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Strong US Jobs and Budding Inflation Spook Bond Markets

PantagesBond markets are selling off across the globe, especially in Europe where rates had been pushed down to all-time lows. The German 10 year bund yield closed Friday at 0.86% after touching 0.99% on Thursday morning. Analysts suggest comments by ECB President Mario Draghi who said “markets should get used to rate volatility” were the catalyst. But the truth is rates were just unsustainably low having reached 0.05% on German bunds in mid-April.

US bonds sold off as 10 year Treasury yields climbed almost 30bp to end the week at 2.41%.

ISI notes that “with oil up 35% from its January lows, deflation around the world has come to an end.” Inflation is coming in around 3% on an annualized basis over the past four months in Europe and the US.  Granted this is mainly a rebound in oil prices but it does help explain the recent backup in bond yields.

Add to this mix a strong US employment report out Friday. ISI again: “May’s headline employment was better-than-expected at +280,000 and the prior two months’ gains were revised up +32,000. The unemployment rate was the one fly in the ointment and rose to 5.5% with the participation rate edging up 62.9%.  Average hourly earnings are accelerating.  They rose 0.3% in May after April’s gain was revised up to +0.2%.   Over the past year they are up 2.3%.The leading components of this report were solid for prospective job growth over the next few months.” Other economic data this week including car sales and the Fed’s Beige book report were healthy. Good for stocks, bad for bonds.

Meanwhile the IMF cut its forecast for US growth (to 2.5% from 3.1%), said the dollar was moderately overvalued  and lectured the Federal Reserve that it should not raise rates this year until there are greater signs of wage and price inflation. The Fed meets June 16/17. APCM bond manager Bill Lierman still expects a rate hike in September.

The S&P 500 ended the week at 2093, down -0.7%. Most international equity markets sold off as well. The Euro Stoxx 50 lost -1.7%. Japans Nikkei index fell -0.5%.

Chinese stocks were particularly volatile losing 5.3% early Thursday before ending up 0.8% that day. For the week the Shanghai gained almost 9%. It is up an astonishing 55% ytd.

Greece announced it would delay a €300m payment to the IMF due today, becoming the first country to employ a rarely-used IMF rule to bundle monthly debt payments since Zambia in the 1980s. The new “deadline” for a deal between Greece and its creditors is now June 30 as the can gets kicked down the road again.

FT: “OPEC delegates said the cartel would keep its output level unchanged at 30 million barrels a day, the second time in six months it has decided to take no action amid a global glut of crude and weak oil prices.” Oil lost a buck this week with WTI settling in at $59 at the close.

Our friends at FNB Alaska have shared this link to a detailed report on employment trends in Anchorage. The unemployment rate here is 5.3% compared to 5.4% for the US and well below the 6.7% rate for Alaska as a whole.

The summer Alaska Baseball League begins next week. College players from the Lower 48 will be here for two months, playing almost every day, and testing their skill using wooden bats. The Eagle River Chinooks kick things off Tuesday when they host the Mat-Su Miners. The Kenai Oilers play the Fairbanks Goldpanners on Thursday. The BUCS play the Pilots here in Anchorage at Mulcahy at 7 pm next Friday. 

Jeff Pantages, CFA®
Chief Investment Officer

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