Financial Markets Update
Disappointing Jobs Report Raises Fresh Doubts About Outlook For Growth; Pours Cold Water On Early Fed Rate Increase
In his most recent Market Comment, WellsCap Senior Economist Gary Schlossberg, looks at the implications of the pervasively weak May jobs report.
As Gary sees it, the dismal early-June data raises fresh questions about the outlook for "risk" vs. "safe-have" assets. Moreover, the disappointing data corroborates the slow-growth warning flashed by a "flattening" yield curve - a narrowing spread between shorter- and longer-term Treasury securities' rates. As Gary points out, in the first week of June, the spread between two- and ten-year securities had shrunk to less than a percentage point - the lowest spread since late-November 2007. Not coincidentally, the eve of the last recession.
Notwithstanding the fact that yield spreads have a strong predictive track record for the economy - so much so that it is included in the Conference Board's index of leading indicators - a couple factors in this cycle could distort the yield curve - economy link:
- Secular disinflation and strong foreign demand for Treasury securities account for most or the yield spread narrowing; and
- Historically low net interest margins have not prevented a recovery in bank lending.
Investors may be leery of rotating back to risk assets this time if inflated asset values in a slow-growth, low rate environment leaves them once again exposed to a U-turn in the interest rate and dollar outlook.
Gary's complete Market Comment can be accessed here.