The yield on the 10 year Treasury note briefly surpassed the supposedly important 3% barrier and then….nothing. So, maybe, contrary to all the commentary that placed such importance on that level, it was just another line on a chart and the bond bear market fear mongering told us a lot about the commentators and not a lot about the market or the economy. As I said last month, despite the recent run up in rates, the economic landscape hasn't changed that much. Since the beginning of the year, nominal growth expectations have risen, with both inflation and real growth expectations up slightly. But taking a little longer view, those expectations are no different today than they were at the end of 2015 or the fall of 2013. Call it what you will – secular stagnation or the new normal – but it is still with us. And I see no evidence that the US economy is about to break out of the 1.5% to 2.5% growth range we've been in for most of that period since 2013.
The economic data since the last update was a little weaker and the markets reflect that with both nominal and real interest rates down ever so slightly. From the bigger picture perspective, if we are to break out to a new higher growth range, we'll have to raise productivity and so far, as the most recent report showed, we aren't. There is some anecdotal evidence that investment may rise – if you believe the companies talking about capex on their conference calls – but like Godot, the hard evidence continues to be a no show. If companies do indeed start investing more then maybe productivity will rise and we can break out of these doldrums for good. But right now it just isn't happening.
One area of concern for the global economy, at least short term, is the recent rally in the dollar. While a strong and stable dollar would be great for the global economy long term, there are short term costs to a rising dollar environment. One consequence is the fall in emerging market currencies and the impact on those economies. Argentina has recently raised interest rates to 40% in an attempt – futile I might add – to protect their currency. Obviously, that isn't going to be a positive for the Argentine economy in the near term. Emerging markets have seen a large inflow of capital over the last 18 months on the back of generally rising currencies. But if the dollar continues to rise, those capital inflows will turn to outflows and EM growth will be impacted. For a variety of reasons I don't expect that but it is certainly something to watch.
I would just note here that I am not in favor of a weak dollar. As I said above, a strong and stable dollar is highly desirable for the US and global economy. I would also add that stable is more important than strong which is in the eye of the beholder in any case. But a rising dollar in a world of very large dollar debts will have consequences, most of them negative in the short run. That's why stable is the more important element. Stability in the reserve currency allows for long term commitments without fear that investments will be negatively impacted by currency movements. Those rapid capital inflows and outflows from EM countries make investment there riskier than it would be in a stable dollar world. A stable dollar isn't just about monetary policy either by the way. Achieving it would require a coordinated effort between the Treasury, the Fed and fiscal authorities. I'm not foolish enough to hope for that anytime soon – if ever.
Economic Reports
Economic Growth & Investment
The GDP report garnered most of the attention among this group of reports but the CFNAI provides a better snapshot of the economy. The CFNAI is a report we watch with great interest because it encompasses and aggregates together a wide range of individual reports. At 0.10 it is reflecting economic growth that is just slightly above trend. The three month average is down to 0.27 but that is well above the -0.75 we would expect prior to recession.
