The Economy and Bond Market Diary (June 7, 2010)
Treasury bond yields continued their move higher this week as market participants begin to embrace riskier assets once again. However, on Friday the yields dropped on the weak payroll report, resulting in a net drop in yield on the 10-year Treasury of 8 basis points for the week, ending the week at 3.21 percent.
The graph shows the month-over-month change in U.S. nonfarm payrolls in thousands. The recent May report showed an increase of 431,000, but it was much weaker than the 536,000 expected. In addition, the prior two months had a net downward revision of 22,000. Also, private employment grew just 41,000, well below the consensus of 180,000.
Strengths
- Employment unexpectedly increased in Spain. The unemployment rate fell by 1.8 percent, which was the largest drop in five years.
- The ISM manufacturing index fell slightly in May but remains at a high level indicating continued economic expansion.
- The May unemployment rate edged down to 9.7 percent from 9.9 percent in April, slightly besting the May consensus forecast of 9.8 percent.
Weaknesses
- As explained above, the May payroll report was much weaker than expected.
- Canada raised rates by 25 basis points in a first step to normalize monetary policy.
- China’s May purchasing managers’ index was weaker than expected and increased concerns of a broad based economic slow down.
Opportunities
- The current environment appears similar to 2008 in many ways but also crucial differences are evident. The economy is recovering and global economic growth still looks like the most likely outcome. In addition, while some fear/risk indicators are elevated they are nowhere near the panic levels seen during the past crisis.
Threats
- Until the European situation is resolved with some degree of certainty the market will be at the whims of macro risk factors.
- Concerns of a full blown credit crisis have probably diminished some but can not be ruled out.
