It’s not just that there was an obvious and intense change in sentiment, as that is quite common among and within markets. It is more so that this repetition is a little too familiar. In January, the mainstream was taken aback as the world looked headed for a very dark place, all “unexpected” of course. Just a few months later, it has been nothing but a huge sigh of relief as if anyone might know for sure the danger has passed.
It has been nearly universal. In Canada, for example, as a proxy for both US and Chinese economies, this exhale into renewed optimism was a big one:
“External developments have conspired against Canada’s economy so far this year, as soft U.S. demand to start 2015 delivered a powerful blow to an economy already reeling from the sharp decline in oil prices,” TD said.
But “the worst is likely behind us.”
In emerging markets, the “flows” have been intense on the same exact premise (and wording).
“People are saying the worst is behind us so it’s no surprise funds are flowing back in. As June approaches there will be more volatility but for now and at least into the early part of May there will still be some inflows.”
Even in the US, as reported today, the economic concerns that were ubiquitous to start the year have softened into almost forgotten memories.
“Recent claims of the demise of the U.S. consumer have been greatly exaggerated,” said Capital Economics economist Steve Murphy. Economists surveyed by The Wall Street Journal had expected April sales would be increase 0.8% from the prior month.
Is anything actually different? Obviously, the mainstream believes it but there is scant evidence beyond risk markets. Stock and junk bond prices rebounded almost exclusively without any confirmation or corroboration in credit and funding. Swap spreads and eurodollar futures barely budged while the S&P 500 briefly threatened a new high. The 10-year treasury yield is closer to a multi-year low right now than even a single further rate hike.
An unbiased read on the economic data shows some minor improvement but not nearly with enough emphasis or difference to suggest that the risks now are any different than when the year started. As my colleague Joe Calhoun and I were talking today, we even said the same thing at the same time, it is so very reminiscent of the period right after Bear Stearns in 2008. This is not to suggest the economy is nearly so bad now as then, only that like then both markets and the global economy sustained a surprising (to the mainstream) and surprisingly heavy blow only to seemingly (on the surface) survive it with but minor damage. That led to an enormous outbreak of cautious optimism expressed no more clearly than by Ben Bernanke as late as June 2008:
The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.
That view dominated the FOMC discussions of that time. Only a few weeks after Bernanke’s unleashed self-assurance, the Committee echoed almost exactly his remarks.
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