Market Commentary

As expected and as evidenced by recent data
April 06, 2010

As expected and as evidenced by recent data the recovery is gaining momentum and I think there is a chance first quarter growth could be around the 4.25%-4.5% range.  As noted several times and as per JP Morgan Asset Management the economy rebounds and average of 5.2% in the 12 months following the end of a post WW II recession.  As per the Council of Economic Advisors the GDP expands an average of 4.5% for the 24 months after the recession ends.

Since the recovery commenced on July 1, 2009, the economy has expanded at an annualized annual rate of 3.9%...2.2% and 5.6% for the third and fourth quarter, respectively.  While anticipated growth is below the average annual recovery rate, the expansion is considerably stronger than most had anticipated even as little as two months ago.

Moreover the possible annual growth rate [3Q09-2Q10] of 4% is two times greater than the 2% average annual rate of the last 10 years.

A consequence of this growth is higher treasury yields.  In my view the treasury bear market that began in January following the release of that month’s surprisingly strong labor report is a cyclical decline that will probably morph into a secular bear market.

It is evident the economic data since the January labor report has overshadowed the FOMC’s reiteration to keep the federal funds rate target anchored between zero and 0.25%  for an “extended period”.  Many regard an “extended period” as about six months and given that we are now in April, it suggests at least August before the Fed alters monetary policy.

I ask however, is not the treasury market suggesting the Central Bank is falling further behind the proverbial inflationary curve.  And if this is indeed the start of a secular bear treasury market, will this monetary inaction unanchor inflationary expectations, the result of which could be horrific given the huge expected supply of government debt?

Recent treasury data support the rise in rates is a function of waning demand as the dollar inflows into treasuries have been negative seven of the last eight weeks by an average of $6.9 billion.  The only positive week was the one ended February 26 and that was marginal at best…$0.1 billion. 

Yesterday the 10-year treasury broached 4.0% for the first time since August 6, 2008.  The reason…stronger than expected growth.

Commenting briefly about equities, stocks posted a moderate advance buoyed by stronger than expected housing and non manufacturing service data.  The latter expanded by the greatest amount since May 2006 indicating possible employment growth in the service sector.  The former—pending home sales—had the biggest gain since October 2001.

What will happen today.

Last night the foreign markets were up.  London was up 0.61%, Paris up 0.51% and Frankfurt up 0.26%.  Japan was down 0.50% and Hang Sang up 1.40%.

The Dow should open nominally lower as some believe equities are over extended and are due for a interest rate/earnings driven correction.  The 10-year is up 8/32 to yield 3.95%.