Reassessing Assumptions
Last year’s markets boogeyman is back. U.S. government debt has reversed its early-year rally, sending Treasury yields higher than where they finished 2022. That is threatening to end a brief reprieve for stocks and riskier types of bonds, which both languished last year as yields climbed rapidly....
Rising Treasury yields erode investors’ willingness to pay up for stocks and corporate bonds, because buying Treasurys lets investors lock in attractive returns that are practically guaranteed....
Coming into this year, many investors assumed that declining inflation and a slowing economy would give the Fed the go-ahead to ease off [its interest rate hikes]. Strong data have now rejiggered that assumption.... [I]nflation figures for January came in higher than expected and showed a decelerating pace of decline compared with previous months. That followed the latest employment report...which indicated unemployment has fallen....
The shift has once more boosted government-bond yields, which are closely tied to investors’ expectations for how the central bank will set interest rates.
– From “Rising Bond Yields Rattle 2023 Stock Rally,” a 2/22/23 news report in The Wall Street Journal. Read more at on.wsj.com/3YUUqBp.
Signs Continue to Point to a 2023 Recession
The Conference Board Leading Economic Index® (LEI) for the U.S. fell by 0.3% in January 2023...following a decline of 0.8% in December. The LEI is now down 3.6% over the six-month period between July 2022 and January 2023—a steeper rate of decline than its 2.4% contraction over the previous six-month period (January–July 2022).
“Among the leading indicators, deteriorating manufacturing new orders, consumers’ expectations of business conditions, and credit conditions more than offset strengths in labor markets and stock prices to drive the index lower,” [said Conference Board economist Ataman Ozyildirim.] “The Conference Board still expects high inflation, rising interest rates, and contracting consumer spending to tip the U.S. economy into recession in 2023.”
– From a 2/17/23, news release issued by The Conference Board, a well-known think tank that tracks economic activity. Read more at bit.ly/41cf9SM.
Government Debt to Rise “Dramatically”
The [federal budget] deficits in CBO’s current projections are significantly larger than those in the agency’s previous baseline projections.... The budget shortfall for 2023 is now projected to be $426 billion more...than projected last May....
The cumulative deficit for the 2024–2033 period is projected to total $20.2 trillion.... Rising deficits boost federal debt dra-matically over the next three decades. In 2053, debt is projected to reach 195% of GDP—far higher than it has ever been.
– From The Budget and Economic Outlook: 2023 to 2033, published 2/15/23, by the Congressional Budget Office, a federal agency. (Worth noting: The CBO report assumes no recession over the next 10 years. A recession would make the deficit/debt projections even worse.) Read the CBO's report at bit.ly/3YztCq0.
