This article appears in the latest edition of AFP EconWatch. Read the full report.
It was an interesting week of information releases as we saw a number of economic indicators exceeding expectations, while a number of indicators disappointed us to the weak side. At the same time, we are also experiencing an increase in geopolitical tensions between Russia and Ukraine.
By far and away, the biggest report of the week was the monthly employment report, which surprised the market with its strength. Payrolls were up 288k (versus a consensus of +215k) and the unemployment rate dropped to 6.3 percent (from 6.7 percent and is now at its lowest level since September 2008). If the pace of job creation through the first four months of the year continues, 2014 will be the best year since 1999 (think “Genie in a Bottle” by Christina Aguilera).
Even with the positive employment report, the U.S. Treasury market showed incredible strength. The lack of evidence of any inflation on the horizon, coupled with increasing news of violence in Eastern Ukraine, kept a strong bid for safety. The two-year yield was unchanged at 43bps (inferring the Fed will tighten interest rates in the early part of the second quarter of 2015); the five-year note yield was down 4bps to 1.67 percent; the 10-year note yield was down 7bps to 2.59 percent, and the 30-year bond yield was down 7bps to 3.36 percent (its lowest level since June of last year). The Treasury curve continues to flatten with the 5yr/30yr spread dropping to +168bps, its tightest level since September 2009.
The U.S. equity markets continue to maintain their recent lofty levels, but in an unspectacular manner. The Dow attempted to set a new all-time high, getting as far as 16,620.06 but still just short of its record of 16,631.63 set last month. The S&P 500 touched 1,891.33, just shy of its record high of 1,897.28 (also reached last month).
The NASDAQ is off about 250 points from its 14-year high, but it is still up about +24 percent over the past 12 months.
The Fed held its latest FOMC this past week. It followed its script perfectly, with a continuation to its tapering program, reducing monthly purchases of Treasuries and MBS by another $10 billion. The Fed has now reduced its purchases to $45 billion/month from a peak of $85 billion/month. It is expected that it will continue on this current path, and wrap up the buying program by year end.
The market was a bit surprised by the weakness in the first quarter GDP number. The number came in at a measly +0.1 percent against an expected +1.1 percent. In general, the market shrugged off the report as backward-looking and greatly affected by the brutal winter we had experienced.