Flattening Yield Curve Signaling Slowing Economic Growth?
Today’s Spotlight Market
Traders may need to scale back their expectations slightly for November job creation as the widely watched ADP National Employment Report showed that 208,000 private sector jobs were created. This was below the consensus estimate of 225,000 jobs. Small businesses created the bulk of new jobs last month, with a gain of 101,000 jobs according to ADP. The important manufacturing sector was responsible for 11,000 new jobs and the construction industry showed a solid increase of 17,000.
Fundamentals
While there are signs that the U.S. economy continues to improve, those analysts and traders who follow the interest rate markets are starting to see some indications that some headwinds are forthcoming. One clue is how the U.S. Treasury yield curve is performing.
Market participants are seeing the yield curve, which is the interest rate difference between the 5-yr Notes and 30-yr Bonds, narrow to levels not seen since 2008 and most of us remember what happened to the global economy back then. A flattening of the yield curve could be an early signs of a slowing economy and in fact, recent data on wage inflation shows little to no growth in workers? wages, which could hurt consumer spending. Low inflation may also cause the Federal Reserve to further delay raising interest rates which would be bullish for U.S. interest rates.
Traders will turn their focus to this morning?s employment data, featuring the always highly anticipated Non-farm payrolls report and unemployment rate. The current forecast is for an employment gain of 230,000 new jobs in November, with the unemployment rate expected to hold steady at 5.8%. Astute traders will be analyzing the non-headline figures such as average hours worked, hourly earnings and the so called ?U6? employment rate for further clues to how the employment picture actually appears to most workers.
Technical Notes? -? View Today’s Chart
Looking at the weekly continuation chart for 5-yr Note futures, we notice that the uptrend line that has been drawn from the 2007 lows has been broken with prices now consolidating below this major trend-line, as well as hovering below the 200-week moving average. This shift in trend is likely due to the perception that the Federal Reserve will be raising rates some time in 2015. Shorter-term treasury maturities are more sensitive to changes in short-term interest rates, which is a key factor in the recent flattening of the yield curve. The recent consolidation pattern has allowed the formation of some fairly clear support and resistance levels. With support found at the consolidation pattern low of 117-21, with resistance seen at the consolidation high of 122-22.5.??
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