Since the beginning of June this year, the US dollar index has recorded a bottoming and rebounding trend. The reason is that the prospect of the Fed’s gradual tightening of monetary policy in the future has gradually surfaced. However, the U.S. Treasury yield has not risen but declined since then. In this week ② it even fell back to a low of 1.126%, which is equivalent to the level at the beginning of the year. Such a deviation made investors feel puzzled and surprised, but analysts pointed out that this It reflects the deep-seated contradictions in the US economic structure.
At the beginning of the year, U.S. Treasury yields followed the upward trend of the U.S. dollar index. The market was worried about the risk of the bond market bubble bursting. The Fed also began to appease the market, thus pushing the U.S. dollar exchange rate and U.S. bond yields into the second quarter to synchronize Fall back. However, after the Fed’s initial release of its tightening expectations last month, the U.S. dollar index returned to an upward trend, but U.S. debt continued to fall. Its unusual situation of departure has forced observation agencies to re-examine the US economic and financial market environment.
Corresponding analysts believe that the divergence between the strengthening of the U.S. dollar and the continued strength of U.S. bond prices may reflect the gap between economic and monetary policy prospects. On the one hand, the economic capacity utilization rate is still far from reaching the highest level, and the funds continue to be deposited in the bond market, rather than continue to flow into real-time areas, which is one of the key reasons for the continued pressure on U.S. bond yields. This is evidenced by the continued unsatisfactory non-agricultural employment data in the United States. Every time U.S. non-agricultural data shows that the growth rate of employment recovery is less than expected, U.S. Treasury yields will usher in a wave of jumps; on the other hand, investors still bet that the Fed will reach the end of this year as expected. At the beginning of next year, the scale of QE will be reduced. This is because the continued rising inflation level has made Fed officials unable to maintain strong stimulus measures for longer to inject more liquidity into the market. Therefore, the expectation of currency tightening is bound to drive the US dollar exchange rate upward.
In other words, the combination of a strong U.S. dollar and a decline in U.S. bond yields is in fact implying that the U.S. economy will move toward a “stagflation” dilemma where high inflation, high unemployment, and low growth coexist. This is what happened in the 1970s. The nightmare that plagued the U.S. economy may make a comeback. After the high-inflation environment faded out of the era of two full generations, it has now become very unfamiliar to most Americans, and even some economic professionals can clearly say that this is for ordinary Americans and investors. What it means.
However, professional investors with keen senses have already noticed this phenomenon in advance and have begun to enter the market. Aneta Markowska, chief financial economist at Jefferies, pointed out that market funds have begun to trade based on the “stagflation concept” and have drawn a picture of the economy in a vicious circle: the excessive rise in prices is stifling demand. At the same time, it will force the Fed and the U.S. government to make wrong decisions, which will eventually plunge the economy further into the quagmire.
And Aneta Markowska pointed out that it was this trading philosophy that promoted the re-flow of funds into the bond market for hedging, which caused the 10-year U.S. Treasury yield to fall from the March high of 1.75% to 1.12% last week. The bond yield is inversely proportional to the price, which means that when the bond yield falls, it must be a result of a large amount of funds concentrated in the market to buy and raise the price.
However, Markowska himself does not agree with the expectation that the US economy is about to fall into stagflation. She pointed out that the US consumer market is performing well, but the supply side has not recovered from the impact of the epidemic, which is one of the reasons for the recent rapid rise in market prices. However, the supply chain will soon be repaired, which will bring a benign situation of booming supply and demand in the market and curb further price increases. On this point, she shares the same view with the Fed’s decision-makers that the rapid rise in prices in the US consumer market is only a “temporary” situation. In this context, the Fed will still wait until at least 2023 before raising interest rates, rather than doing so. As the agency predicts, it will act in a hurry by the end of 2022.
On the other hand, she is also optimistic about the prospects for US economic growth. In addition to reaching the expected 3% growth rate for the whole year of this year, she is expected to continue to grow by 4-5% next year. By then, not only will the consumer market remain healthy, but the acceleration of inventory replenishment activities will also bring additional pull to GDP. Even after the compensatory consumption blowout, the supply side still has momentum to further fill the gap, so the virtuous economic cycle will continue.
Therefore, the expert pointed out that as an indicator that combines market interest rates and economic growth expectations, the current trading level of 10-year U.S. Treasury yields below 1.30% has in fact shown that investors are overly pessimistic about the U.S. economic outlook, and this It is completely unnecessary. Coincidentally, Michael Collins, senior portfolio manager of fixed-income asset investment agency PGIM, also pointed out that the future economic growth and inflation rate in the United States will remain at a “moderate” level. Even if price increases continue to be high for the rest of this year, it will still Will return to the level of the trend it should be. At the same time, the United States will remain one of the main engines of the global economy. It should not be overly speculated that the US economy will stall again without proof.
However, in any case, the US CPI recorded a year-on-year increase of 5.4% in June, while the PPI increased by 7.3%, which will still make people sensitive to this data nervous. Even Fed Chairman Powell was forced to admit that inflation was more stubborn and persistent than he and his colleagues at the Fed had expected. This is also the reason why the U.S. dollar index continued to rise after the Fed’s first mention of the prospect of reducing QE efforts after the Fed’s resolution in June.
The concern that inflation may stifle the economy is only one aspect. Another, more plausible reason for driving capital to flow into the safe-haven U.S. bond market and thereby pushing down bond market yields is everyone’s further concerns about the global epidemic that has not yet completely subsided. Especially under the background that the more infectious Delta mutant strain is raging around the world. Nancy Davis, founder of Quadratic Asset Management, pointed out that if the spread of the epidemic accelerates again, on the one hand, the economy may be additionally devastated. On the other hand, the setback of industry chain activities such as semiconductors and real estate will further restrict the recovery of supply and increase prices. The upward pressure has not decreased but increased, so “stagflation” may really become a major concern for investors by then.
However, relevant market researchers also admit that under the background that the epidemic has lasted for 18 months, global investors have become shocked. Therefore, any negative fundamentals may quickly trigger a wave of market safe-haven buying needs. This makes it understandable that US bond yields are currently at a low level of 1.2%. But it does not mean that U.S. bond prices can continue to rise indefinitely, because sooner or later the Fed’s tightening actions will fall from the verbal level to the actual level, which will then have a bottom-up impact on the fixed income bond market.