Bloomberg: Reason for Hopes
* TheU.S. labor market’s success in adding 2.5 million workers in May boosted recovery hopes. Not one of 78 forecasters polled had anticipated a positive number, and global data is now often beating expectations
* That suggests growth has troughed already as the second derivatives of many forward-looking indicators have turned positive. PMIs are still deep in the red, but getting back to 50 no longer seems so distant.
* Meanwhile, real and nominal rates plumb fresh depths -- the Bank of England is among those considering a policy rate below zero, and markets are betting the Fed will cut further and may also go negative
* That helps explain equities breaking from the real economy -- there is no alternative. With yields low, bonds are unattractive. Residential and commercial property can’t be expected to soar in a recession. Faith in commodities was shaken when oil futures traded negative. Stocks are attractive by comparison -- as one bond guru once said of Treasuries, they look like the cleanest dirty shirt
* Considering the expected earnings yield for shares as a function of rates, as the Fed or Yardeni models do, a world of negative interest rates can justify price-to-forward-earnings valuations far higher than ever previously accepted
* Provided recoveries extend, the key issue will be forecasting how the post-pandemic global economy will differ from the before and during stages
* First, it’s useful to remember that the first quarter’s volatility was the result of demand destruction in the wake of a natural disaster. The cure for this is fiscal, not monetary, policy. That may bring Europe to the fore now that politicians there are finally moving toward a shared debt burden
* The phenomenon of working from home is probably here to stay, boosting investment in communications infrastructure to wipe out productivity losses once associated with time outside the office. No wonder some IT firms are smashing records
* Emerging markets are likely to continue lagging because they are more exposed to the pandemic and its economic impact. Many developing nations lack facilities to treat mass infections and can’t enforce social distancing
* The main risk to the bullish view is a resurgence in Covid-19 cases that lead to secondary lockdowns, pinching off any green shoots. Witness the slump in stocks late last week as California, Texas and Florida saw increases in identified cases
* Then there’s U.S. elections to take into account. They could spur volatility, but they also add to the potential for the Fed to err on the dovish side. Chairman Jerome Powell said he “isn’t even thinking about thinking about raising rates.” While equities initially sold off on concerns about how gloomy the Fed’s outlook seems, extended stimulus should be a net positive for the world economy, especially if that leads to a weaker dollar
* The first half of this year showed the pitfalls of predictions and the potency of central banks. With policy makers clearly at the helm, global financial markets can ride those waves of stimulus into calmer seas during the second half of 2020
* TheU.S. labor market’s success in adding 2.5 million workers in May boosted recovery hopes. Not one of 78 forecasters polled had anticipated a positive number, and global data is now often beating expectations
* That suggests growth has troughed already as the second derivatives of many forward-looking indicators have turned positive. PMIs are still deep in the red, but getting back to 50 no longer seems so distant.
* Meanwhile, real and nominal rates plumb fresh depths -- the Bank of England is among those considering a policy rate below zero, and markets are betting the Fed will cut further and may also go negative
* That helps explain equities breaking from the real economy -- there is no alternative. With yields low, bonds are unattractive. Residential and commercial property can’t be expected to soar in a recession. Faith in commodities was shaken when oil futures traded negative. Stocks are attractive by comparison -- as one bond guru once said of Treasuries, they look like the cleanest dirty shirt
* Considering the expected earnings yield for shares as a function of rates, as the Fed or Yardeni models do, a world of negative interest rates can justify price-to-forward-earnings valuations far higher than ever previously accepted
* Provided recoveries extend, the key issue will be forecasting how the post-pandemic global economy will differ from the before and during stages
* First, it’s useful to remember that the first quarter’s volatility was the result of demand destruction in the wake of a natural disaster. The cure for this is fiscal, not monetary, policy. That may bring Europe to the fore now that politicians there are finally moving toward a shared debt burden
* The phenomenon of working from home is probably here to stay, boosting investment in communications infrastructure to wipe out productivity losses once associated with time outside the office. No wonder some IT firms are smashing records
* Emerging markets are likely to continue lagging because they are more exposed to the pandemic and its economic impact. Many developing nations lack facilities to treat mass infections and can’t enforce social distancing
* The main risk to the bullish view is a resurgence in Covid-19 cases that lead to secondary lockdowns, pinching off any green shoots. Witness the slump in stocks late last week as California, Texas and Florida saw increases in identified cases
* Then there’s U.S. elections to take into account. They could spur volatility, but they also add to the potential for the Fed to err on the dovish side. Chairman Jerome Powell said he “isn’t even thinking about thinking about raising rates.” While equities initially sold off on concerns about how gloomy the Fed’s outlook seems, extended stimulus should be a net positive for the world economy, especially if that leads to a weaker dollar
* The first half of this year showed the pitfalls of predictions and the potency of central banks. With policy makers clearly at the helm, global financial markets can ride those waves of stimulus into calmer seas during the second half of 2020