Heightened COVID-19 concerns this summer have poured cold water on the optimism that surfaced in May and early June, amid easing of economic lockdowns in parts of the country. We have been once again reminded that the virus remains the dominant driver of the economic outlook, but other doubts have emerged as well regarding the sustainability of the United States as the preeminent global economic power. The steady decline in the U.S. dollar index during the month of July and corresponding record highs in gold and silver prices sparked some speculation of burgeoning cracks in the U.S. outlook. The combination of the rising COVID death toll, the perceived mismanagement of the crisis at all levels, prolonged economic stagnation, and corresponding federal debt explosion are some of the apparent sources of concern in global markets. The worsening political climate hasn’t helped, either, whether considering the current Congressional stalemate over a new fiscal aid bill or the upcoming election.
- The path of COVID-19 remains the predominant driver of economic outlooks, and July was not a positive month on that front.
- Q2 GDP was expectedly bad on a historic level, but Q3 began with positive momentum on multiple fronts, but continued progress will likely require improved COVID data and additional fiscal aid.
- The July FOMC meeting offered no major surprises, but Fed Chair Powell did hint that the long-awaited changes to the Fed’s policy framework could be announced in the near future.
Despite these concerns, Treasury yields ended the month of July at or near record lows across the curve. In other words, global investors are not shying away from U.S. credit amid the dollar sell-off. It’s quite the opposite. To be clear, the U.S. Treasury market remains one of, if not the, deepest most liquid fixed income markets in the world, and Treasury yields, while at historic lows, remain positive. That cannot be said for much of the developed world, with the level of sovereign debt trading at negative yields now approaching a record high. July pessimism culminated with the release of the Q2 GDP report (first estimate) on the 30th. While fairly close to expectations (Bloomberg median survey), a 33% quarterly decline (annualized) in output is startling nonetheless, and it shattered the previous post-WW2 record of -10% (Q1 1958).
This market overview is provided by ALM First Financial Advisors, LLC, the investment advisor for Trust for Credit Unions. Read more from ALM First about the latest economic data releases and overall market trends at Trustcu.com.