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Economic Update April 2007
Information for Buyers
Prior to the jobs report on Friday, one of the major factors that was driving the direction of equities and bonds last week was the improving tension between Iran and U.K. The happy ending of the drama prompted unwinding of the flight-to-safety trades and a retreat in oil prices. After the release of the British soldiers, crude oil fell 2.4% to $64.28 a barrel and spurred a rally in the equity markets.
Several mid-tier economic reports from last week pointed towards softer economic growth and building inflation pressure, which makes the Fed’s job quite complex in the following months. Factory orders came in lower than expected--up just 1% from February. The ISM manufacturing index declined to 50.9 in March, which is marginally close to the 50-level that draws the line between expansion and contraction. The ISM non-manufacturing index, which covers service industries, also decreased unexpectedly from 54.3 to 52.4. This is the worst reading since April 2003 and the third decline in the last four months.
On Friday, the Labor Department released the number for the March non-farm payroll. It showed that the U.S. economy added 180,000 more jobs, which was much higher than the median economists’ estimate of 130,000. The unemployment rate also ticked down to 4.4% from February’s 4.5% against market consensus that it would remain unchanged. This matches the lowest rate in 6 years. The last time unemployment was lower was in May 2001.
The positive employment news on Friday sent the 10-year Treasury benchmark down 18/32 in price to end Friday’s two-hour market session at 99-03, yielding 4.74%. Over the last 12 months some of the biggest one day up or down movements in 10-year Treasury yields have been associated with the jobs reports. The odds that the market had priced in for near-term rate cuts before the release of the data were completely erased. The markets concern was that the next Fed move might have been to raise interest rates and not cut them. Currently, Fed fund futures are priced for no rate cut in May while the odds for a cut in the Fed’s June meeting are slim, at only 12%.
While bonds took a heavy blow from the employment data, stocks had a strong week with all three benchmark equity indexes at their highest since Feb. 26th, the day before a sell-off in China that started the downward spiral for world equities. For the week, S&P 500 rose 1.6% to 1443, the NASDAQ returned 2.1% and ended at 2471, and the Dow rose 1.7% to finish the week at 12,560. Small cap stocks performed in line with large cap stocks and in terms of style, large cap growth stocks outperformed large cap
value stocks.
This week will be light in terms of economic data releases. The minutes from last month’s FOMC meeting will be released on Wednesday and may provide some insights to what the Fed’s next move might be. The Producer Price Index (PPI) is being released on Friday. As this is one of the primary indicators that measure the level of inflation, any deviation of this number from the market consensus of 3% could affect rates. If it comes higher than expected, Treasuries will sell off and mortgage rates could edge higher. If it comes in lower, expect a rally for the bonds and therefore lower mortgage rates.
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