By: Mark Schieffer, CFA
EVP Chief Investment Officer
The April employment figures were soft for the second consecutive month. Non-farm payrolls grew by just 115 thousand, compared to economist estimates of 160 thousand. The February and March reports were revised upward by about 50 thousand jobs. The relatively warm winter pulled demand and jobs forward, giving the U.S. economy more growth than expected in the first quarter. Now, it appears we’re in a bit of a lull domestically, coinciding with continued slowdown and recession conditions in many European economies. Retail sales in the first quarter finished strong, lead by a continued strong increase in auto sales. However, early indications for the second quarter are showing some slow down across the board. Oil and gas prices have been on the decline recently and this should help to relieve some near term pressure on consumer spending.
The housing market continues to grind through inventory issues. The cycle goes like this: 1. Sell foreclosed properties to cash investors, driving prices lower, but also reducing existing housing supply; 2. Cash investors rent said properties, then increase rents as rental vacancy rates are down to less than 9% (lowest in 10 years); 3. Investor demand increases to purchase foreclosed properties to turn into rentals; 4. Bank-owned properties hit the market to go back to #1; 5. Rinse; 6 Repeat. Home builders are now starting to get involved in this loop, with some new housing construction projects being dusted off to satisfy demand for new homes.
The 2-year T-note yield is down just 2 basis points in the last month to a current yield of .26%. Over the last seven 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 near record lows of 1.83%. This is a result of renewed “flight to safety” with European heads of state being replaced left and right. There is a lot of concern (valid) that all the recent austerity measures adopted by the old countries may be scrapped in favor of new government borrow and spend tactics. U.S. stocks fell 1-2% in the last month on weaker U.S. growth prospects, with GDP estimates downshifting from 3% to 2% annual growth rates.