What will be the role of fiscal spending on new macroeconomic patterns?
FOMC in its last meeting has been ambivalent with regard to economic projections, citing risk associated with “unemployment and inflation as broadly balanced.” However, most saw risk to the GDP forecast and inflation weighted to the upside. An important variable looked at with much anticipation is the spread between the 2 year and 10 year Treasury bond yield and how the commodity market will react in response to the US response to the ensuing Syrian conflict. The differential of the 2 year and 10 year treasury bond yield exhibits consumers expectations on long term inflation rate, bringing about an increase in long term nominal interest rates vis a vis short term interest rates. The spread between the 2-year and 10 year treasury yields has gradually fallen ever since the Trump election in November of last year. This narrowing of yields or a decrease of yield spread gives the notion that investors are becoming very circumspect of the economic climate and are less optimistically inclined towards business conditions.
It would certainly be interesting to note how the FED would react to the possibility if the long end of the curve does not rise, as it would certainly not make any sense for it to keep on raising interest rates if possible economic slowdown would ensue as a result. An inverted yield curve means that long-term bond prices are rising faster than short-term bond prices and is a harbinger of recession. From an Intermarket perspective, some jitters appear on the horizon, as S&P and DOW Industrials have declined from there all time high levels. For example, with a P/E ratio of 25, the S&P is trading much above its historical levels, and possibly is reaching an unsustainability level. Gold has also been exhibiting a sense of upsurge, as it is higher by 13% from its December lows and earlier last week it broke its 200-day moving average. A phenomenon that has not been witnessed since US elections. The FED has not made any bones about reduction of its balance sheet from a whopping $4.5 trillion in portfolio and mortgage notes to $2.5 trillion over the next 5 years. Gary Dorsch of Global Money Trends, does point out that the current bull market is 97 months old much higher than the average from the 54-month average. He recounts that stock market just does not die out of old age, but rather it is a combination of overvalued equities or excessive tightening by the FED disrupting business cycle. From an empirical standpoint he does point to the reality that S&P automotive index is already down by 7.5%, which may not fundamentally mean well for the metal indexes, but it does throw light on the vulnerabilities at the macro-economic scale. Further, the Dollar index has also hit resistance as it continually goes through a consolidation phase. Obviously, which side it picks would be difficult to ascertain with assurance, but the confluence of factors are against dollar dynamics and so are the long-term fundamentals.
For many investors, it may be too late to hitch a ride, because financial trends may have already started to unfold as investors stay blind sighted.