Economic recovery is the biggest historical event


The weekly report of QNB Group revealed that the process of reviving the economy after the pandemic (2020-2021), which refers to an economic recovery driven by stimulus measures aimed at saving the American economy from a sharp decline, is likely to be recorded in history as one of the largest macroeconomic events ever. After the sharp decline in the nominal GDP of the United States of more than 33% on an annual basis in the second quarter of 2020, activity recovered strongly, recording annual nominal growth rates of 38%, 6% and 11% in the following three quarters to the first quarter of the year Present.
During this process, the American markets witnessed an exceptional rise, as stock indices recorded a strong performance and commodities that are highly sensitive to cyclical factors compensated for their previous losses, and even achieved new heights.
It should be noted that the bond markets, which are highly influenced by macroeconomic factors, confirmed this positive ground. In fact, from August 2020 to March 2021, bond yields continued to indicate the continuation of positive factors supporting the US economy. The prime spread between 10-year Treasuries and 2-year Treasuries has widened, resulting in a healthy slope of the yield curve. This was a positive sign of economic expansion, as lower short-term yields in the curve imply monetary stimulus, while higher yields on longer-term bonds signal strengthening expectations for growth or inflation. Moreover, the price ratio between high-yield corporate bonds and US Treasuries rose, indicating a growing risk appetite among bond investors or a months-long “risk appetite” environment.
But after March 2021, the performance of bond markets began to change, with the yield curve flat and risk appetite waning. This process accelerated after the last meeting of the Federal Open Market Committee in June, when policymakers announced after the meeting that they wished to begin discussions to reduce quantitative stimulus, noting that they expected two rounds of rate hikes in 2023, after they had not expected any Interest rate increases in March 2021.
In our view, the bond markets send two messages about the US economy.
First, bond markets expect that growth in the US may already have peaked in the second quarter of 2021, after several quarters of very strong activity.
Second, the bond market is treating the current inflationary pressures as only temporary, likely driven by the pandemic commodity shortage. A flattening yield curve (higher short-term rates and lower long-term rates) indicates that inflation is only a short-term concern.


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