Prior Week Summary
Bond yields fell last week as fears of slowing growth and lighter-than-expected stimulus from the Bank of Japan increased the attractiveness of haven assets. The 10-yr Treasury fell roughly 11 basis points on a week-over-week basis, tightening the 2s10 spread to just above 79 basis points. Separately, The Commerce Department reported that second quarter GDP fell considerably below consensus expectations, growing at a 1.2% annualized rate. Market participants were equally disappointed by the negative revisions to 2015 GDP, showing a more pronounced slowdown in the final 3 quarters of 2015 than previously reported.
The FOMC left overnight lending rates at current levels at the July meeting, a move that was widely expected by the market. The committee left the the door open for a September hike stating, “Near-term risks to the economic outlook have diminished”. Fed Fund Futures reflected the FOMC sentiments and lackluster GDP growth, moving the possibility of a rate hike before year-end lower, to only 36%.
Alan Greenspan, former Federal Reserve Chairman, warned the bond market of the risks at current prices last week saying, “We get very nervous when the stock price index goes to high p/e, we ought to be somewhat nervous when the bond rate does the same.”
The Look Forward
All eyes will be on the non-farm payroll report scheduled for release on Friday. After two months of volatile job numbers in both directions, markets will look to see if job numbers stabilize.