The chart shows a below-consensus reading for April manufacturing is once again allowing fixed income prices to show their true colors. Ahead of the unexpected 0.6% decline in industrial output, treasury prices and Eurodollar futures were falling after stronger than expected Empire manufacturing and initial claims reports. Errant bond prices recently have left traders with “egg on their faces” according to a quote used by the Wall Street Journal this morning. Min Zeng’s excellent column contrasts the initial year-end forecasts with the reality of today’s fresh lows for the year – not only in the United States but also around the world as the risk juggernaut steams full ahead.
Despite short-term speculators’ attempt to push yields higher in an effort to derail late-to-the-party bond-buyers, yields at the 10-year dipped below 2.5% following the weaker manufacturing reading.
The point has been made for some time that there is no reason that yields cannot head back towards 2.25% as a result of tame inflation and the fact that investors are too anxious over the likely timetable and extent of tightening by the FOMC. The point remains: What might happen to equities as yields push back into lower territory for the year?
On Thursday the answer seems to be one of continued trepidation. Equity prices are once again falling back from record highs as stock investors ponder the ramifications of falling yields when very few onlookers had projected such a move. The Citi economic surprise index, which measures the health of data points relative to expectations has been encouraging recently.
Yet such a rally in this index rarely matches declining bond yields. Perhaps equity traders really have little to fear, except perhaps the shadow of that age old mantra of “sell in May and go away”.
Citi economic surprise index has been rising while yields tumble.