Falling Treasury yields are boosting both September Treasury Bonds and Treasury Notes overnight as fear that the global economic recovery could be dead is driving investors to seek shelter in so-called safer assets.
Many veteran investors have always said “if you want to know the direction of the economy then watch the Treasury yields”. Based on the current price action and backed by last week’s dovish statement from the Federal Open Market Committee, investors are increasing demand for the lower-yielding Treasuries, indicating that the U.S. economic recovery may be slowing.
Investors have also chosen to ignore the pledges by the G-20 nations over the week-end to maintain stimulus plans until their economies have fully recovered. The pumping of money into the economy has been one of the main catalysts behind this entire 15 month rally. Although during the G-20 photo-op the leaders seemed happy, behind the scenes one has to question how Obama is going to get away with spending the U.S. out of a possible double-dip recession and increasing the budget deficit while countries such as the U.K. and Germany adapt more austere financial measures. At some point there is going to be a major conflict triggered by clashing economic theories.
The Obama administration has adopted the Keynesian approach to solving the economic down turn. This theory calls for more and more government spending. This government spending is supposed to stimulate demand from consumers which is expected to trigger job growth. The government expects to get some of its money back in the form of taxes. The question is “what if consumers stop spending, or businesses stop hiring?”
On Monday, it was reported that consumers spent less in the first quarter than previously estimated. Today, the Conference Board is expected to show a drop in consumer confidence. Friday’s U.S. Jobs Data Report is expected to show its first decline since December. Both of these reports reflect a changing attitude for consumers and businesses. Consumers seem to be gearing toward saving cash and using credit less frequently while businesses seem to be responding to this shift in consumer attitude by cutting costs and limiting hiring.
Last week’s drop in home sales sent equity prices plunging and Treasury yields rising. Today, the release of the Case-Shiller 20 city Index may have the same effect on the market should this index meet pre-market expectations. This report is expected to show that property values in April climbed 3.4 percent from the same month in 2009. The problem with this report is the lag between what it is based on and current market conditions. Since the tabulation of this report, perspective homeowners have lost their incentive to buy because of the expiration of the homeowners’ tax credit program.
Stock investors have to ask themselves “who is going to buy a house now with the economy weakening and jobs being threatened”?
All of this news is adding up to the call for a sharply lower opening in U.S. equity markets this morning. Besides the outlook for a weaker U.S. economy, global investors reacted to reports that growth in China is slowing. The Leading Economic Index for China rose 0.3% in April. This was less than the 1.7% reported June 15th. Coupled with the fear that China’s growth is not likely to accelerate and should grow moderately at best, are early trader reaction to the call for a decline in U.S. jobs, and speculation regarding the results of the European bank stress tests. The combination of all of these factors has created fear and this fear is expected to pressure equities while driving up Treasury Bonds and Treasury Notes.
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