Chairman of the Board Ben Bernanke’s concerns expressed in Washington on Wednesday rocked investors’ nerves helping to send equity indices plunging and bond yields lunging. His warning that it might take “a significant amount of time” to restore the 8.5 million jobs lost throughout 2008 and 2009 were reinforced today by an unexpected uptick in a reading of firings. But beneath the surface the labor news isn’t as bleak as bears need to sink confidence and proving the patchy nature of the recovery is a slew of corporate earnings demanding of the Chairman, “what slowdown?”
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Eurodollar futures – Initial claims through the weekend unexpectedly rose to 464,000. In addition to the approximate 100,000 monthly average gain in private sector hiring, as Mr. Bernanke pointed out, the data is a frustrating sign of the elongated tenure of the labor market recovery. However, the reading of continuing claims dipped sharply to 4.487 million, which is the first dip beneath a reading of 4.5 million since December 2008. The index does not, however, include Americans receiving extended benefits.
Markets are slowly coming around to the fact that despite all of the slowdown talk, corporate America doesn’t depict an economic picture likely to head into the second leg of a double-dip recession. With more than eight out of 10 S&P 500 index companies exceeding second quarter profits in excess of analysts’ forecasts, it is easy to understand how investors have collectively misread the economic tealeaves portending nothing more than a reduction in the pace of expansion.
Despite Mr. Bernanke’s stance that the FOMC stands prepared and willing to adjust policy again to counter the “unusually uncertain” economic picture, yields today are higher in light of a smaller dip in leading indicators than was forecast. Meanwhile existing home sales failed to slump as far as the gloomier forecasts and presented a bow on the knot of economic data today by delivering an increase, rather than a decrease, in house prices.
September treasury futures are having a hard time contending with a 2% surge in equity indices and have fallen 12 ticks to 123-04. Curiously and despite the specter of a further monetary policy ease, we can see no mad rush into the December Eurodollar futures this morning. One might have expected buyers to raise the likelihood of any monetary easing into the final quarter, which would have lifted the December contract above the September contract (the December yield would fall beneath that implied by the September contract). Yet this hasn’t happened and the five basis point spread between the two contracts remains intact today. The 10-year yield rose to 2.923% after today’s data while the two-year added two basis points to 0.576% remaining just above yesterday’s all-time low for yields.
European bond markets – Bunds are extending losses in afternoon trading with the September contract unwinding an early gain when it reached a high of 129.43. The contract is now lower at 128.80 and faced increasing losses after a PMI survey for the Eurozone unexpectedly depicted a healthy ongoing expansion for both services and manufacturing. Economists had predicted that, like the rest of the globe, the data would contract. Euribor prices continue to make healthy gains as liquidity concerns unwind in anticipation of a positive outcome for Friday’s stress tests. The reports are published after business hours in Europe.
British gilts – Yields rose in Britain but only by a couple of basis points to 3.26% as the September gilt future faced losses to 121.22 following a robust retail sales report. The June sales report showed that sales increased in June by 0.7% month-over-month helping alleviate some fears that the recovery is facing a brick wall. Despite a worsening inflation outlook, short sterling futures made gains of around five basis points helping to steepen the yield curve even though Bank of England economist Spencer Dale ruled out a return for inflation to the target 2% central rate until 2011. A budget sales tax rise due to come into effect in January will add to the consumer price index.
Japanese bonds – Rising risk aversion dominated early Asian trading after U.S. equity prices slipped in response to Bernanke’s remarks on the economy. The ongoing move into the yen resulted in official comments warning of recovery risks stemming from the move, while helping build demand for Japanese government bonds. The 10-year yield slumped by three basis points to 1.045%.
Canadian bills – A disappointing retail sales report for May has been discounted and sent September bond prices lower by 22 ticks to 122.19 where the implied yield reads 3.194%. There is ample evidence that the Canadian economy is on the road to recovery including surging gains for employment, which means that today’s takeaway on retail spending is rather redundant. Supporting that view is the response of the Canadian dollar, which easily reversed initial declines back towards its intraday peak as commodity prices jumped on hopes for global growth.
Australian bills – Aussie government bond prices rose in line with the risk aversion hangover from the North American session. Yields declined four basis points to 5.127% while bill futures traded on the back foot, sliding by three basis points.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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