The US equity market and Treasury yields continue to gain momentum

Market Realist

A must-know weekly update on the US Treasury bills (Part 1 of 4)

Manufacturing and consumer spending rise, jobless claims ease off

J.P. Morgan released a very important global economic indicator last week signaling contraction in the U.S. and Japan services sectors offset by the growth in the Global Manufacturing Purchasing Managers’ Index. Both the countries have suffered from the bad weather conditions. Released on March 5, 2014, the Global PMI was down at 52.5 levels from 53.9 levels reported on February 5, 2014.

The United Kingdom remained a real bright spot among the service and manufacturing sectors covered by the survey. Euro zone, despite the turmoil in Ukraine, also showed some recovery in the service sector. China’s manufacturing sector remained weak while its service sector saw a modest growth.

Despite a slow growth in the service sector, the U.S. motor vehicle sales were solid at a 15.3 million units in February 2014, versus 15.2 million units and 15.4 million units in the prior two months. Markit U.S. Manufacturing Sample Index reported a sharp upturn in the U.S. manufacturing sector during February 2014, at a composite 57.1 level from 53.7 level in January 2014.

Initial jobless claims fell to a very sizable 26,000 level in the week eneded March 1 to a much lower-than-expected 323,000 level. Monthly consumer spending reported by Gallup rebounded to its peak since 2008 levels to an average $87, after a sharp post-holiday decline to $78 in January 2014.

Treasury yields moved northward

The Treasury yields across maturities ranging from one-month to 30-year periods gained last week on account of better-than-expected economic indicators. The U.S. 10 year Treasury yield was about 14 basis point up. Other things being constant, increase in the Treasury yields causes bond prices (BND) to fall. However, stock market perceives rise in the interest rate as a sign of improved economy, which indicates high corporate profits and healthy share price growth.

S&P 500 earnings releases

S&P 500 Index was up by 100 basis point last week as corporations continued to beat the market analysts’ earnings expectations. Last week’s surprises came from Staples, Inc. (SPLS), Joy Global Inc. (JOY), and Costco Wholesale Corporation (COST), who reported higher earnings per share than estimated. Staples, Inc. (SPLS) is a large office supply chain store with over 2,000 stores worldwide in 26 countries, while Joy Global Inc. (JOY) is a world leader in mining equipment services. Costco Wholesale Corporation (COST) is a leading warehouse retailer with a market capital of $50.3 billion.

Positive earnings triggered the performance of the SPDR S&P 500 ETF (SPY), which was up by 1%. SPDR S&P 500 ETF (SPY) measures the performance of the 500 largest U.S. firms including the likes of Apple (AAPL), Exxon Mobil (XOM), and General Electric (GE), and its considered to be one of the best representations of the domestic economy.

Investors who wish to tap the interest rate growth in the U.S. Treasuries may consider a blend of short-term and long-term government trading equivalents including iShares Barclays 20+ Yr Treasury Bond (TLT) and SPDR Barclays Intermediate Term Treasury (ITE). Last week, the U.S. Department of Commerce issued $110 billion short-term Treasury bills.

Continue to Part 2

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