Treasury prices are holding the gains from yesterday with little in the way of market-moving news overnight. As we discuss in the section below, Treasuries are at an interesting point, particularly the 10-year note. The yield at 2.30% is resting on a resistance level that has held several times since December and the lack of any selling pressure overnight tells us traders may still want to move through that level. The catalyst, however, may come just as well from flight-to-safety trades via geopolitical risks as it may from mediocre to poor economic results. The next important economic numbers arrive on Good Friday with CPI and retail sales for March, but the markets will be closed so any trading on the results will have to wait until Monday. Thus, we could well be sitting at these levels through the Easter weekend, absent a push from the geopolitical side.
|Economic News||U.S. 10-Year Treasury Yield||Agency Indications|
Fed Chair Janet Yellen spoke Monday after the market closed and it confirmed the central bank has shifted gears from post-crisis healing to one of sustaining economic gains. The money quote was, “Before, we had to press down on the gas pedal trying to give the economy all of the oomph that we possibly could, but now we are trying to give it some gas, but not so much that we’re pushing down hard on the accelerator.” Bonds initially sold off on that comment, but investor concerns about geo-political risks reversed the losses as flight-to-safety trades ensued after the White House issued a warning to Syria and tensions over North Korea rumbled on.
While Treasuries initially spiked lower in yield following the March jobs report, they failed to hold those yields as the totality of the report was really more of the same in the labor market: steady, if unspectacular, gains and not likely to shake the Fed from it’s planned tightening path (more on that below). While the geo-political concerns are sustaining a bid in Treasuries, pushing through the 2.30% level may be a tough task as much of the recent bond bullish news has been priced into the market. The caveat to that is if the geo-political risks escalate then the brief yield lows following the jobs report (i.e., 2.27%) will be tested again.
On Monday, we billed this week as a showdown between soft data (think survey and consumer confidence readings) and hard data (the kind that reflects actual activity). While the hard data will be coming later in the week, namely with inflation readings and retail sales, the soft data continues to reflect optimism. The NFIB Small Business Optimism Index edged lower in March but it still reflects a continuing high level of small business optimism, but some dings to that outlook may be appearing. The slight decrease in March did represent the second month in a row, and it should be noted the results for March were collected before Congress failed to repeal. Thus, the failure to pass a key piece of Trump’s campaign promise may impact sentiment and prompt a larger drop in the index in April. Be that as it may, the March results still bode well for future hiring trends in the small business sector. Also, despite the recent declines, the index remains close to its cyclical high and close to the levels last seen only in 1980s and in 2004.
The NFIB Small Business Index will be followed tomorrow by the University of Michigan’s Consumer Sentiment preliminary reading for April. Expectations are for the index to decline slightly (96.5 vs. 96.9 in March) but still well within ebullient territory. It will be the March Advance Retail Sales Report on Friday that will be the better tell on consumers actual inclination to spend. The retail sales numbers are expected to decline for the month and that is one big reason first quarter GDP estimates are hanging in the low 1% range, or below.
Moving on to hard data, much was made of the March Employment Report last Friday and the headline miss of 98,000 new jobs versus expectations of 180,000. While the miss was wide, other elements of the report were representative of continued strength in the labor market. The unemployment rate dropped 2/10ths, to 4.5%, as the Household Survey had a much greater gain in jobs, which came from a combination of decreases in the ranks of the unemployed as well as an increase in the labor force (indicating people moving straight into the labor force and finding work). Wage gains, while not accelerating, maintained their recent trend of 2.7% year-over-year gains. Thus, it looks to us like the headline miss was the work of unseasonably warm weather in February bringing forward some hiring, but, on balance, the labor market continues to look healthy and will certainly not keep the Fed from a possible rate hike in June.
Buttressing the above claims, the February Job Openings and Labor Turnover report found job openings rose to 5.743 million from 5.625 million in January. The February openings total represents the highest since July and the fourth highest in this cycle. The job opening rate (job openings as a % of total employment plus openings) rose to 3.8% versus 3.7% the prior month. The quits rate (those voluntarily leaving a job and a measure of worker confidence) dipped to 2.1% versus 2.2% in January. The 2.1% rate is the average over the past year while the 2.2% January rate represents the high for the cycle.
In summary, we think the March jobs report and the February JOLTs report provide further confidence to the Fed that the labor market continues rolling along with little not to like. Despite the weakness in first quarter GDP, the ongoing health of the labor market is likely to keep the Fed on track with it’s rate tightening stance.
U.S. 10—Year Treasury Yield Sitting on Resistance
The rally in Treasuries since the mid-March FOMC meeting has sent yields to some important resistance levels. The graph illustrates the 10-year note yield over the past year. The recent rally is evident with yields falling from a yearly high of 2.627% to the present 2.304%. As seen in the graph, that yields represents the 76% Fibonacci retracement level which has provided significant resistance to further yield declines since December. One maxim in technical analysis is that the more a support or resistance level is tested, the more likely it will succumb. If that is to happen, however, we think the catalyst will be from geo-political risk with Syria, North Korea, and French elections all being capable of providing the flight-to-safety spark that sends yields lower. Thus, the push through resistance will more likely come from front page news rather than anything in the business section.
Agency Indications — FNMA / FHLMC Callable Rates