Must-know: Why ECB’s rate moves cause Treasuries to increase

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Overview: Why the shift in ECB’s rate increases Treasuries (Part 1 of 5)

BLS releases non-farm payroll figures for May

Investors should pay special attention to indicators this June—data releases for the second quarter may have a lot to make up for after last week’s negative gross domestic product (or GDP) surprise. The second GDP estimate released by the Bureau of Economic Analysis, reported a 1% contraction in the U.S. economy in the first quarter. While the manufacturing sector keeps powering the recovery ahead, the consumption and housing sectors will have to come up to speed for the second quarter GDP to make up for the dismal first quarter. However, markets continue to believe that this will happen as the S&P 500 Index (VOO) and the Dow Jones Industrial Average (DIA) continued to scale new heights this week reaching all-time highs.

The Bureau of Labor Statistics released its non-farm payroll figures for May on Friday, May 6. Non-farm payroll additions in the month of May came in at 217,000—slightly ahead of consensus market estimates of 213,000. The unemployment rate stayed put at 6.3% and didn’t increase as many economists had expected. Most of the job additions took place in the private services sector, which increased by 198,000. Services sector companies include financial institutions like Wells Fargo (WFC). The S&P 500 Index (VOO) was up by 0.39% as at 10:08 a.m. EST.

Manufacturing indicators: Factory orders, PMI readings

In this series, we’ll analyze the economic data releases Monday–Wednesday. Among the manufacturing indicators, the Factory Orders report was released on Tuesday—orders increased 0.7% month-on-month (or MoM), ahead of consensus estimates. Other major manufacturing releases this week included the Institute for Supply Management’s (or ISM) and Markit’s Purchasing Managers Index (or PMI) releases—both releasing on Monday.

Both ISM and Markit, also released their respective survey readings for the services sector (referred to as non-manufacturing or services PMI) on Wednesday. We’ll be discussing the PMI reports in greater detail in the following sections.

Motor vehicle sales

Motor vehicle sales in May increased to a higher-than-expected 16.8 million units at a Seasonally-Adjusted Annual Rate (or SAAR). The May reading was even more surprising after the strong selling figures reported in March and April. Markets thought the selling rate in March and April was unsustainable and largely caused by the lure of sales incentives and a post-winter bump. It appears that it wasn’t just the weather and the discounts. Sales of vehicles made in the U.S. were especially strong, rising by 3.9% to 13.3 million (on a SAAR basis)—their highest level since January, 2006. Rates for car financing were slightly lower in May compared to April, which has been one of the factors spurring sales. Motor vehicle sales are a very important indicator for both consumer confidence and spending trends.

Gallup’s U.S. Economic Confidence Index (or ECI)

The ECI increased to -14 in May—its highest level this year. However, confidence figures trail the numbers reported in May, 2013, (-7). Increasing consumer confidence in the economy bodes well for consumer spending and GDP growth in the second quarter. We’ll be discussing Gallup’s U.S. Consumer Spending Measure, which released on Monday, in greater detail in the fifth part of this series.

Construction spending

Construction spending figures for April were released on Monday. Although construction spending increased 8.6% year-over-year (or YoY) and 0.2% over March, 2014, it was below market estimates, which had expected a 0.7% increase over March. A 0.8% increase in public construction spending was mainly responsible for the increase.

Retail sales

Both the ICSC-Goldman store sales and the Johnson Redbook reported YoY increases in sales at 3.1% and 3.5%, respectively. The positive sales releases were driven by warmer weather as well as the improving labor market and consumer confidence.

Fixed income investors have reason to cheer as ECB lowers rates into negative territory

Positive economic data is usually followed by an increase in yields for bonds. However, yields on U.S. Treasury bonds, which increased Monday–Wednesday, fell on Thursday, due to the European Central Bank (or ECB) taking its deposit rates into negative territory as part of a monetary easing package. This means that banks will now have to pay the ECB 0.1% interest to keep reserves with the ECB. In contrast, the Fed pays banks interest (currently 0.25%) on excess reserves maintained at the Fed.

The move comes as the ECB tries to stimulate lending and spur private investment. This factor spurred demand for U.S. Treasuries, resulting in falling yields and rising prices. The yield on 10-year Treasury bonds (IEF) fell by two basis points to 2.59%, while the yield on 30-year Treasury bonds (TLT) fell by one basis point to 3.44% on June 5.

In the next section, we’ll discuss the manufacturing and non-manufacturing PMI releases for May, issued by the ISM. Please continue reading the next section of this series.

Continue to Part 2

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