It is interesting to follow the market's developments. The U.S. market has reached an all-time high, with 10-year bond rates falling below 4% after peaking at 5% in late October.
Bond Market Dynamics
In the case of bonds, this movement has been the fastest and most pronounced (in terms of declining yields) in at least the last 30 years during a period unrelated to changes in the DCP (Duration Convexity Parallel shift), meaning constant interest rates.
Financial Conditions
Macroeconomic and financial conditions are notably different:
In November 2020, there were expectations of economic reopening due to the development and deployment of anti-COVID vaccines. This was supported by the remarkable speed of recovery in both corporate and macroeconomic indicators, combined with trillions of dollars in QE provided by central banks worldwide.
By April 2020, the situation was clear. The recovery followed the extreme collapse in March, aided by an actual injection of $5 trillion from global central banks between March and May 2020. Additionally, it defied expectations of widespread business bankruptcies and economic collapse.
The Current Economic Landscape
Moving to November - December 2023, it represents one of the most potent recovery impulses in the last 100 years. Market movements align with an influx of approximately $3 - 4 trillion in liquidity from global central banks. This has coincided with a reduction in interest rates to zero amidst a robust economic expansion (with GDP growth exceeding 3 - 4%) and a 15% increase in corporate profits.
Retail Sales Analysis
It's also noteworthy that U.S. retail sales data indicates that demand remains robust, showing no signs of a crisis.
November saw a 0.3% month-on-month increase in nominal terms, following a 0.2% contraction in October. Since these data are volatile, it is recommended to focus on smoothed data for a more accurate assessment.
The average monthly growth in retail sales over the past 12 months stands at 0.34% (0.27% in real terms). A year earlier, it was 0.49%, or roughly zero when adjusted for inflation (from November 21 to November 22). Between 2011 and 2019, the figure was 0.33%, with a similar inflation-adjusted growth rate (BLS calculates zero commodity inflation over this period).
In 2022, demand was supported by resources in the form of loans and savings accumulated in 2020 - 2021. These savings stabilized demand until the third quarter of 2023, and from the second to the third quarter of 2023, wages and salaries became the main resource. They showed positive real dynamics following the slowdown in inflation.
Looking ahead, wage growth over the next 12 months may face constraints due to reduced business investment activity and the normalization of the labor market (reduction in the surplus of job vacancies). This will intensify competition for jobs and consequently exert downward pressure on wages.
The proportion of spending on fuel is close to its lowest point in 20 years, except for 2020. This represents another source of support for demand, as up to 2% of expenditures have been freed up since 2022, which can be reallocated to other categories of goods due to the drop in fuel prices.
Conclusion
In conclusion, recent market highs and rapid rate changes reflect a dynamic economic landscape. Despite strong signals of economic recovery, challenges such as rising wages and changing investment dynamics are looming. Retail resilience and the release of spending due to lower fuel costs are supportive. Adaptability remains key to navigating this transformation.