Economic Growth Is Good, Unless You Are Bond Market

Here’s a chart posted on X (formerly Twitter) by LizAnn Sonders, Schwab’s strategist on the PCE data from last week (8/31/23), which shows Core PCE services ex-housing – a metric cited many times by Jerome Powell as something being watched by the Fed / FOMC – showing an uptick in July ’23.

The impact of the Core PCE data was lost last week thanks to the positive action in Treasuries after the weak Jolts report and the August ’23 jobs data on Friday, September 1.

There is still a lot of nervousness around that 10-year Treasury yield, and it approaching 4.35% once again. The October ’22 high for the 10-year Treasury yield was 4.33%, according to one of the technicians Trinity uses for this kind of work, and we keep bumping against this level.

Personally, I put a lot of weight on jobless claims because this release is frequent (every Thursday morning) and timely in its use (the data is updated as of the Friday of the prior week) so I think it is very useful as an economic indicator, much more so than many others, like the monthly jobs report, which is actually two surveys – household and business – and subject to large revisions up to two months after the fact.

• The iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) low last October ’22 was $91.85;
• The AGG 52-week low is $93.20;

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Those are the two levels being monitored for positions within client accounts.

Frankly, this is still a solid economy, with the Atlanta GDPNowcast indicating a +5% GDP growth estimate for Q3 ’23. Inflation is receding, and the Fed and FOMC have seemed to put the US economy on a soft landing glide path, but those Treasury yields don’t like the economic growth rate after 14 years of zero rates.

A tougher slog and potentially higher Treasury yields were what prompted this blog post in August ’23.

Noting the bond market’s various “annual returns” from 1 year through the last 15 years in this week’s blog post didn’t garner any attention, but the data looks somewhat bullish given the low returns, but you’d think that’s because the low yields from the last decade.

Remember, in 2012 (around the time of the Greek austerity referendum), and 2016 (the original Brexit vote), the 10-year Treasury yield traded down to the 1.25% – 1.40% yield range during the Obama Administration.

The fact is, we could see a decade for the Treasury market – after 14 years of zero interest rates – that resembles the decade for the S&P 500 from 2000 to 2009.

Watching the 10-year Treasury yield level of 4.35% like a hawk.

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Take all of this with substantial skepticism and a healthy grain of salt. None of this is advice, and it’s only written to help me carve out my thought process for portfolio construction. It’s only one person’s opinion. All S&P 500 EPS and revenue data is sourced from IBES data by Refinitiv or from Factset where noted. Capital markets can change quickly for both the good and bad. Evaluate your own appetite for market volatility and adjust accordingly.

Written By: Brian Gilmartin