I came into this week with a bearish edge to get through the data—which I thought would generally be better than it turned out to be.
Treasuries bull flattened largely on the back of a set of soft data leading up to the Nonfarm Payroll report, ancillary issues that have been ongoing (Washington stuff, foreign exchange influences, etc.), and a teeny bit of reduction in the market’s odds for a Fed hike later this year. December fed-funds edged to 1.21+ percent, the lowest they’ve been since the middle of May. Hike probabilities sank to 36.5 percent.
Vis-a-vis NFP, it was strong to cap off a week of otherwise disappointing data, so maybe it simply neutralizes the action. It’s not clear if the firm NFP report will stall the performance in Treasuries. It is August—summer doldrums and all that—and liquidity or lack thereof may allow for exaggerated action. But the fact is, in the wake of the report, Treasuries didn’t give up much ground at all, which is telling—balance between firm labor and meek inflation and demand.
While NFP is typically a given month’s big kahuna, the elements leading up to it this time around caught my eye. We had a softer tone in Chicago’s Purchasing Managers Index and its components—zero gain in personal income, zero gain to real personal spending, zero gain to the MoM Deflator, and a pretty paltry 0.1 percent gain to the core measure. Institute for Supply Management trimmed down a bit, too, as did its employment component. And we saw construction spending go negative in June, along with rather severe drops in some folks' auto sales—GM down 15 percent, Fiat-Chrysler down 10.5 percent, Ford light vehicles down 7.4 percent—all weaker than expected off already lame forecasts.
Did you catch the Economic Cycle Research Institute posts (brought to my attention by the strategy team at Citigroup) on “All Signs Point to a Cyclical Downturn in Inflation” and “Phillips Curveball”? Chalk two up for the bond bulls out there.
How stocks handle things so well, I simply don’t know, and if you tell me it’s better earnings, surely we realize those expectations are managed to provide some upside smiles. This is standard behavior. Still, the economy wheezes or chugs along, and I suppose which verb you choose depends on if you see the glass as being half empty or half full. With GDP averaging about 2 percent since 2012 and inflation running at 1.4 percent, as much as I would like to say something is at risk, those sorts of figures don’t really threaten a lot.
Interest rates plug through a largely sideways range, and although it pains me to think this way, maybe stocks can hold up, too. Perhaps it’s my intrinsic bond bias, but I continue to feel that stocks are too rich for the sort of economy we have and the extraction from the table of dangerously easy monetary policy. Which is to say, I think stocks look more worrisome than do Treasury yields in the coming quarters.
David Ader is chief macro strategist for Informa Financial Intelligence.
