Last year on August 2,2019, I addressed the issue could the 10-year yield get below 1%.
I said yes, but it would need help.
Can The 10-Year Yield Break Under 1%
After the inverted yield curve event, which I stated, this would be bullish. The bond market acted better, stocks hit an all-time high, but most importantly, the economic data got better. PMI data, retail sales, housing starts, permits, new home sales, existing home sales, all were showing that the expansion still has legs.
This year, it’s much different. It’s just one event, and it is Chaos and the Butterfly effect.
What I wrote on Feb 3rd for Housing wire was this.
In chaos theory, the butterfly effect refers to the idea that due to the interconnectedness of all things, a small event can result in significant effects on a nonlinear, dynamic system.
The butterfly effect gets its name from the metaphor that even small swirls of air caused by the flapping of a butterfly’s wings can change the path of a tornado, also though the system is far removed in space and time from the first event.
In many ways, we see this theory manifest in the U.S. bond and stock market – a dynamic system that is prone to the influences of distant perturbations.
Case in point, a virus outbreak among an urban population of a distant country may lead to a lower rate of growth in the economy in 2020. But it could also lead to a lower 10-year yield and thus lower mortgage rates for the housing market.
My 2020 Economic Forecast had a headline theme with it on lower yields as well.
“The stock market is at all-time highs. This means we are vulnerable to pullbacks, perhaps even a 10% plus correction, something that didn’t happen once in 2019.”
“Any stock market sell-off, correction, or near-bear market can drive money into bonds short term. With many headline-driven risks in play next year, don’t ignore the lower end of my bond market channel just yet.”
We are very close to breaking under 1%, and we have Chaos doing its thing right now. If we got as low as 1.03% on the 10-year yield in early trading.
For these yields to stick, you need to see the economic data to get worse, or these yields will shoot higher.
Right now, I can connect 2 of my last 3 recession red flags to the Coronavirus that has a high probability of happening in the next 6 months. These two can recover quickly, as well. That is the key because this is all about the Coronavirus and nothing else. The economic data did get better before this event.
Recession Red Flag Model Here, 3 are up, and 3 are down still.
These are the 2 flags that could be raised together over the next few months.
1. An over-investment in the economic cycle creates a big supply spike due to weaker demand, which will drag the entire economy lower.
The virus itself is creating the supply and demand shock. Duration and scale matter here now with the U.S. Expect the U.S. to fight back against this virus and send the American bears back to the abyss where they belong.
I am attending a world safety patient summit this week, and the one question that I want to see get answered is this. Let’s assume heat does its thing with the virus, and things look better come late spring and early summer. Do the experts believe this will come back in fall and winter.
2. Leading economic indicators fall 4-6 months
Since LEI is working form all-time highs, PMI data recently got better, and jobless claims have formed a bottom in 2019. With the weakness that will happen with this event, this has the potential to fall 4-6 months. LEI is heavy on ISM/PMI and claims put together. What was the reason I was so sure this data line wasn’t breaking last year can show weakness this year? The key is to remember that this is a short term event, so these data lines can get better quickly. The economy was a fine pre coronavirus escalation.
The weakness we can potentially see here can reverse the course.
Just be mindful of duration and scale over the next few months. Take the data lines one day at a time. Once the world defeats this virus and humanity prevail once again, we can go back to pre coronavirus data trends.
Logan Mohtashami is a financial writer and blogger covering the U.S. economy with a specialization in the housing market. Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1987. Logan also tracks all economic data daily on his Facebook page https://www.facebook.com/Logan.Mohtashami and is a contributor for HousingWire.