Nevertheless the market has focused on the Fed’s “taper” musing. In particular, the recent economic data suggest that growth is muted, or stalling rather than rebounding. Therefore, while the Fed should worry about the dynamics of an exit, as a sharp rise in yields would crash the economy and markets, the current conditions point to additional accommodation being the outcome of upcoming meetings. “Pick your poison,” sadly, is the dilemma Bernanke faces, and he’ll pick more stimulus.
Put another way, something other than economic conditions has driven the backup in yields. This is highlighted in the graph below that both shows the spike in yields as a yellow line, and a shaded red/green areas that consolidate dozens of monthly economic reports.
What the figure shows is that U.S. economic statistics, weighted by how much they impact markets historically, have been missing consensus estimates pretty solidly on the low side since peaking in March, while bond yields have disengaged from these misses, and have shot straight up!
The global macroeconomic picture is worse.
In China, the stock market languishes just barely above its 2008 nadir, and has been in a downward trending channel since a post crisis peak realized in 2009! Though the new leadership enjoyed a two-month honey moon during December and January, that rally was short lived, and the three-year downward channel sustained. Meanwhile the raw material sectors have collapsed in recent months, as shown below in the six-month graph of Rio Tinto’s stock price.
The impact of China’s slowdown on raw material prices has been global as suggested by this recent Wall Street Journal headline: “Iron Ore Has Fallen 30% Since February”
A slowdown more broadly across EM also has been occurring in recent months, as reflected in the graph below. It combines a broad EM Economic Surprise Index, published by Citicorp, with a PriceStats graph produced by StateStreet and the MIT Team known for the “Billion Prices Project”.
Global investors are taking note, Barclays reports, as shareholders recorded large weekly net redemptions in both EM Bond Funds and EM Equity Funds going into May month end.