To the dismay of many observers, US treasury yields have been dead as a doorknob despite the 20% rally in stocks over the last three months. In fact, the US 10-year yield is on the verge of breaking below the 2.56% level it reached on January 4th when recession concerns were flaring. This obviously begs the question of what US yields are sniffing out that equities are not? It’s a fair question, but the answer isn’t necessarily one that results in a binary outcome of stocks up>rates up, stocks down>rates down. In other words, rates can perfectly well head lower even as stocks chug higher if the right mix of declining growth and inflation is commingled with accommodation monetary policy. Indeed, that is exactly what we got in early 2016 when 10-year rates fell from 2.32% to 1.36% over the span of six months while stocks rallied by 17% from the February ’16 lows into July of that year. That setup looks similar to today and several leading market indicators are telling us so.

First on the docket is Chinese economic activity. Chinese economic activity is so important because changes in Chinese growth accounts for the bulk of the delta in global growth. China is also located towards the beginning of the global supply chain and so Chinese economic activity leads US economic activity by a good bit. Chinese economic activity is still falling and the most cyclical of leading indicators is saying growth in China will continue to wane for sometime. Here we show new Chinese export orders with a seven month lead overlaid against the US 10-year treasury yield. Much like 2016, this indicator is telling us that US growth, inflation, or both will be slowing for the foreseeable future and that dynamic could ultimately be reflected in much lower US rates.