grew at a solid 3.4 per cent annual pace from October through December, the government said Thursday in an upgrade from its previous estimate. The government had previously estimated that the economy expanded at a 3.2 per cent rate last quarter.

The Commerce Department’s revised measure of the nation’s gross domestic product – the total output of goods and services – confirmed that the economy decelerated from its sizzling 4.9 per cent rate of expansion in the July-September quarter.

But last quarter’s growth was still a solid performance, coming in the face of higher interest rates and powered by growing consumer spending, exports and business investment in buildings and software. It marked the sixth straight quarter in which the economy has grown at an annual rate above 2 per cent.

For all of 2023, the U.S. economy – the world’s biggest – grew 2.5 per cent, up from 1.9 per cent in 2022. In the current January-March quarter, the economy is believed to be growing at a slower but still decent 2.1 per cent annual rate, according to a forecasting model issued by the Federal Reserve Bank of Atlanta.

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Thursday’s GDP report also suggested that inflation pressures were continuing to ease. The Federal Reserve’s favoured measure of prices – called the personal consumption expenditures price index – rose at a 1.8 per cent annual rate in the fourth quarter. That was down from 2.6 per cent in the third quarter, and it was the smallest rise since 2020, when COVID-19 triggered a recession and sent prices falling.

Stripping out volatile food and energy prices, so-called core inflation amounted to 2 per cent from October through December, unchanged from the third quarter.

The economy’s resilience over the past two years has repeatedly defied predictions that the ever-higher borrowing rates the Fed engineered to fight inflation would lead to waves of layoffs and probably a recession. Beginning in March 2022, the Fed jacked up its benchmark rate 11 times, to a 23-year high, making borrowing much more expensive for businesses and households.

Yet the economy has kept growing, and employers have kept hiring – at a robust average of 251,000 added jobs a month last year and 265,000 a month from December through February.

At the same time, inflation has steadily cooled: After peaking at 9.1 per cent in June 2022, it has dropped to 3.2 per cent, though it remains above the Fed’s 2 per cent target. The combination of sturdy growth and easing inflation has raised hopes that the Fed can manage to achieve a “soft landing” by fully conquering inflation without triggering a recession.

Thursday’s report was the Commerce Department’s third and final estimate of fourth-quarter GDP growth. It will release its first estimate of January-March growth on April 25.

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Canadian economy starts the year on a rebound with 0.6 per cent growth in January – CBC.ca

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The Canadian economy grew 0.6 per cent in January, the fastest growth rate in a year, while the economy likely expanded 0.4 per cent in February, Statistics Canada said Thursday.

The rate was higher than forecasted by economists, who were expecting GDP growth of 0.4 per cent in the month. December GDP was revised to a 0.1 per cent contraction from zero growth initially reported.

January’s rise, the fastest since the 0.7 per cent growth in January 2023, was helped by a rebound in educational services as public sector strikes ended in Quebec, Statistics Canada said.

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WATCH | The Canadian economy grew more than expected in January: 

Canada’s GDP increased 0.6% in January

41 minutes ago

Duration 2:20

The Canadian economy grew 0.6 per cent in January, the fastest growth rate in a year, while the economy likely expanded 0.4 per cent in February, Statistics Canada says.

“The more surprising news today was the advance estimate for February,” which suggested that underlying momentum in the economy accelerated further that month, wrote CIBC senior economist Andrew Grantham in a note.

Thursday’s data shows the Canadian economy started 2024 on a strong note after growth stalled in the second half of last year. GDP was flat or negative on a monthly basis in four of the last six months of 2023.

More time for BoC to assess

The strong rebound could allow the Bank of Canada more time to assess whether inflation is slowing sufficiently without risking a severe downturn, though the central bank has said it does not want to stay on hold longer than needed.

Because recent inflation figures have come in below the central bank’s expectations, “it appears that much of the growth we are seeing is coming from an easing of supply constraints rather than necessarily a pick-up in underlying demand,” wrote Grantham.

“As a result, we still see scope for a gradual reduction in interest rates starting in June.”

WATCH | Bank of Canada left interest rate unchanged earlier this month: 

Bank of Canada leaves interest rate unchanged, says it’s too soon to cut

22 days ago

Duration 1:56

The Bank of Canada held its key interest rate at 5 per cent on Wednesday, with governor Tiff Macklem saying it was too soon for cuts. CBC News speaks with an economist and a couple who might be forced to sell their home if interest rates don’t come down.

The central bank has maintained its key policy rate at a 22-year high of five per cent since July, but BoC governors in March agreed that conditions for rate cuts should materialize this year if the economy evolves in line with its projections.

The bank in January forecast a growth rate of 0.5 per cent in the first quarter, and Thursday’s data keeps the economy on a path of small growth in the first three months of 2024. The BoC will release new projections along with its rate announcement on April 10.

Growth in 18 out of 20 sectors

Growth in January was broad-based, with 18 of 20 sectors increasing in the month, StatsCan said. The agency said that real estate and the rental and leasing sectors grew for the third consecutive month, as activity at the offices of real estate agents and brokers drove the gain in January.

Overall, services-producing industries grew 0.7 per cent, while the goods-producing sector expanded 0.2 per cent.

In a preliminary estimate for February, StatsCan said GDP was likely up 0.4 per cent, helped by mining, quarrying, oil and gas extraction, manufacturing and the finance and insurance industries.

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Economy

Yellen Sounds Alarm on China ‘Global Domination’ Industrial Push – Bloomberg

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US Treasury Secretary Janet Yellen slammed China’s use of subsidies to give its manufacturers in key new industries a competitive advantage, at the cost of distorting the global economy, and said she plans to press China on the issue in an upcoming visit.

“There is no country in the world that subsidizes its preferred, or priority, industries as heavily as China does,” Yellen said in an interview with MSNBC Wednesday — highlighting “massive” aid to electric-car, battery and solar producers. “China’s desire is to really have global domination of these industries.”

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