Economic Insights - April 2015

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There are geopolitical uncertainties buffeting the global economy, but the moderate volatility levels seen recently in equity markets indicate that most decision-makers have built those challenges into their plans.

However, investors and many business professionals remain obsessively fixated on much smaller factors primarily related to the U.S. economy. That is why we have seen the stock market repeatedly sell off in the face of upbeat news.

Consider the sell off on March 6, when job creaftion was stronger than consensus expectations in February, representing the fourth consecutive month of upside surprises in payrolls.

This was a shock to many who expected unusually rough winter weather in February to hold back job growth. According to NOAA, a population-weighted measure of how cold it was around the country (called heating degree days) it was the coldest February, for the most people, since 1979.

Because even this year’s Polar Vortex couldn’t stop job growth, many analysts who had thought the Federal Reserve would hold off on rate hikes finally realized that a June rate hike actually makes sense. So, the way it turned out, good news for the economy was bad news for equities and bond prices.

Good news for the economy should have sent bond yields higher. Based on real

GDP growth and inflation, the yield on the 10-year Treasury note should already be around 4 percent. So, as expectations for Fed rate hikes solidify, the entire yield curve will trend higher in the years ahead.

However, this employment news indicates that the economy continues on its slow-but-steady course and that the bull market remains intact. Admittedly, the Fed has focused primarily on the job market and set a high bar for rate hikes. And, it now looks like the economy is clearing that bar.

This is a reason for equities to move higher, not lower.

Nonfarm payrolls were up 3.3 million from a year ago, the fastest pace since 1999-2000. And although average hourly earnings were up only 2 percent compared to a year earlier, the increase in hours — from more people working and longer workweeks — means total cash earnings were up 5.3 percent.

So, with consumer prices falling in the past year due to the large drop in energy...

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