The government updates the first-quarter GDP tomorrow, but till then we’re told that the economy expanded by a scant 0.6% in the first three months of this year, based on a real, annualized calculation. Meanwhile, the real yield on the 10-year TIPS closed yesterday at 2.70%, which is to say that inflation-indexed Treasuries offer a considerable yield premium over the pace of economic expansion.
By that standard, U.S. interest rates are tight by more than a little relative to recent economic growth. Of course, the relationship between the price of money and GDP’s pace evolves, sometimes dramatically. GDP rose by a strong 5.6% in real, annualized terms in Q1 2006, a quarter that witnessed real yields on the 10-year TIPS in the low-2% range. In other words, the price of money in early 2006 appeared loose, but has since given way to looking tight.
The challenge to that theory comes by surveying the price of money internationally. BCA Research yesterday published a provocative chart showing that globally defined bond yields generally are low relative to the world economy’s rate of growth. Interest rates, the research shop opined, “are not yet restrictive.” From that analysis comes the counsel that global equities looked poised to rise. “It will take a much sharper rise in the cost of debt to curtail the bull market in global equities. Until then, our outlook for higher stock prices remains intact,” BCA counseled.
So far, so good. But the human mind is subject to what’s only just passed, and on that score there’s the issue of red ink to assess. A look at MSCI’s suite of benchmarks for various slices of developed foreign markets shows a trend of unmistakable consistency: down. For the past month, virtually all MSCI indices in the developed world are in varying states of loss. Representative of the trend is MSCI EAFE, which is off by 1% for the past month, in dollar terms.
But even here, selectivity in how one reviews the world’s equity markets offers alternative results. Emerging markets continue to bubble. MSCI Emerging Markets is up 3.6% for the past month, in dollar terms. Regions within EM are doing even better over the same period, with MSCI EM Asia rising 5.6% for the past month and MSCI EM Eastern Europe adding 7.2%.