Markets Sniffing Out The End Of The Delta-Driven Economic Slowdown

You know the day destroys the night

Night divides the day

Tried to run

Tried to hide

Break on through to the other side

-The Doors

While Covid infections continue to rise and weigh on economic data, the markets seem to be seeing a receding in the impact on the horizon. Some might point to the weakness in U.S. stocks last week to refute the point, but that selling was likely exacerbated by investors realizing capital gains in advance of the likely increase in the capital gains tax rate. Since late July, the U.S. economic surprise index has been below zero, with readings below zero indicating that economic releases have been weaker than expected. In contrast, positive readings indicate better than expected economic releases. Despite the continued weakness in the U.S. economic surprise readings, the 10-year Treasury yield has begun to move higher.

This weakness in the economic surprise data combined with rising yields is not just a domestic phenomenon. While the Citi global economic surprise readings have been trending lower since mid-June and are currently negative, the percentage of debt currently with a negative yield has also been trending lower since late August. A rise in the amount of negatively yielding debt has typically been associated with weaker expected economic growth. The move higher in global bond yields corresponds with the U.S. 10-year Treasury yields rising.

While Covid infections are continuing to rise in the U.S. and many other countries, perhaps the decline in the rate of change is some indication that things are already beginning to improve. The momentum of U.K. infections seems to have peaked for now, and the U.S. appears to be following suit. The speed of increase in U.S. Covid cases finally declined after 11 straight increases in week-over-week cases.

Interestingly, Japan adds another data point to this narrative since Japan has had significant Covid issues, and the Japanese economy is very dependent on the global economy. The economic surprise data in Japan has been weakening since late May, while the pace of infections began to rise sharply in July. While the weekly growth of infections remains high, the peak momentum was in late August. Japanese stocks hit their recent bottom at roughly the same time as the pace of infections peaked and have outperformed the S&P 500 by almost eleven percentage points since that time. The TOPIX just made a 30-year high by exceeding the level set back in March 1991!