US markets this week continue to reflect a modest growth play despite uninspiring data. Safe haven concerns from abroad and deflation worries have diminished, although unexpected news could quickly reverse trends – as we have so vividly seen over the past few years. The yield on the benchmark 10 year bond headed up again from its nearly two year low at the end of August and start of September (although it remains very low), as capital shifted into stocks at the margin.
Data has been thin and sentiment modestly positive in this shorter post-Labor Day week. Still reeling from last week’s weak unemployment data for August, US financial markets have been chewing on possibly more positive news on the labor market front (unemployment claims may be showing some trend improvement). Still, weak data and surrounding discussion from the past few weeks led forecasters to revise downward their 2010 and 2011 outlooks (eg, the new Blue Chip.) While a double dip recession is not expected, growth and labor market improvements are expected to be weak. Deflationary worries have receded slightly, but the deflation ghost hovers in the background of market activities and policymaker risk concerns. (The US slowdown and a few other factors have just led the OECD, the advanced industrial economies’ policy think tank, to call for additional stimulus in countries that have fiscal room for maneuver, aka “fiscal space”.)
Awaiting any economic policy surprises today from the President in his scheduled news conference, markets have not reacted much to the President’s announcement earlier this week of additional proposals to modernize the economy’s infrastructure through basic capital spending projects – perhaps because they think it won’t get through Congress. (His proposals are not stimulus of the same variety we have seen over the past few years to jump-start the economy. Rather, they are growth friendly investment proposals to fix some of the aging infrastructure – highways, bridges – for the longer term. The ARRA – last year’s stimulus package – included infrastructure spending, but it was for the most part shovel-ready so that resources could be moved into the economy relatively quickly.)
Safe haven pressures on the US market have so far been relatively limited this week, with financial pressures coming from Ireland (a tighter fiscal policy has increased pressures on its financial sector, still overextended from its construction boom) and some so far quiet concerns about European bank capital. It remains to be seen how the new Japanese stimulus measures will affect US markets.
China has also been on top of the agenda. The financial press has covered the visit to China of two of the President’s top economic advisers (including Larry Summers), presumably to discuss market valuation of the Yuan among other concerns with the leadership. At the end of the visit, Treasury Secretary Geithner criticized the lack of market orientation of the currency. Next week, Congress is expected to put the spotlight on the Chinese currency and its undervaluation (creating problems for the US manufacturing sector), which could be particularly sensitive as the mid-term elections approach. China is the largest foreign holder of our sovereign debt.