The stock market may be banking on more stimulus, but the bond markets don’t see it
Therefore, spending from the executive orders may amount to under $100 billion. In contrast the Cares Act cost $2 trillion. For every dollar the Cares act spent to boost the economy, the executive orders offer five cents. Therefore, the main value from the executive orders may be in prodding negotiators back to the negotiating table to agree on a far larger package with a possible spending level of $1 to $3 trillion of stimulus. Of course, that hasn’t happened yet.
The yield curve is not showing the aggressive steepening that can be useful in signaling recovery. For example at the start of 2010, as we put the last recession behind us 10 year Treasury bonds yielded around 3% more than their 2 year equivalents. Now that same spread is much smaller at closer to 0.5%. If there’s a major rebound coming, then the bond markets aren’t seeing it.
Of course, there are plenty of other factors impacting markets beyond stimulus. Vaccines, lockdowns, case rates, the trajectory of the U.S. dollar and the coming election to name just a few themes. Still, just as stimulus boosted the markets materially in recent months, so we may see material impact in the remainder of 2020 too if stimulus measures pass.
It’s unlikely that the limited executive orders over the weekend gave the stock markets the fuel they needed for U.S. growth over the second half of 2020. However, market’sperhaps implies optimism that a bipartisan deal will ultimately be struck. In contrast, bond markets don’t share the stock market’s recent exuberance. That could be a worrying sign for the economic outlook, regardless of where the stimulus debate lands.
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