Global CIO Commentary by Scott Minerd
Prophecies of imminent economic catastrophe have become almost de rigueur in recent months. Whether it is talk of Europe facing deflation, Japan’s Abenomics experiment failing, China heading toward a real estate crisis, or Russia being on the brink of direct conflict with Ukraine, the narrative is similarly dark. The “imminent crisis” theme has become overplayed, but if experience has taught me anything it is that nothing is more tiresome than a fashionable consensus. The reality is that none of these regions seem likely to suffer a calamitous near-term crisis, thanks in part to the world being afloat in a sea of liquidity.
U.S. 10-year Treasury note broke out of its range this morning. Rates are now headed to 2.2% or lower.
Every major central bank, except the European Central Bank, has been printing money. And all indications are that Europe is ready to combat low inflation and anemic credit growth through some combination of policies such as negative interest rates, another long-term refinancing operation facility, or even direct quantitative easing. Europe may well turn on liquidity just as the U.S. Federal Reserve is withdrawing it by tapering the pace of its asset purchases.
All these fears of a major crisis have spurred a flight to quality to U.S. Treasuries, which has been partly responsible for the recent bond market rally. With many investors fearful, the 10-year U.S. Treasury note broke out of its tight trading range in recent days, closing at 2.45 percent on Thursday -- its lowest yield since June of last year. Rates could now be headed to 2.2 percent or lower, just as the outlook for the U.S. economy is starting to brighten.
Recent U.S. economic data suggests the underlying strength of the American economy. While first-quarter U.S. gross domestic product growth was -1 percent, the first negative reading in three years, details in the report revealed strong consumer demand. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, grew at 3.1 percent. With the terrible, weather-induced first-quarter weakness behind us, lower interest rates should bolster housing and spur faster U.S. economic growth. In Europe, economic confidence has reached levels not seen since 2011 and economic growth is modestly improving. All of this means that a huge swath of the global economy is now growing, which should benefit struggling economies, as noted in the chart below.
While structural problems in the world’s major economies are not going away, for the foreseeable future these problems should not stop the global economic expansion. It’s worth repeating my mantra of recent weeks -- 2014 looks like the year to disregard that well-known trading adage “sell in May and go away.”
U.S. and European Recovery Benefits World
U.S. and European economic data have been on an improving trend, helping to bolster the outlook for the global economy. As output accelerates in advanced economies, countries around the world should benefit from increasing demand for manufacturing inputs. With the investment cycle turning in the United States and Europe, global trade should accelerate in the near term, helping kick-start growth in some struggling emerging market economies.
ADVANCED ECONOMY PMIS AND GLOBAL TRADE
Source: Haver, Guggenheim Investments. Data as of 4/30/2014. PMI data prior to June 1997 is the average of the United States and United Kingdom only.
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