July 1, 2021
Bond yields move lower and the yield curves flattens late in an economic cycle. But late cycle dynamics also include lower commodity prices, specifically for industrial metals and crude oil. Industrial metal prices have pulled back from highs as China’s government steps up efforts to curb speculation, but crude prices continue to move higher. One can argue that crude prices are partially rising as production/output remains disciplined, but the demand still has to be there for prices to rise. This cycle could be different. The 2020 recession was the steepest and shortest on record so maybe the recovery will be the steepest and shortest as well? The recession was steep because lockdowns stopped activity in an otherwise healthy economy with ample policy support. The recession was short-lived for the same reasons and further supported by unprecedented monetary and fiscal stimulus. Lockdowns were an event, but reopening is a process that happens over time. Economists estimate the global economy grew at a +4.6% annual pace in H1, and will likely accelerate to ~+6.5% in the second half as economies continue to reopen. While it’s reasonable to assume some deceleration in US growth from the +9% annual pace in Q2, its way too early to assume late-cycle dynamics. US consumer balance sheets are the best in more than 40 years, credit conditions are excellent and money supply is still growing. A strong growth backdrop supports early-cycle dynamics including higher yields, gentle curve steepening, increased corporate profitability and a feedback loop to improved labor markets, increased output and back again.