The Most Important Number of the Week Is 6.2%
(Bloomberg Opinion) -- It’s all downhill from here? For the first time this year, Wall Street analysts have started cutting their forecasts for U.S. growth in 2021. They now expect the economy to expand 6.2%, according to a monthly survey by Bloomberg News, down from a 6.6% estimate in July.
Let’s get this out of the way right now: First, no one should be disappointed if the latest estimates prove true, as it would still represent the best year for the economy since 1983. Second, the latest outlook is still way above the 4.1% pace of growth that was projected at the start of the year.
Nevertheless, it’s the direction that matters. The latest survey results will only heat up the debate over whether we are at “peak growth.” That’s especially true after the University of Michigan said Friday that its preliminary index of consumer sentiment for August plunged to the lowest since December 2011. Concern about the economy’s prospects, faster inflation and the recent surge in coronavirus cases from the fast-spreading delta variant were behind the decline.
In normal times, signals like this would prompt investors to flee riskier assets such as equities and head toward safe government bonds. These aren’t normal times, though, and anybody who has been paying attention would know that this is probably an ideal time for most financial assets, risky or not.
The reason is that a slowdown in growth is likely to temper the notion that the economy is overheating and supporting faster inflation. It’s also likely to mean that the Federal Reserve won’t be in a hurry to withdraw monetary stimulus. (Along with keeping benchmark interest rates near zero, the central bank has been pumping about $120 billion into the financial markets every month through its purchases of U.S. Treasuries and related securities.) Finally, slowing growth might increase the chances that Democrats settle their differences and push through President Joe Biden’s $4.1 trillion economic agenda.
Let’s start with inflation. Tentative signs emerged this week that the recent spike higher in consumer prices may be ending. The government said its consumer price index rose 0.3% in July after soaring 0.9% in June. The bond market certainly believes that inflation has peaked. Breakeven rates on five-year Treasury notes, a measure of what traders expect the rate of inflation to be over the life of the securities, ended Friday at 2.59%, down from 2.77% in mid-May.
Moving on to the Fed, bond traders appear to have no fear that the central bank will pare back its bond purchases sooner and more forcefully than forecast even after last week’s blowout employment report, which showed big job gains for July. For one, the yield on the benchmark 10-year Treasury note fell eight basis points, or 0.08 percentage point, to 1.28% on Friday, the biggest decline in almost four weeks. Also, demand at the Treasury Department’s monthly auction of 10-year notes this week surged to the highest since May 2020, based on the amount of bids received relative to the amount offered. Not only that, but Bloomberg News reports that activity in Eurodollar call options suggests traders have been piling into bets that the Fed won’t raise interest rates at all within the next four years.
As for Washington, it’s always dangerous to predict what politicians may do. That said, Democrats control the White House and both chambers of Congress, and it’s hard to see them failing to push through a massive, multitrillion-dollar, once-in-a-generation economic stimulus with consumer sentiment faltering and the mid-term elections just more than a year away. Another consumer sentiment survey like the one Friday from the University of Michigan will go a long way toward narrowing any differences the progressives on the far left may have with their more moderate colleagues.
All of this, then, helps explain why riskier assets barely budged after the Bloomberg News survey showing a lowered outlook and the poor University of Michigan sentiment index reading. The S&P 500 Index set another all-time high on Friday while a proxy for junk bonds — the widely followed iShares iBoxx High Yield Corporate Bond Index — rose for a third straight day.
The message being sent by the markets is to ignore what is likely to be a string of soft economic data in the weeks and months ahead. The economy will slow, and the Fed and politicians will get nervous, but it also means that the stimulus that has fostered the economic rebound and propelled markets higher will also likely continue. In other words, bad news is good news for markets.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Robert Burgess is the Executive Editor for Bloomberg Opinion. He is the former global Executive Editor in charge of financial markets for Bloomberg News. As managing editor, he led the company’s news coverage of credit markets during the global financial crisis.
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