- Joshua Younger of JPMorgan is crunching data from macroeconomic reports to get a grip on market sentiment - and he says it shows growth expectations, yields and rates still have a lot of room to fall.
- Younger says machine leaning tools show there is usually a gap of three to six months between changes in market sentiment - like the dramatic ones now taking place - and changes in growth expectations.
- That's creating a wave of bullishness in the bond market that won't abate soon.
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It's hard to find an edge in the most chaotic market of recent memory. But JPMorgan fixed-income strategist Joshua Younger has one of the more creative ways to find one.
Younger says he's run linguistic and machine learning-based analysis of his firm's macroeconomic reports, a strategy that's helped him evaluate how the global economy will perform and how the bond and currency markets will move. Right now they show words like "coronavirus" and "epidemic" are popping up in an overwhelming 70% of those reports.
Given the potentially disastrous effects of the COVID-19 outbreak, which as of Wednesday has infected more than 120,000 people worldwide, that level of focus might not be a surprise. But it doesn't just reflect the market's fears today - it's a hint of what's coming next.
"Shifts in the tone of macro discussion have been predictive of subsequent moves in rates through a range of environments," he said. "Medium-term shifts in macro research sentiment have presaged growth downgrades in subsequent months (e.g., 1-year ahead consensus GDP forecasts, on a 3- to 6-month lag)."
In other words, the negative commentary has become very bullish for bond prices, suggesting yields and interest rates will continue to drop as growth expectations continue to go down. That would, in turn, keep the pressure on a stock market that's already slid into near-bear-market territory as investors look elsewhere for yield.
Another sign of moves ahead: Younger says his research shows that sentiment about the direction of interest rates didn't react to the outbreak news until recently. That means it's not likely to reverse soon.
He adds that stock and credit markets have priced in about an 80% chance of a recession. Economic data is nowhere near that dismal today, but as that changes, market reactions are likely to be strong.
"To the extent that the tone of macro research remains bullish for Treasuries and points to the risk of further downgrades to global growth expectations, it should serve as yet another headwind against higher yields," Younger wrote. "The next domino to fall is likely growth forecasts, which have been revised substantially lower in some regions closer to the epicenter of the outbreak; away from emerging Asia we have yet to see major revisions lower."