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Global Macro: Jobs Report Hits Bonds

Stocks in this article: RSP CORP SHY TLT TIP

NEW YORK ( TheStreet) - Employment data, released Friday, gave much needed direction to global financial markets that had remained range-bound and volatile since the Federal Reserve hinted at a premature end to its quantitative-easing program.

Bond markets reacted sharply to the news, pushing yields a few basis points lower. U.S. equities rose around 1%, and now through the use of intermarket analysis, we can take a closer look at the developing trends in fixed income.

The pair below is of S&P Equal Weight ETF (RSP) over Investment Grade Corporate Bond Index Fund (CORP). It measures investor sentiment on the current economic climate.

As equities raced higher in late 2012, U.S. stocks outperformed corporate debt, signaling strong investor sentiment. The pair briefly consolidated beginning around May 22, the day Fed Chairman Ben Bernanke testified in front of Congress, but has since rushed toward upper boundaries based on the view that the Fed will continue its stimulus efforts. Economic data remain light next week, giving this pair room to move higher.

The next pair is of Barclays 1-3 Year Treasury Bond Fund (SHY) over Barclays 20 Year Treasury Bond Fund (TLT). It measures the curvature of the U.S. yield curve.

Short-term Treasuries outperform long-term ones during times of economic expansion, resulting in a steeper curve. The chart below shows a consolidation of price action leading into the jobs data last week.


Although the pair looks to have broken higher above support, it is still somewhat suppressed, due to the gradual nature of the U.S. recovery. The curve will flatten when the end of monetary easing becomes more definitive, but until that point, the pair should drift higher.

The last chart is of Barclays TIPS Bond Fund (TIP) over Barclays 7-10 Year Treasury Bond Fund (IEF). The pairing signals inflation expectations.

As inflation has become less of a threat, commodities and export-driven economies, such as China, have shown profound weakness. The price action has also left some Fed officials proclaiming that stimulus efforts are a long way from being pulled, and the U.S. could see even more loosening in order to drive inflation higher.

European and Chinese inflation data will be released this week, but based on the pair below, the data may come out below expectations.

Central-bank easing across the world has aimed to defeat low inflation, but until growth in demand returns, investors have no reason to fear rising interest rates.

At the time of publication the author had no position in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Andrew Sachais' focus is on analyzing markets with global macro-based strategies. Sachais is a chief investment strategist and portfolio manager at the start-up fund, Satch Kapital Investments. The fund uses ETF's traded on the U.S. stock market to gain exposure to both domestic and foreign assets. His strategy takes into consideration global equity, commodity, currency and debt markets. Sachais is a senior at Georgetown University earning a degree in Economics.

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