They say that timing is everything. In the last couple of weeks economists have cracked open the debate over how fast the broader economy is really recovering and specifically how robust is that of the labor market. The Fed claims that it may take four or five years to drag the rate of unemployment back to where it was before the bust. In light of five back-to-back monthly payroll gains and another dip in the unemployment rate to 8.9% the bigger debate is likely to be whether the Fed isn’t just minding its back regarding its decision to buy a further $600 billion in bonds through June.
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Eurodollar futures – In the five months since the Fed announced its decision to embark on wave two of its quantitative easing policy the economy has added 673,000 jobs and the rate of unemployment has backed healthily away from a double-digit pace. But as they carved out their plan, the Labor Department over the previous four monthly reports showed job losses totaling 330,000 jobs. That was following what quickly began to look like an aberration in the May reading of 458,000 new jobs. Many people question the need to “print money” and are concerned that the Fed can’t keep doing this forever. But for its part, and probably quite rightly, claims that the economy wouldn’t be showing the recovery without its efforts. The February report revised the weather-impacted gain in the previous month up from 36,000 to 63,000 but showed 192,000 additional jobs were created. That was just about in line with consensus and showed outsized gains for manufacturers and those in the construction industry. Earlier this week the Fed’s Beige Book gave its first hint that the employment recovery was getting better. Investors have been dulled recently by Chairman Bernanke’s incessant retort reminiscent of an abusive childhood teacher saying, “Not good enough boy. Do it again!” After being smashed on Thursday by the best service sector performance in six years and reshaping of the European yield curve, investors took Friday’s employment report in good spirit and reversed earlier losses for 10-year notes sending the yield down to 3.55%. Eurodollars also recoiled from a kneejerk loss and made gains of 10 basis points on the session.
European bond markets – Three-month cash Libors rose in London to the highest since June 2009 to end a week in which a de facto tightening of European rates occurred. We’ll have to wait for the official announcement when the ECB reconvenes in April for that. The rate at which bankers lend to one another leapt to fully discount a 25 basis point rate rise in London following a major change in the shape of the yield curve, Two-year yields rose to the highest in more than two years. ECB whisperer Bini Smaghi recently warned of the threat of rising inflation. It was his muted voice that set off the avalanche that ensued. Today he warned that a failure to raise rates in response to rising inflation would allow core inflation to quicken. At this stage the euribor futures curve has possibly overdone the move and is not heeding Mr. Trichet’s observation that any rate rise wouldn’t necessarily be the start of a trend. But most onlookers know not to stand in the way of an avalanche. Euribor futures expiring at year-end have risen in yield by 90 basis points so far this year.
Canadian bills – The short end of the curve is responding positively to the U.S. report and possibly moreover to the fact that the Canadian dollar remains significantly above parity with the dollar. A strong currency dampens the impact of inflation, a fact that is self-evident in Canada and the central bank has been quick to point out that the rising loonie is reason itself to think about the need to further act on interest rates at this stage of the recovery. The June government bond future rose 43 ticks to 119.65 to yield 3.36% and 19 basis points lower than comparable U.S. treasury yields. That premium has virtually doubled in a week.
British gilts – Short sterling futures pared earlier losses incurred in the aftermath of the ECB’s de facto tightening of monetary policy across the continent. There was also a second downbeat report from the Halifax on house prices showing an annual 2.7% drop in home values with a projected 2% decline likely in 2011 according to the building society. June gilt futures rose sharply sending the yield lower to 3.65%.
Japanese bonds – Appetite for Japanese government debt was once again dulled by prospects for a strong recovery in the United States. Of course Japanese government paper prices also felt the wave of selling across global bonds in wake of European events. Meanwhile rising global stocks provoked a fifth day of losses in six as the yield on the benchmark 10-year flew back up to 1.29%.
Australian bills – Aussie 90-day bill yields shed four basis points while the 10-year government bond bucked conventional wisdom with its yield dipping by four basis points to 5.56%.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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