By: Mark Schieffer, CFA
EVP Chief Investment Officer
The May employment figures were soft and disappointing for the third consecutive month. Non-farm payrolls grew by just 69 thousand, compared to economist estimates of 150 thousand. The April report was revised downward by 38 thousand jobs. The relatively warm winter pulled demand and jobs forward, giving the U.S. economy more growth than expected in the first quarter.
European bank performance and sovereign debt worries continue to dominate the daily financial market news. While Greece is facing a new round of elections, which could determine their fate as it relates to the Euro currency, Spain and Italy, two much larger economies, are now finding it much more difficult to access capital markets. Central bankers and politicians are pointing fingers to decide who should do the heavy lifting to restructure regulation and/or recapitalize. All of this activity is leading to weaker Euro/stronger dollar, making U.S. exports relatively more expensive. Trade activity around the world is slowing, trimming marginal growth prospects of global and U.S. economies. I expect U.S. GDP growth to remain in the relatively low 2% range for the balance of 2012. The reality of the “fiscal cliff”, where the Bush tax cuts are set to expire at the end of the year and government spending is due to be cut dramatically beginning 2013, is beginning to get more focus in the press. With gridlock in Washington D.C. and a contested Presidential election, it may be difficult to avert the current course.
As a result, the likelihood of the Federal Reserve extending or expanding monetary stimulus has increased. U.S. interest rates are probably going to be “lower for longer” and Operation Twist, due to expire June 30, is likely to be extended and possibly enhanced to allow the Fed to buy mortgage-backed securities. There are a few voting members of the FOMC who have reached their puke point on providing additional stimulus, so any new boost will not be based on a strong consensus.
A couple of more positive thoughts: oil and gas prices have been on the decline recently. Gas prices are down 20 cents per gallon in the last 2 months and this should help to relieve some near term pressure on consumer spending. The housing market may be beginning to turn positive. Investors continue to snap up homes on the secondary market and builders are starting to increase construction. We’re now five years into the housing collapse/recovery and I expected this to last about seven years, so we’re much closer to the end of the terrible cycle.
The 2-year T-note yield is up 3 basis points in the last month to a current yield of .29%. Over the last eight months, this bellwether short-term safe investment has traded within a range of less than 20 basis points. However, the 10-year T-note yield fell another 20 basis points in the last month to 1.63% currently, after dropping to a historical low of 1.45% earlier in the month. Just three months ago, the 10-year T-note yield was 2.38% (75 bps higher). U.S. stocks fell another 2-3% in the last month on weaker global growth prospects and poor sentiment surrounding Europe.