Declining bond yields over the last several days will once more be supportive for commodities. They'll also boost stock prices later this summer following a correction. That's my main message this morning.
The worst time of year to be invested in raw materials and common stocks is typically from May to September. And over the last three years, every spring has arrived with a severe sell-off for commodities prices. This year is no exception, only the cycle arrived later with everything, except the grains and some of the softs, falling hard lately. Worst hit are the base metals, long overdue for a massive pullback following incredible gains since 2002.
Once again the world is coming to terms with slowing U.S. economic growth. Amazing, but just four weeks ago markets were dealing with the exact opposite, worried about rapidly rising inflation, causing bond yields worldwide to soar. The benchmark U.S. 10-year T-bond yield surged to more than 5.25% two weeks ago; this morning, yields have declined to 5.06%.
News this week of still-weak U.S. housing data has stoked more fears of softer export growth in regions like Europe and Asia, which depend on a healthy trade surplus with the United States. Also, a protracted bear market in housing, which I expect to occur, will also eventually curb domestic consumption at some point. If the unemployment rate starts to rise, as I'm expecting it to, then Bernanke will start cutting lending rates to spur economic growth ahead of an election year in 2008.
The good news in this otherwise dark economic forecast is that bond yields will continue to decline over the short-term because the U.S. economy is likely to remain sluggish for most of 2007. There's no boom going on. I've been arguing here all along that bond yields are unlikely to surge in 2007 and 2008 because housing is weak, offsetting credit demand. That should be supportive of an accommodative Federal Reserve, and at some point later this summer or fall, a weaker dollar.
Lower bond yields are a good thing. The five-year trading range for U.S. and global bond yields remains intact. The bear market in housing assures more range-bound trading.
