What Are You Expecting?
10 year yields have risen sharply over the last three weeks (eg. US Treasuries “from this year’s low of 1.68% on February 2 to 2.13% on Friday”). Ed Yardeni highlights three reasons for the rebound: (1) better than expected payroll employment data, (2) better than expected German factory orders data, and (3) better than expected Japanese GDP and exports data. In fact, European economic data has been better than expected this year. PMIs, consumer confidence, and even GDP, especially from eastern European countries, are all signaling a rebound in exports, spending and activity. Let me guess…you don’t buy it. But consider this: your disbelief that European economic data could actually be positive is precisely what this data is measuring. Tomfoolery is seductively entertaining, and it can dominate the senses. Don’t let it. Meanwhile, “volatility and trading volumes have collapsed this month as U.S. stocks have marched to fresh records, a respite that few investors foresaw and few expect to continue.” A lot of investors are going long America (observe: the $US, US equities), and the crowded dollar has some people worried about EM debt: “Portfolio managers in the global bond market may dump EM debt very quickly as interest rates begin to rise, forcing some EM corporates to buy dollars to redeem maturing debt. This could push the dollar higher, tightening monetary conditions even more. And this would reduce capital investment in the EMs, raising the risk of recession and inducing bond managers to dump more EM credit into the market.” Speaking of emerging markets, some are expecting a “manufacturing exodus” out of China this year: “Notably, Japanese companies are moving back to Japan, in part due to the cheaper yen and perhaps expectations of further weakness in the yen. China, on the other hand, is squeezing its low cost manufacturers with a stronger yuan.”
“Having watched smokers quit and drivers adopt seat belts and folks lose weight, I am unable to imagine large numbers of active investors quitting the Great Game.”