market views

Reading Between the Tea Leaves of the 10 Year Note

Frank Trotter | March 1, 2016 3 MIN READ

In sharp contrast to the enthusiasm that followed the Fed’s December rate hike, including the accompanying cheers from market commentators, there’s no disputing this one clear fact: It’s been a tough start to the year—and a really rough ride for markets all around the globe. You hear it on the news. And you feel it in your gut as you wince at month-end reports. Admittedly, it’s tough sledding right now, but I’m holding firm to my opinion that slim slivers of hope can still be found in today’s current abyss.

Back in the fall, I’d expressed some concern over the true state of perceived economic strengthening. Some economic statistics suggested a firming, others, like market prices, suggested differently. Today, it’s pretty clear to most just which indicators were painting the more accurate picture of what was to come.

As for the root cause, one common storyline suggests that we look east to China. The theory is that the economic slowing in China is creating a ripple effect, or tsunami if you will, around the globe. Is it possible? Could the state of affairs in China really be the culprit for today’s worldwide market turmoil? Or, instead, is it simply an indicator of some other weakness? Recall that much of China’s previous growth has come as an exporting economy. So, could it be that the waning economies of the U.S. and Europe are the real culprits here, at least as far as China’s economic state is concerned, since we’re less able to purchase Chinese goods?

Early 2016 Market Performance Figures - 1/1/2016 - 2/12/2016

Source: EverBank Research Team, based on analysis of Bloomberg data.

Turning the focus to a key note

As a banker, I have a natural tendency to focus on interest rates. The U.S. 10 Year Treasury Note, in particular, is a number I turn to regularly for helping to shape my opinions and views on where our economy may be tracking. Just last month, in fact, I wrote briefly on this treasury yield, which at the time hovered just above 2%. Well, fast-forward a few weeks, and it has since dropped to below 1.8%. So what’s this telling us? Two things:

1. The market does not believe that there will be any significant inflation on average over the next ten years. This flies in the face of official statements and moves such as the December rate hike. It also suggests that many market participants are back in the business of return of capital instead of return on capital.

2. The market also does not believe that there will be significant economic growth over the next ten years. That’s a long time, and while this impact is closely connected to the first, there are clear doubts that economic activity will employ many more people—thus driving up wages.

So, today, right now, it feels as though the market isn’t necessarily forecasting a crash or complete collapse. It’s possible I suppose, but I feel strongly that more dire market prices would have already surfaced. Instead, the multiples in the stock markets and the price of core commodities are being reset to reflect this viewpoint of no growth and no inflation.

Speaking at a conference recently, I joked that I wanted to update all of my charts every hour to stay current in this market. By the time you read this piece, will prices be even lower? Will the market have finally taken a break? For now, I’ll just wait, watch and listen to the daily market price whispers.

Frank Trotter
Frank Trotter
Executive Vice President, Chairman Global Markets
Frank Trotter
Frank Trotter
Executive Vice President, Chairman Global Markets
Frank has over 35 years of experience in banking and global markets. When not in the office, you might find him speaking on the financial conference circuit, giving an interview on the latest world economic news, or at the nearest ice rink playing pick-up hockey.

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