Broad Strength in Housing Helping to Mitigate the Risk of a Deeper Downturn
June 08, 2015 — The past week saw some volatility in global asset markets highlighted by another sharp leg higher in bond yields. Wednesday’s press conference with European Central Bank (ECB) President Mario Draghi was relatively uneventful but still managed to contribute to renewed volatility in global bond markets. Draghi dovishly reiterated that the ECB remains committed to completing its quantitative easing program and has yet to even discuss an exit strategy. He further explained that there is a long way to go to meet the ECB’s inflation target and noted a recent loss of momentum in some European economic data. That said, one press conference exchange in particular contributed to a breakout in German bund yields. For context, German 10-year bund yields rose to fresh 2015 highs on Thursday at 0.95%, up from near zero in mid-April. When asked if the ECB would act to tame the sharp rise in yields, Draghi responded with an unequivocal no and encouraged markets to get used to volatility as it is an inevitable byproduct of ultra-low interest rates.
Friday’s nonfarm payrolls report capped off a busy week for U.S. economic data. Following several months of disappointing job growth early in the year the labor market rebounded in a major way last month. According to the BLS report, the U.S. economy created 280,000 jobs during May and blew past consensus expectations for 225,000 new jobs. There was broad strength in most of the key metrics contained in the report. Importantly, wages showed signs of improvement with average hourly earnings gaining 0.3% on the month, ahead of expectations and up from 0.1% in the prior month. Year-over-year average hourly earnings gained 2.04% and reversed a recent downtrend. The headline unemployment rate did tick up slightly to 5.5%, but did so entirely due to a healthy jump in the number individuals entering the labor force by actively looking for jobs. March and April’s somewhat weak job creation was also revised higher by a total of 32,000 net jobs and total payrolls are now up 2.21% year-over-year, the fifth best gain since the 1990s. The solid jobs data added to the longest stretch of job gains in the modern economic history of the U.S. – a streak which does not appear at risk of ending in the near-term. The solid jobs report contributed to a surge in 10-year Treasury yields, which ended the week at the highest level since September.