Review and Preview
Ted Wieseman, Economist, Morgan Stanley
Treasuries ended the past week mixed, with modest gains along much of the curve, but small losses at the long end. There were significantly better gains across the curve through midday Friday, as investors scaled back their expectations for the economy and reversed most of the post-FOMC hawkish repricing of the Fed, responding to dovish comments from Fed Chairman Bernanke and a continuation of the run of mostly sluggish economic data since the FOMC meeting. Gains were partly reversed Friday afternoon, however, when month-end buying from index extension and stock to bond asset reallocations didn't materialize as expected, and position lightening and moves to reset some shorts after a lot of short-covering into Thursday added to a supply overhang from the week's 3-year, 5-year and 7-year auctions. There was some reversal as yields rose Friday, but a substantial further scaling back of the post-FOMC meeting hawkish Fed repricing was seen during the week. The futures market is still pricing an earlier start to Fed tightening than the reiterated FOMC statement guidance for no change in rates until at least late 2014, and the pricing is still somewhat more hawkish than before the FOMC meeting on March 13, but there's been a significant dovish shift in the past week-and-a-half. Chairman Bernanke's Monday speech on "Recent Developments in the Labor Market" didn't necessarily indicate more likelihood that the Fed might announce additional easing measures in coming months, which we think is likely but data-dependent. But his cautious assessment on the sustainability of recent labor market improvement and his sense of urgency in getting the long-term unemployed back to work before they become structurally unemployed provided clear implicit pushback against the market's move after the FOMC meeting to price an early shift towards Fed tightening.
A ray of light, at last!
Roger Josefsson, Senior Analyst, Danske Bank
Sweden has performed very well in the cyclical rebound in the wake of the Great Recession. Annual GDP growth in 2010 and 2011 averaged almost 5% y/y while the unemployment rate fell by more than 1.5 percentage points.Looking ahead, Danske’s optimistic view on the global economy rests primarily on continued strong growth in the Americas and Southeast Asia. However important, these economies only account for a minor part of Swedish exports, whereas around two-thirds of exports go to the sickly European economies.
Renormalization of Rates
John E. Silvia, Chief Economist, Wells Fargo
For some time, we have argued that the current benchmark Treasury rates were arbitrarily low given the aims of U.S. monetary policy, the flight-to-safety trade tie to the European sovereign debt situation and cautious expectations on economic growth. In recent weeks, all three factors have moved our way and rates are at a more normal level, but low, compared to our expectations on growth, inflation and monetary policy.
U.S. – Sticker Shock
Chris Jones, Economist,TD Bank Financial Group
There were few surprises in the Fed minutes this week. The Committee re-iterated its support for hyper-stimulative monetary policy while effectively silencing hopes for another round of asset purchases. Although QE3 is off the table for now, the Fed does not necessarily think the economy is in for smooth sailing.
Compiled by David Song, Currency Analyst