The stock market now views lower longer-term Treasury yields as a negative, signaling problems ahead. This concern may be overdone, however. The primary problem appears to be fear of a significant global economic slowdown, according to news analysis. A dissipation of the boost to growth from US fiscal stimulus, fear of renewed restrictions in response to the Delta coronavirus variant, an apparent decline in the chances for more US stimulus as the Biden proposal has questionable support, and the decline in a number of commodity prices are possible reasons for the concern.
However, there are reasons to think that fear of a sharp slowdown is overdone. Central banks support a continuation of strong economic growth. Last week's release of the June FOMC Minutes suggested most Fed officials do not think the economic has improved enough to warrant even discussion of a tapering of Treasury/MBS purchases in the near term. Fed Chair Powell should reiterate the Fed's commitment to support growth in his Semi-Annual Monetary Policy Testimony this week. The Chinese central bank appears to have eased a bit late last week, even though it called its rate cut technical. As for the coronavirus, the Delta variant does not seem to have as severe effects as earlier versions. Moreover, some vaccines are said to provide protection against it, while boosters are being developed to directly target this latest variant, as well. It is highly unlikely that a resurgence of the virus this fall will prompt state governments to impose significant restrictions on economic activity.
To be sure, a slowdown in US economic growth from the exceptional speed of re-opening has been the risk. A slowing over Q221, even as the q/q growth remained strong, was projected in my May 16 blog ("Economic Growth Strong and Slowing At Same Time"). Nevertheless, growth is likely to remain above trend, although not by as much in H121. Company surveys showed good momentum in US and global growth as the quarter ended. The Markit PMI and ISM Indexes remained at high levels in June, as did other surveys. US job growth was strong. And, while Total Hours Worked slowed, they are set up for solid growth in Q321 (see last week's blog).
Last week's release of Unemployment Claims data disappointed the stock market, as Initial Claims came in well above the consensus estimate. But, in fact, the Claims data show an improving trend in labor market conditions, despite the uptick in Initial Claims in the latest week. While the downtrend in Initial has slowed since May (see table below), the downward direction still indicates above-trend economic growth. And, the downtrend in Continuing Claims shows a renewed speedup and hints at increased hiring -- possibly because a number of states ended the supplemental benefits (thus persuading people to accept jobs rather than stay on benefits).
This week's US economic data are expected to be consistent with a moderation in economic growth. Consensus look for +0.7% m/m in June Industrial Production, with Manufacturing Output up 0.3%. The latter would be a sharp slowdown from May's +0.9%. Moreover, there is downside risk, based on Total Hours Worked. Consensus looks for +0.5% m/m in June Ex Auto Retail Sales. This does not fully unwind the -0.7% in May, although there is upside risk from higher prices. Consensus looks for high prints for the June Core CPI (+0.4% m/m) and Core PPI (+0.5%). These estimates are high enough to leave open the door for a smaller print, however.
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