Weekly Commentary - Labor data surprise market
U.S. equities suffered its worst fall over 2 months, as investors worry Fed will taper its bond-buying program soon. Strong economic data reinforced investor’s fears that Fed will act as soon as September. Last Thursday, the U.S. Labor Department reported a strong labor market data. Initial jobless claims decreased to 320,000, the lowest level since 2007. The number of unemployment-benefit claims reduced to 2,969,000 and unemployment rate fell to 7.4%. In addition to labor market improve, the report showed consumer price rose by 0.2% to 2% from a year ago.
After strong labor data released, bond prices fell and 10-year Treasury yield rose up to 2.755%. It may be a sign that markets are ready of tightening. In June, Fed Chairman Ben Bernanke said that the tapering timing depends on how the economy performs and he targeted jobless rate below 7% and inflation of 2%. Now, data shows improvement in U.S. economy, which they are 7.4% and 1.3% respectively. Some bankers suggest a compromise, which Fed should reduce the bond-buying program with a small amount at first in case the Fed’s overstate economy’s recovery. Of course, there are lots of ways of tapering, and the final decision will be made on September 17-18.
Over past 3 months, we kept looking for a significant signal of Fed start to reduce its program. While 10-year bond yield rose to its 2 years highest level, we expect Fed will act soon. In a cloudy period like this, equity market and bond market both are fluctuant and risky. In short term, we will take profit from U.S. market, and then we may weight back after collapse.
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