Taper Tantrum 2.0 Dominates

Taper Tantrum 2.0, emanating from Europe rather than the United States continues to overshadow other developments. Yesterday, the yield on the 10-year German Bund pushed through the 50 bp mark that has capped the occasional rise in yields in recent months. The record of the ECB meeting was understood as indicating that the official assessment had surpassed the actual communication in order try to minimize the impact. Comments from the ECB’s Coeure seemed to point in the same direction. European bond yields are edging higher again today.  

US yields were dragged higher but still lagged behind the backing up of European yields. This resulted in a further compression of yield spreads and helped lift euro back above $1.14 (three-day high). The euro is in narrow ranges today near yesterday’s highs. The euro has approached the high from late June near $1.1445. If it cannot make a new high today, the technical indicators may look a bit toppish.  

There were two impulses from the US economic data. On one hand, the ISM non-manufacturing survey was stronger than expected at 57.4 from 56.9 in May. The Bloomberg survey showed a median forecast for a weaker report. It averaged 57.3 in Q2 after an average of 56.4 in Q1 17 and 55.8 in Q4 16. The non-manufacturing PMI averaged 54.9 in 2016. Forward-looking orders rose to 60.5 from 57.7. Also, the price paid moved back above the 50-level (52.1 vs. 49.7 in May). Prices paid did slip in the ISM manufacturing report. The combination of modest inflation in services and deflation in goods (especially consumer durable goods) is part of the underlying price dynamic that often is obscured by focusing on headline measures.

On the other hand, labor market readings disappointed.This included the ADP (158k vs. 188k median forecast in the Bloomberg survey) and the employment component of the ISM non-manufacturing survey (55.8 vs. 57.8). Weekly initial jobless claims rose for the third consecutive week. During the week of the national survey, weekly jobless claims, and their four-week moving average were little above levels that were seen during a similar period in May. The 19.3% drop in the Challenger jobs cuts stands as an exception to the generalization.