The outlook is for further declines in Treasury and high grade bond yields

While the April employment report was stronger than the markets feared, it was certainly not an indication that the US economy is on a vigorous growth path. Indeed, the US economy remains sluggish and even vulnerable to retrenchment in response to a delayed reaction to Federal  tax increases, sequestration, the financial burdens of health care costs and the slowing global economy. That combination promises a continued pattern of restrained inflation (with a persistent risk of deflation), weak commodity prices, and a continued easy Fed policy.

April nonfarm payrolls rose 165,000, only seemingly strong in contrast to the 88,000 rise (before subsequent upward revision) originally reported the prior month. The unemployment rate edged down to 7.5% from 7.6% in March, and not as in the prior month because of a 496,000 plunge in the labor force. But this is hardly a truly strong employment report. This is certainly not an impressive employment gain.considering that it is not even sufficient to meet the job requirements of a normal pace of new entrants to the the labor force. Moreover, the entire rise in  employment contributing to the decline in the unemployment rate was due to a rise in "self employment"-which is often a questionable description of reality.  The broader measure of the unemployment rate, U-6, actually rose to 13.9% in April from 13.8 % in March. And equally significant, there is also an array of  recent weaker economic reports .Average weekly earnings and the average number of hours worked both declined in April, a potentially significant development. Factory orders, a leading indicator, fell sharply in March to 467.3, from 486.8 the month before.  Durable goods order were particularly weak. suggesting business caution. This seems confirmed by a decline in nonresidential spending in March.  While GDP rose at a  respectable 2.5% annual rate in the first quarter, if  recent reports persist the pace of real GDP will be significantly slower in the current quarter. The realty is that the US economy can not be counted on to be the vigorous engine of global economic recovery that many expect it to be.. Except for Germany, all of Europe is either in or at risk of falling into recession. The unemployment rate in both Greece and Spain are at 27%, depression levels. With austerity mandated as the price of  financial assistance, no  imminent economic rebound appears likely in Europe. Japan's economic outlook  remains questionable, despite bold monetary stimulus. And China's estimated GDP growth, reportedly at about a 7% rate, and of dubious validity, is weaker than anticipated. Moreover, China has its own construction bubble that has yet to burst.  This combination will keep inflation subdued and central banks around the globe committed to an easy money and credit policy for an extended period of time. That will not lead to an inflation surge, if at all, for years and years to come .  There is too much of a gap between production demand and capacity, too many unemployed and too much required  further deleveraging of excessive reliance on debt. As a consequence there will likely be a continued downdraft of commodity prices, probably including gold after its recent run-up after India's buying runs its course.

And though it may seem hard to believe, long term US Treasury and other high grade bonds will continue to improve in price and decline in yield as there is increased market recognition that the outlook is for low inflation,or worse, weak economies, commodity price doldrums and persistent central bank easing.

Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square  #249
East Northport, NY 11731

This and earlier reports can be accessed at philipbraverman@blogspot.com