June 2, 2014
Last week: For the second week in a row, the bond market made the biggest headlines. The Federal Reserve is tapering down its quantitative easing (buying fewer bonds) and the economy is catching up from a bad winter. With sentiment up, strong job growth and some renewed strength in the ordering rate, one might think artificially low borrowing rates would be moving back toward normalcy (something reflecting a 2 percent inflation rate, and maybe a 2 percent risk factor). Instead of moving up to about a 3 percent yield on a 10-year Treasury bond (on its way higher, assuming sustained economic growth), yields fell from above 2.7 percent to 2.45 percent this week.
Moreover, it’s not like stock prices are falling or volatility in stocks is sending money into the bond market. Rather, the bond market is making a bet that the economy is more likely to lose steam and gain momentum. The economic data point to gathering strength. And that’s the view of professional economists (as much as 4 percent GDP growth this quarter, annualized), and that’s on track with a slow build in consumer sentiment as well.
Who is right? Maybe the better question is what is the proper way to view all this. German bond yields are almost a full point lower than U.S. bonds right now. And Japanese bonds are even lower. So one could argue that money is flowing away from other markets to chase the higher yield, sending prices of U.S. bonds up, which sends yields lower. If one takes that view, it would follow that money flowing away from bonds elsewhere is also decreasing money there, keeping the euro much above its purchasing parity level. This is not an argument justifying lowering yields but it does suggest lower yields are more reflective of what is not happening elsewhere around the globe than what is happening domestically.
Employment Situation, May (Bureau of Labor Statistics)
The economy opened up more than 250,000 new jobs in April. The figure for May might come back to about 200,000, or about the trend growth of the past 12 months. Still, this would be a reflection of an ecoonomy gaining strength. And the paychecks from these new jobs, along with slowly rising sentiment, could fuel replacement buying. That includes consumers replacing old worn furniture and appliances along with continued vehicle replacement. And with final demand finally picking up, there very well could be more business investment – giving these workers the necessary tools to get the work done. Money for investment is not the issue. Indeed, neither is sentiment as surveys of attitudes of business executives through the first quarter reflect an uptick in optimism.
An uptick in consumer spending and business investment is a recipe for continued job growth of more than 200,000 per month for at least the next few months. In other words, the economic cycle could well start spinning a little faster, just as The Conference Board Leading Economic Index has been signaling. Look for more construction jobs, service sector jobs, perhaps even some manufacturing jobs.
Regionally, hiring has been the weakest in the service-dominated big population centers in the Northeast and Midwest. If the labor market is turning more robust, it is likely that service-sector employment in these markets is starting to pick up.
Source: The Conference Board
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