I rarely disagree with my old friend Larry Kudlow, but on last night’s show we differed about the strength of the US economy. I claimed (per yesterday’s posts) that the main pillars of stock market strength were foreign growth and a weak dollar; Larry sees a possible turning point in the Main Street economy.
The one element of the market picture that surprises me is how stable the 10-year yield has been of late. The Fed has been buying a lot of securities recently — maybe that’s the explanation. Another possibility is that real rates are actually declining (click to enlarge):
I don’t take the 10-year inflation indexed yield as a good proxy for real rates, but it’s still interesting. That’s a 60 bps move down from January to April. The reason that the 10-year indexed yield isn’t a good proxy is that it reflects inflation volatility; people will accept less interest on a yield that guarantees compensation for future inflation if there is a possibility that inflation will spike in the future.
Even so, that big a drop in the inflation-indexed yield doesn’t bode well for future growth. Even if it does reflect inflation volatility rather than growth expectations, isn’t inflation volatility bad for future growth?
And then there’s that New York Times poll about Americans’ economic pessimism…