A week that saw equities and bonds prepare for the first rate rise.

Equities had a mixed week particularly in the US as investors seem to be preparing for the first rate rise in 7 years. On Friday the latest non-farm payrolls number showed an increase of 295,000, higher than expectations, while the jobless rate fell from 5.7% to 5.5%.  Two-year treasury yields rose from 0.65% to 0.73%, suggesting bond markets are starting to bring forward interest rate expectations. We wrote on Friday that we believe at the next Federal Reserve rate setting meeting on the 17th and 18th of March, Janet Yellen will prepare investors for the first rate rise in June, after Friday’s data that outcome is becoming even more probable.  As inflation and interest rate rise expectations continue to be raised, it is going to be even more important that the economic data continues to beat forecasts.

 

We have also said recently we now believe the behaviour of bond markets will determine equity price movements in the short term, an orderly rise in yields should not spook equities too much but a sharp rise will.  This was clearly demonstrated on Friday as the fall in equities coincided with a fall in bond prices. What investors should bear in mind is that rates had to normalise at some stage and this should be seen in a positive light, as it should demonstrate a strengthening US economy.

 

The past week saw money continue to flow into equities particularly from the retail investors, according to Meryl Lynch. Retail investors are often considered to be the ones last to the party, and professionals often believe just as the music is starting to slow down. The Vix rose over the week closing above 15.

 

After the weak close in the US on Friday equities in Europe may start on Monday in a cautious mode. Sunday’s Chinese export data may help to mitigate some of the weakness as the custom department reported a 48% increase in exports to the rest of the world for the month of February year on year. Further evidence of a slow down in the Chinese economy imports fell 20%, also higher than expectations.

 

A slightly quieter week ahead in the US for economic data, on Thursday we get the latest retail sales data and then on Friday Michigan consumer sentiment. Demand in recent treasury auctions has been waning and on Thursday the US have a 30-year bond auction, with the recent fall in bonds this auction may be watched more closely.

 

There is little of any interest during the week in the UK; the main event will be on Tuesday, as the House of Lords Economic Affairs Committee will interview Mark Carney. On Monday in Europe we get the latest reading of the Sentex investor sentiment, hopes will be that the recent improvement in economic data in Europe will be reflected in an improvement in investor sentiment.

 

 

Posted on March 8, 2015 .