Factory orders are weak, but fear is declining

Nondefense factory orders in May proved to be stronger than expectations (+0.7% vs. 0.1%), and capital goods orders were revised a tiny bit higher, but neither series shows any meaningful growth. This is more confirmation of the already-known fact that economic growth has been weak in recent months. We've seen slowdowns and pauses such as these before without it being the precursor to a recession, so this does not necessarily bolster the bearish case for the economy.

I think it's more likely that the recent economic weakness is the by-product of Eurozone fears, rather than the beginnings of a recession. Fortunately, those fears are once again subsiding, as the chart above suggests. Spanish 2-yr yields are down almost 150 bps in the past two weeks, as the near-term likelihood of a Spanish default has dropped meaningfully. The Vix/10-yr ratio has backed off its recent highs at the same time, driven mainly by a decline in the level of market fear—the Vix index has dropped from a high of over 27 a month ago to 16.4 today. 2-yr Eurozone swap spreads are in the low 70s, which is still elevated, but substantially lower than the 100+ numbers we saw at the end of last year. 10-yr Treasury yields remain extremely low, however, which means that the rise in risk assets of late (commodities are up over 8% in the past two weeks, and the S&P 500 is up over 7% in the past month) is being driven by a decline in pessimism, not a rise in optimism.