Last week ended on a sour note with a weaker-than-expected August jobs number. But while disappointing, as I write in my new weekly commentary, last week’s number is not necessarily indicative of a softening U.S. economy.
First, we shouldn’t put too much weight on the weak August numbers. As my colleague Rick Rieder pointed out in a recent post , August’s modest print was mostly a reflection of seasonal weakness and is likely to be revised higher. In addition, while the labor market still faces structural headwinds, average monthly non-farm payroll gains are above the 200k level, consistent with a decent economic expansion.
Meanwhile, outside of the jobs report, other U.S. economic releases are painting a consistently positive picture of the domestic economy. In the latest ISM manufacturing survey, new orders reached their highest level since 2004. And the service component of that survey hit a nine-year high. Finally, the rate-sensitive auto sector recently witnessed a surge in annualized auto sales to 17.45 million, the best level since early 2006.
In short, while the U.S. economy certainly still has structural issues, most cyclical factors suggest that the economy should be relatively strong through year end.
So what does this mean for investors? There are three main takeaways: upward pressure on short-term rates, a stronger dollar and continued pressure on commodity prices.
Given the economic landscape, the short end of the yield curve is most vulnerable to rising rates. Long term rates have remained relatively contained (although they did rise 10 basis points (bps) last week. The lack of volatility in longer-term Treasuries is partly a function of the collapse in yields in Europe and much of the developed world.
But while long-term yields have been stable, short-term rates have been steadily grinding higher. While still a bit off of their July highs, 2-year yields are nearly 25 bps above last fall’s lows. As such, I continue to believe that investors should exercise caution on the 2-5 year portion of the Treasury curve.