June 23, 2005
A DIP BELOW 4%
The bond market has its story and it's sticking with it, namely, an economic slowdown is coming. That, at least, seems to be the message in yesterday's dip below 4% for the yield on the 10-year Treasury Note. That's the first slip below that mark since June 9.
Adding to the belief that a slump is heading this way is the chatter in Europe that an interest-rate cut is imminent. Speculation on that front helped motivate traders to sell the euro, which now trades at around $1.20, which is near its lowest level against the buck since September 2004.
"Lower interest rates cannot come quickly enough for manufacturers,” Howard Archer, chief UK economist at Global Insight, told the Financial Times today. Belgium, for instance, is "on the brink of recession," advises Expatica. Italy's already in a recession, to judge by the 0.2% drop in its real GDP in the first quarter and Germany isn't far behind with a1.1% rise in its economy in the first three months of this year. France is doing slightly better with a 1.7% rise in GDP in the first quarter, but its 10.2% unemployment rate shows no signs of falling. Ditto for Germany's 11.8% jobless rate in France.
If the pressure for a rate cut is growing, the European Central Bank so far refuses to budge. The ECB's main refinancing rate for the moment remains at 2%, where it's been for the past 24 months. But there's a different mindset in Sweden, where the Riksbank on Tuesday embarked on an aggressive easing policy by cutting its benchmark rate by 50 basis points to 1.5%. Meanwhile, the minutes of the Bank of England's monetary policy meeting earlier this month reveal that some members voted for interest rate cuts. Although BoE ultimately decided to stand pat, it's clear that momentum is on the march for lower rates in Europe.
The Treasury market in the U.S. seems caught up with similar expectations. Never mind that the Fed's still tightening. Indeed, today's jobless claims release for last week suggests the economy is still erring on the side of growth. Initial jobless claims fell to 314,000 for the week through June 18. That's down by 20,000 from the previous week, and the lowest since mid-April, according to the Labor Department.
Regardless, the market will no doubt be highly focused on the payrolls report for June, scheduled for release on July 8. The burning question hanging over that release is whether the weakness depicted in the May report was a fluke or something more omninous. Indeed, last month witnessed the slowest rise in nonfarm payrolls—just 78,0000—since August 2003, raising questions of whether the U.S. economy was headed for a slowdown of some magnitude.
The optimistic interpretation was that May was a one-time event. Economic consultancy Stone & McCarthy subscribes to that brand of confidence, arguing that a "snapback" in the June payrolls is likely. The only question is how big the snapback will be, the firm advises. Rolling out its crystal ball, S&M's best guess is a gain of 195,000 new jobs for June, a prediction supported somewhat by today's news of a fall in last week's jobless claims. The oil market offers its own prediction for a robust economy by keeping the price of crude near an all-time high in New York futures trading. No wonder the bond market this morning was already rethinking the wisdom of a 10-year yield of under 4%.
Posted by jp at June 23, 2005 5:20 AM
i think the situation in bonds might be changing soon, with cnoco bidding for unocal, instead of buying treasuries, or congress starting a trade war over it, despite greenspan, we could be in for a long hot summer over a melting stock market whcih surprisly doesnt drive up bonds. and the dollar melts down?
Posted by: cc at June 24, 2005 9:26 AM
As interest rates move towards zero across most of the developed world, reflation and leverage will inflate demand leading to increase in prices of raw materials and financial assets. At the end of the reflation cycle, as central banks get concerned about inflation and reduce interest rates we are more likely to see crashes in financial markets and prices of raw materials
Posted by: Anmol at June 24, 2005 1:09 AM