Monday, June 3, 2013
Although there are some signs that the U.S. economy might be starting to show some sustainable economic growth, the data outside of the U.S is much more precarious. On Friday, data on Germany's (the EU's largest economy) retail sales for April came in worse than expected, falling by 0.4% vs. expectations for no change last month. This comes on the heels of a Euro zone unemployment rate of 12.2%: which is the highest level of unemployment since this data was collected back in 1995. Slowing growth expectations in China, Australia, and Canada, as well as Japan's struggles to revive its moribund economy seem to project more headwinds to global economic growth than can be overcome from moderate improvement in U.S. growth.
Although recent economic data has been mixed as to the extent of strength in the U.S. economy, U.S. Government Bond traders appear to be looking at the bright side of economic reports, with expectations that the Federal Reserve will begin to curtail its bond buying binge sooner rather than later. This view coupled with rising equity markets has sent Bond yields higher in May. A good example of how market sentiment has shifted occurred this past Friday. U.S. Treasury yields initially fell to start the session on Friday, as disappointing data on 1st quarter GDP and higher than expected jobless claims announced on Thursday were followed by weaker than expected data out of Germany and the Euro zone. However, Bond price gains were quickly erased once the Chicago ISM data was announced. Here the data was surprisingly upbeat, with the purchasing manager's index for May rising to 58.7, vs. 49 in April. This figure was sharply higher than the 50.3 reading many analysts were expecting. This data overshadowed more subdued data on personal income and consumer spending, which came in slightly lower than expected. The yield on 10-year Notes rose nearly 50 basis points in May alone, as traders do not want to be left holding large amounts of government debt should the Fed finally start to ease back on its Bond purchases. Friday's Bond market volatility may have been enhanced by repositioning by fund managers who may be shifting more into equities and away from fixed income due to the lopsided performance in favor of equities the past several weeks. Looking ahead this week, we have a slew of economic data, including the ISM Manufacturing (49.5 est.) and Non-Manufacturing (52.5 est) Index readings for May, Construction Spending (0.5% est) for April, and the always highly anticipated but prone to revisions data on Non-Farm Payrolls (+170K est) for May to cap the week on Friday. Given the recent history of economic data, we should probably expect more conflicting readings regarding the strength of the economy and certainly test Bond bears' resolve to continue to sell U.S. Treasuries despite the possibility that the Fed may remain cautious and not begin to withdraw stimulus until most, if not all, of the economic data confirms solid -- perhaps more importantly --sustained growth for the U.S. economy, which may not come for many weeks, or even months into the future.
Looking at the daily continuation chart for 10-year Note futures, we notice if we draw a trendline from the major lows made back in the early summer of 2007 to the present, prices are still holding about 4-full points above this line. This gives room for yields to increase further, but still not threaten the uptrend that has been in place for nearly 6 years. The 14-day RSI has moved into oversold territory, with a current reading of 29.174. Chart support is seen near the November 2011 low at 127-06, with resistance found at the 200-day moving average, currently near the 132-16 price level.
Mike Zarembski, Senior Commodity Analyst