Deutsche Bank’s head of European rate strategy, Francis Yared, shows as an example of “all not being well in the world, let alone the US.”
Here is why he is cautious, and why he thinks it just may be that the lunatics have taken over the insane asylum.
“…it is imperative that the data does turnaround during 2015h2 for the recent rise in yields to be sustained. It is quite surprising to us that there is so much focus on US employment data and Fed Funds normalization to the exclusion of global trade data or US demand let alone productivity. A case perhaps of the lunatics trying to run the asylum. We suspect that while the last thing the Fed wants to do is to suggest growth isn’t what it should be, for fear of making things worse, the over arching principle of not committing the cardinal sin of the Type 2 error will prevail. As long as hope springs eternal and we still all expect stronger growth, then Fed delay is justified and allows for these elevated yields, with a view that they can edge higher. But if that hope were to diminish regardless of what the Fed does, yields would have to come down sharply. And if the Fed did sin, then they would come down a lot and fast.”
What is the other thing DB is concerned about? The same one we noted last week when we showed The “Divergence At The Root Of Most American Economic Problems”
There are two concerning new trends as regards the longer term outlook for core rates. In their own right they would justify a renewed bull run to lower yields if they are not reversed.The first is the surprisingly sharp drop off in global trade in early 2014 that followed weakening into year-end 2014. This is over and above the decline in oil. It is likely affected by the west coast port issues but this doesn’t obviously account for other regional weakness. In the grand scheme of things trade is well correlated with turning points in the interest rate cycle and all else equal clearly “justifies” current low real yields. It is a requirement almost now for trade volumes to stabilize and improve for yields to be stable or higher.
Why trade is so weak may speak to the demand side of the secular stagnation debate. Supply creates demand and maybe demand creates supply; the issue is that secular stagnation can be driven by lack of productivity for lack of investment or innovation.But also demographics and the residual of financial repression can affect the outlook for demand. Note that globally productivity is also very weak whether Japan, Europe or China.
The other new source of concern on the demand side is US demand itself. For a while there has been general disappointment in the response to lower oil prices. But it is now getting absurd. In April real retail sales slowed to less than 1 percent year over year, weakness not seen since the sharp decline in early 2014 and before then since the crisis itself. In principle we know that the savings rate is a little higher, but the issue is that if this data is accurate (oh for the utopian world of data revisionism, life would be so much simpler), then there does appear to be a new emerging trend of structurally weaker demand. Another example of the secular stagnating demand creating the secular stagnating supply (productivity). We illustrate this in the charts below that show the log linear trend for real retail sales growth had pretty much returned to the pre crisis level of around 2.8 percent annualized. However since mid 2013 it seems to be breaking lower. As a result the cumulative deviation below trend to date is close to 2 percent. Clearly from the post crisis sample period residuals there has been a shift with the residuals being comfortably positive from 2011 to mid 2013 but generally negative since.
Fear not Deutsche Bank economists, because any indicator you demonstrate which confirms the world is not only locked in a state of secular stagnation thanks to a record $200 trillion in global debt, but that the US economy is rapidly contracting to recession, will be promptly double seasonally-adjusted away by the US Department of Truth
