Gross domestic product grew at a 2.2 percent annualized rate in the second quarter, compared with an initial estimate of 1.7 percent released July 31, according a Bloomberg survey before tomorrow's Commerce Department report. Initial jobless claims fell by 5,000 to 331,000 last week, a separate survey showed before the Labor Department data also tomorrow . U.S. employers added 170,000 workers this month, and the unemployment rate held at 7.4 percent, according to economists surveyed before the Labor Department report on Sept. 6 .
“The focus is already shifting to the payrolls number,” said Tony Morriss, head of interest-rate research at Australia & New Zealand Banking Group Ltd. in Sydney. This is “important in shaping expectations not only of the taper in September, which almost looks to be a done deal, but on projecting when the Fed might have sufficient confidence in the recovery to eventually lift short-term interest rates.”
Eoin Treacy's view Mortgage REITs, municipals, high yield bonds
and other vehicles that have been the target of carry trades, speculative flows
and those seeking to profit from QE have pulled back sharply as the prospect
of Fed tapering forced a reassessment. This has achieved at least some of what
the Fed had intended from tapering in that credit has been re-priced.
The market is now weighing whether the strengthening of the domestic US economy is likely to be counterbalanced by the threat of wider unrest in the Middle East from airstrikes on Syria. Let's look at some of the more relevant charts:
US 10-year yields have doubled in the last year and have at least paused below 3% over the last few weeks. However, a break in the progression of higher reaction lows, currently near 2.6% would be required to begin to question medium-term supply dominance. Canadian yields have a broadly similar pattern.
The Merrill Lynch US 10-year Treasury Futures Total Return Index failed to sustain the breakout to new all-time highs in May and pulled back to test last year's low near 1900. This is the first time in at least the last decade that the Index has pulled back into the underlying range; representing a trend inconsistency. A bear market will be confirmed if it encounters resistance in the region of the 200-day MA on the next significant rally and subsequently drops to new reaction lows, creating a downtrend.
On a commonality basis: UK Gilt yields continue to extend the break above 2.5%. German Bund yields completed a yearlong base this month and while there is room for some consolidation, a sustained move below 1.75% would be required to begin to question potential for additional expansion. Swiss 10-year yields appear to be in the latter stages of forming a first step above their yearlong base. Australian 10-year yields have a similar pattern. Japanese yields spiked higher earlier this year and while the rate has contracted somewhat, the benefit of the doubt can continue to be given to potential for additional upside over the medium term. While the majority of commentary focuses on the larger debt markets it is also worth pointing out that Singaporean 10-year yields have surged higher over the last three months to retest the 2010 and 2011 peaks.
The Syrian situation has the capacity to instil additional volatility and demand for a safe haven. However, the broader macro environment reflected in the above charts suggests that government borrowing costs are likely to increase further.