Approaching a Turning Point

Higher interest rates continue to negatively affect the real economy, increasing the susceptibility of risk assets to downside risk.

September 11, 2013   |    By Scott Minerd, Global CIO

Global CIO Commentary by Scott Minerd

There have only been 16 occasions during the past half century when interest rates rose more than 20 percent over 200 days. On a percentage basis, the recent rise in rates has been the most violent on record and we are continuing to see evidence of the negative effects of this in the real economy. In particular, lower activity in the housing market and the reduction in residential construction have caused a drop in disposable income. Aggregate income growth has slowed over the past four months, and the resulting downturn in consumption caused a poorer-than-expected back to school season for nearly all major retailers. On top of that, the September 6 employment report, which saw only 169,000 new jobs created and included significant downward revisions for the previous two months, was in all shapes and forms a disappointment. This will create further problems for generating the type of wages and household income necessary to support consumption. The signals in the real economy suggest that yields may already be somewhat stretched, yet the current upward move in rates does not appear to be over. Primarily, this is because investors are focusing on the outlook for quantitative easing. My previously stated target of about 3.5 percent for the 10-year note still appears accurate. Equities also look stretched at current levels, and divergences are exacerbating, meaning we could be facing a pull-back. The situation in the stock market right now brings to mind the words of Baron Rothschild who said the secret to his great wealth was that he sold early.

Real 10-Year Treasury Yield vs. Consumer Confidence

Historically, the real yield for 10-year Treasuries has tracked closely with the University of Michigan Consumer Sentiment Index. However, the correlation has broken down in 4Q2011 due to the Federal Reserve's effort to lower long-term interest rates. As the Federal Reserve is set to slowly reduce the pace of its asset purchases, the gap between 10-year Treasury yield and consumer confidence has begun to converge. Today, economic conditions as measured by consumer confidence would suggest that the 10-year real yield should be around 50 basis points higher if monetary policy were to normalize.

UNIVERSITY OF MICHIGAN CONSUMER CONFIDENCE VS. REAL 10-YEAR TREASURY YIELD

CUMULATIVE NYSE ADVANCE/DECLINE LINE AND THE DOW JONES INDUSTRIAL AVERAGE

Source: Bloomberg, Haver Analytics, Guggenheim Investments. Data as of 9/11/2013.

Economic Data Releases

U.S. Payrolls Disappoint as the Unemployment Rate Shrinks on Falling Labor Force

German Data Weaker, China Rebound Continues

 
Important Notices and Disclosures

This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. This article contains opinions of the author but not necessarily those of Guggenheim Partners or its subsidiaries. The author’s opinions are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC. ©2014, Guggenheim Partners. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.


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