Stocks and Bonds Fall

June 8, 2015

Stocks and Bonds Fall Photo

Stocks and bonds fell in price last week, driven by continued brinksmanship in Europe regarding Greece's financial situation, rising German bond yields and a strong May employment number. I expect the situation in Greece to continue without a resolution until late June. The Greek decision to bundle and defer its June payments to the International Monetary Fund (IMF) sets up a final showdown over the next few weeks. This is only the second time in the last 30+ years that a country has taken this approach.

May's employment report was strong from almost every perspective. The 280,000-job gain in non-farm payrolls exceeded the consensus estimate of 225,000, and prior payroll reports were revised higher by 32,000. Average hourly earnings increased by a robust 0.3%, pushing the annual growth rate up to a two-year high of 2.3%. The unemployment rate rose by 0.1% to 5.5% and was driven by an increase in labor force participation of 397,000. The strong job market is pulling people back into the labor force.

Given the strengthening economic data, I feel more convinced that the Fed will increase interest rates at its September meeting. In this environment, I expect:

  • The selloff in stocks and bonds to continue in the weeks ahead,
  • 10-year Treasury yields to test 2.50% over the next few weeks and possibly sell-off to 3.00% this summer, and
  • Stocks, as measured by the S&P 500 Index, to test support at 2,040 over the next few weeks, with downside during the summer to 1,950.

Tags: Monday Morning O'Malley | Bonds | Stocks | Germany | S&P 500 | 10-Year Treasury | Employment numbers | Greece | International Monetary Fund (IMF)

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