Like a summer rainstorm, the bout of volatility in global financial markets that arrived two weeks ago has come and gone. It was thunderous at the time, but has not appeared to have lasting consequences.
A big rally in early trading Thursday has brought the index to within 3 percent of its all-time high. The spurt of panicky activity followed by a rapid calming over the last week is perhaps best captured by the Vix, an index of expected stock market volatility.
But while things have rapidly gone back to normal in the stock market, the bigger shifts in bond and currency markets that caused the momentary sense of panic in the stock market haven’t reversed themselves.
Here’s our detailed explanation of those shifts from last week. But here’s the important thing to know: Nothing about these trends has really changed even with the calming of the market chaos.
Ten-year U.S. Treasury bonds are yielding a mere 2.3 percent, down from 3 percent at the start of the year, a move that normally signals a gloomy economic outlook (and is matched by falling long-term interest rates around the world). Investors continue to expect inflation well below the 2 percent the Federal Reserve aims for, with prices in bond markets implying 1.54 percent annual inflation for the next five years. The prices of oil and agricultural commodities fell sharply from July through early October, and they haven’t rebounded.
Volatility Spiked Last Week, but Has Receded
And markets are now putting significant odds on the possibility that the Federal Reserve won’t increase interest rates in 2015, the way it has long signaled is likely. Futures markets on Thursday were indicating a 31.5 percent chance of no rate increase next year, up from 9.1 percent at the start of October.
If you knew only those facts, you would conclude that a slowdown in United States economic growth was underway, and maybe even a new recession. Part of the conundrum, though, is that those trends have occurred despite generally positive signs for the nation’s economy.
The last few reports on the job market have been pretty good. Part of the reason the market was up Thursday was that Caterpillar, the construction equipment company that is a bellwether for global economic growth, announced strong earnings and rising expectations for next year.
In other words, nothing has happened either in the economic data or anecdotally in the last few weeks to make one doubt that the United States economy remains on a path of gradual improvement. Nothing, that is, other than bond, currency and commodity markets pricing in a more gloomy outlook, particularly in terms of persistently low inflation.
Now that markets are calming down and becoming less erratic, that is the bigger, longer-term question that remains: Which of those views will turn out to be correct?