Stocks were juiced to new highs for the year on better than expected employment numbers. Nonfarm payroll employment declined by 247,000 in July on a seasonally adjusted basis, much better than the -325k expected. June’s data was revised upward from -467k to -443k.
The main reasons for the better than expected numbers include a 28.2k addition to automotive manufacturing payrolls during a month that historically cuts some due to planned summer shutdowns, this surprise increase is exacerbated by the seasonal adjustment. Federal Government payrolls increased 12k and several service sectors were better than expected but unfortunately too much of the positive surprise compared to what was expected seems to be one time in nature. The auto industry has “cash for clunkers” to thank for the pop last month but that shaping up to be short lived.
Last week was the worst for Treasuries since the March of 2003. Yields were up across the curve every day but one last week to their highest levels since mid-June as investors continue to shed Treasuries in exchange for riskier investments like stocks and corporate bonds. The 5-year credit default swap index, which measures the cost that investors are paying for protection against default for 125 different companies, is at its lowest levels since May 30 2008.
The main reasons for the better than expected numbers include a 28.2k addition to automotive manufacturing payrolls during a month that historically cuts some due to planned summer shutdowns, this surprise increase is exacerbated by the seasonal adjustment. Federal Government payrolls increased 12k and several service sectors were better than expected but unfortunately too much of the positive surprise compared to what was expected seems to be one time in nature. The auto industry has “cash for clunkers” to thank for the pop last month but that shaping up to be short lived.
Last week was the worst for Treasuries since the March of 2003. Yields were up across the curve every day but one last week to their highest levels since mid-June as investors continue to shed Treasuries in exchange for riskier investments like stocks and corporate bonds. The 5-year credit default swap index, which measures the cost that investors are paying for protection against default for 125 different companies, is at its lowest levels since May 30 2008.
The FOMC will meet this week, and while it is expected to leave the Fed Funds Target Rate unchanged at 0-.25%, a large question mark remains over the future of the Fed’s open market operations. Recent fedspeak has shown some member’s hesitation to increase the amounts dedicated to buying Agency MBS and debentures along with Treasury bonds, fearing the price instability that could ensue if the Fed does too much to keep rates low. Nonetheless it stands to be a heated topic and if the Fed comes out and states that all programs will end as scheduled it will mark the first real tightening of monetary policy during this latest cycle. But that is probably wishful thinking on my part. Something to the effect of, “We will continue to monitor market conditions before making a final decision” is more realistic. Especially considering the next meeting on September 23 will likely be the Fed’s final chance to extend the Treasury program before it completes.
Treasury supply for this week looks like this:
· Tuesday - $37 billion 3-year notes
· Wednesday - $23 billion 10-year notes
· Thursday - $15 billion 30-year bonds
Cliff J. Reynolds Jr., Investment Analyst
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