The IMF this week recommended that the Federal Reserve delay its first hike in interest rates until we see “clear signs of wage and price inflation, and sufficiently strong economic growth.” It’s debatable if those conditions apply, although many analysts say nay at the moment. In any case, sober economic analysis may not matter as long as the Greek crisis stalks the macro landscape.
In theory, the jig is up this Sunday, when Greece must reach a new bailout deal with Europe or face the uncertainty of going it alone. The optimistic view is that the outlook will clear for the timing of the first interest rate hike once clarity is restored on matters related to Greece, for good or ill. But that’s probably assuming too much. Instead, the path forward will remain a messy affair, regardless of what happens on Sunday. Somehow, the end game is never really the end game when it comes to the slow-motion crisis in the Eurozone’s southeastern corner.
Meantime, it’s game-on once more when it comes to the crowd’s appetite for liquidity and safety. Bond prices are up, which means that yields are down. The benchmark U.S. 10-Year Treasury yield slumped to 2.27% yesterday (July 7), according to Treasury.gov data—a slide that’s reversed most of the recent gains that pushed the rate to roughly 2.50% in late-June.
The big question is whether the current decline in US rates is largely a temporary reaction to news about Greece? That’s a reasonable assumption, or so one can argue based on yesterday’s revised economic forecast via the Atlanta Fed’s GDPNow model. The July 7 estimate for second-quarter GDP growth ticked up to 2.3%, a new high for the Q2 projection. Yes, that’s still a modest rate of growth, but the fact that it’s still inching higher suggests that the US economy remains on track for a decent if unspectacular expansion in this year’s second half.
Yesterday’s monthly numbers on job openings suggests no less. The Labor Department reported that the number of openings increased to another record high in May, albeit for a data series with only 15 years of history.
If the US economy is still poised to grow, why are Treasury yields tumbling? Greece is probably the explanation. China’s sagging stock market isn’t helping either. The weakness in equities is unnerving investors in Asia and around the world at a time when global growth appears to be faltering. Markit Economics noted earlier this week in its global PMI report that growth in June weakened to its slowest pace in five months as output in emerging markets contracted.
Is the Fed likely to start raising rates in the current climate? Probably not, although we’ll know more after Sunday, when the new-world-post-ultimatum order for Europe emerges. Meantime, it’s risk-off for a world that’s forced to endure another phase of blow-back that can be traced to the Great Recession… six years later, and counting.
When the dust clears, it’s not unreasonable to imagine that we’ll be back where we started: modest growth and more than a few caveats. That, of course, will lay the groundwork for a renewal in forecasting that a rate hike is just around the corner.