Abbreviated version

Life has thrown me a curve ball this week, so I don’t have much time to go into a lot of charts and ideas. If you can think of me when praying, meditating or even throwing coins in a fountain, I would greatly appreciate it.

The story in the markets right now is the differing growth profiles. I hinted at this last week when I discussed the possibility of a rotation out of US stocks and into US bonds, German stocks or Chinese stocks. It seems that this is playing out in spades this week:

But could have much more to go on a long-term view:

If you want to focus on one chart, one set of instruments, to focus on in the market, I suggest the bond market. I always suggest this to my students, even having the 10-year US yield woven into my quiz or test questions. All assets are priced off the bond market. Treasury Secretary Bessent told us that markets should judge Trump not on stock market but on the 10-year Treasury yield. Given the painful unwind of too much fiscal spending, which is leading to $9 trillion of issuance this year, I would agree with him.

On the other side, we have some very different dynamics around the world. In fact, while the US is restricting stimulus, other countries are stimulating, though some perhaps not as much as the market wants.

In Germany, new Chancellor Merz announced fiscal spending on defense and infrastructure of at least EUR 500 billion. He is not the only EU official urging more fiscal stimulus. In fact, this may be a welcome sign not only to investors rushing into German defense stocks, but even to ratings agencies, believe it or not:

In China, Premier Li Qiang told the Party Congress that boosting domestic consumption is the government's top priority. In 2024, consumption only counted for about 30% of economic growth vs. 68% back in 2018 at the start of the trade war with the US.

While some investors still think that China needs to do more, because many think it is on the brink of a balance sheet recession ala Japan in the 90s, parts of the Chinese stock market (namely tech) love the idea. The Chinese bond yield, which had been in freefall last year, is showing signs of bottoming in what would be a healthier sign.

The Japanese Trade Union Confederation, known as Rengo, said Thursday its member unions demanded an average wage increase of 6.09% this year, up from last year’s 5.85%, and seeking more than 6% for the first time in more than three decades. Unions representing workers from smaller companies demanded a 6.57% raise, jumping from 5.97% last year. Rengo represents roughly 6.8 million workers employed across the nation’s industries. 

While other countries have been fighting against inflation since Covid, Japan has welcomed inflation as a catalyst to get out of its malaise. Mission accomplished?

This brings me to the most important chart for me right now:

Will Japan (orange) lose control of the 10-year yield, which moved above 1.5% recently? While this sounds low in absolute terms, it is well above the real growth rate and Japan as a country is considerably indebted. Will bond investors lose any appetite for government bonds?

What about Germany (blue)? Sure, equity investors love the stimulus, as does a ratings agency. Even the EU is fine with the removal of the debt break. However, yields spiked 40 basis points THIS WEEK ALONE. Could we get too much of a good thing? Could the bond market break?

China (purple) is in a different boat. Yields have been in freefall as many, myself included, saw China as the next Japan given negative demographics:

However, the trade war may finally be the catalyst needed to get China to increase fiscal spending and policies aimed at spurring domestic consumption. Perhaps, the move in yields this week shows a market starting to believe.

Finally, how well will the US be able to issue debt in a global bond market that is undergoing a rout in the last week or two? Will the US be seen as a safe haven? Or will Treasuries sell-off too?

I don’t have the answers but a wise man is not one with all of the answers but one who knows who to ask the question to. I am asking that question to the bond market. Thus, I am watching yields the rest of this month to see how investors are interpreting events in a rapidly changing world.

Stay Vigilant