Putting the Cart before the Horse
It’s all about the data, with the jobs report being front and center. But what happens when the data doesn’t fit into the Treasury (UST) market’s narrative? We’ve gotten a glimpse of this recently, so here are some observations.
While the employment data is no doubt the “leader of the pack” for the money and bond markets, investors also received a stronger-than-expected report on manufacturing last week. The ISM Manufacturing Index rebounded in March, led by gains in the areas of new orders, production, employment and prices. The result is that the overall gauge remains safely in the expansion column.
Back to the March job numbers. The headline nonfarm payroll number came in measurably above consensus: +196,000 vs. +177,000, which, in my opinion, makes last month’s revised +33,000 an anomaly instead of the beginning of a new downward spiral. There was nothing new on the unemployment rate front, with the jobless rate staying at 3.8%. The key takeaway is the fact that the unemployment rate is still under the 4% threshold.
As I’ve noted before, the average hourly earnings figure deserves some attention as well. Wages posted a year-over-year gain of +3.2%, down 0.2 percentage points from the prior month. I won’t bore you with the details, but this modest deceleration just looks like a little breather from February’s robust performance. More importantly, wages have now produced eight straight months of year-over-year gains with a “3” handle—the first time since 2008/2009.
So, how’s the UST 10-Year faring in all of this? The Relative Strength Index (RSI) may be my new favorite bond market gauge. Only about two weeks ago, I blogged that the RSI was signaling an overbought condition. Since hitting an intraday low of 2.34% on March 27, the UST 10-Year yield has risen almost 20 basis points (bps) and has moved back over the 2.50% threshold, as of this writing.
Fed Funds Futures (my least favorite gauge) are now getting close to removing a rate cut for this year and only one, not two, rate cuts for 2020. For the record, this back-and-forth pattern is why it’s my least favorite market gauge. At this stage of the game, I still see Q1 as being the trough in economic activity and do not foresee a rate cut in 2019.
To borrow, or perhaps alter, a quote from the famous fixed income strategist Ferris Bueller, the bond market moves very fast; if you don’t stop and look at the data once in a while, you could miss it (Fed rate call). Against this ever-changing macro backdrop, I feel bond investors should focus on yield-enhanced core strategies, complemented with short-term government floating rate Treasuries.
Unless otherwise stated, data source is Bloomberg, as of April 8, 2019.
As part of WisdomTree’s Investment Strategy group, Kevin serves as Head of Fixed Income Strategy. In this role, he contributes to the asset allocation team, writes fixed income-related content and travels with the sales team, conducting client-facing meetings and providing expertise on WisdomTree’s existing and future bond ETFs. In addition, Kevin works closely with the fixed income team. Prior to joining WisdomTree, Kevin spent 30 years at Morgan Stanley, where he was most recently a Managing Director. He was responsible for tactical and strategic recommendations and created asset allocation models for fixed income securities. He was a contributor to the Morgan Stanley Wealth Management Global Investment Committee, primary author of Morgan Stanley Wealth Management’s monthly and weekly fixed income publications, and collaborated with the firm’s Research and Consulting Group Divisions to build ETF and fund manager asset allocation models. Kevin has an MBA from Pace University’s Lubin Graduate School of Business, and a B.S in Finance from Fairfield University.