THE curious task of economics,” Friedrich Hayek once said, “is to demonstrate to men how little they really know about what they imagine they can design.” This certainly rings true when you consider Friday’s US 10-year Treasury yields rally. The release of January’s US non-farm payroll data jerked the market into action. But why it did so is more a matter of taste.
Eric Brittan, an economist at Fathom Financial Consulting, explains: “You have one of two options when it comes to interpreting the rally: the benign view that the US economy is getting stronger, so investors are selling their bonds to buy things that will make them more money such as commodities. Or the malignant view: you think the US economy is in real trouble.”
Lea Tyler, an economist at Oxford Economics, falls into the first camp: “The payroll numbers were a disappointment but I think people broadly think the economy is in better shape, inflation is well-controlled and there is plenty of slack in the system –that’s why people are selling bonds.” This, she explains, leads her to believe that bond prices will be biased towards the upside in the next quarter.
Brittan, however, probably falls into the second category, explaining that the US economy is structurally unsound: “The unemployment data disguises all kind of things. For instance, the US employment patterns used to be characterised by lots of churn – US workers could be made unemployed and then find another job within a few weeks. Now the average is 38 weeks unemployed.” He says this is worrying because many unemployed people fall out of the statistics since the US only provides unemployment benefits for 26 weeks.
Michael Hewson of CMC agrees: “The figures are a misnomer, I reckon the real unemployment figure in the US is closer to 18 per cent. Analysts are reading them wrong.” Still he thinks this means the rally could continue.
UNMOTIVATED AND DESKILLED
Brittan warns that reading the figures wrong can come at a high price: “When people are long-term unemployed they become unmotivated and deskilled, this is what happens in Europe when a financial crisis hits. America could be adopting European long-term unemployment patterns.” This is why, he explains, he believes Treasury yields will be range bound, even falling, in the next few quarters.
Most see yields continuing to rise, but Contracts for difference traders will need to tread carefully when interpreting the non-farm payroll data. In which camp do their allegiances fall? After all, even the best economists sometimes have to admit to uncertainty.