April 27. Bad Durables data….still a transitory slowdown?
–Another in a string of disappointing economic releases Friday, Durable Goods. Year over year ex-transportation was -1.9%. That’s a bad number. And so…yields went down, led by the reds in eurodollars, (red pack +3.75 bps), and by the five year on the treasury curve, -3.3 bps to 1.322. The ten year note fell nearly 3 bps to 1.916. Strength in US equities doesn’t seem to be diminishing the appetite for treasuries at this point. Indeed, January 2016 Fed Funds are at their high settlement for the year, 99.61 or just 39 bps, suggesting just one 25 bp hike in 2015. A friend of mine noted that even an extremely modest tightening pace of one hike this year and two in the first half of 2016 would put the funds target in a range of 0.75 to 1.00% and that a price of 98.885 (or 1.115%) on EDU16 (September 2016) appears to be way too high. This line of reasoning is logical and pervasive, especially in light of the fact that the Fed is overtly talking about lift-off. For example, Pimco is expecting the first rate hike this September. However, the Fed’s models have been lacking, their dot forecasts and projections of economic growth and inflation have constantly been revised lower. This week the BoJ is also expected to cut growth forecasts, and in the US, Q1 GDP and the FOMC announcement are on Wednesday.
–I suspect GDP will be a weak print. And we all know the reasons…bad weather, the west coast labor dispute that severely slowed port traffic, the decline in energy activity. Perhaps those factors are all in the rear view mirror now. But there still seem to be risks associated with Greece, and with China, etc.
–Treasury auctions 2, 5 and 7 year notes, Monday, Tuesday and Wed. New recent high Friday in 5/30 treasury spread above 129. The treasury curve has been reasonably well correlated with the price of oil. As time goes on, a slightly higher oil price will appear inflationary on a 3 and 6 month basis. But I think the long end of the market is starting to become more attuned to the possibility that inflation measures might perk up on several fronts, even if the economy is stagnating.
–Interesting article on ZeroHedge about LSU drawing up a possible bankruptcy plan due to budget cuts. http://www.zerohedge.com/news/2015-04-26/its-not-just-students-who-are-broke-lsu-draws-bankruptcy-plan
On the younger end of the age spectrum the obstacle is student debt. On the older end it’s health care and pensions…
