Markets at Milestones – Ahead of Wall Street

ZacksWednesday, December 24, 2014

Stocks are on track to continue the 5-day winning streak into today’s abbreviated trading session. The post-Fed meeting rally has pushed the major indexes into milestone territory, with the Dow Jones index adding more than 900 points in 5 days. This morning’s positive Initial Jobless Claims reading should help sustain the positive sentiment, though volumes will be thin ahead of the holiday.

Bonds reacted in the opposite direction to the +5% GDP report, by pushing yields higher — the yield on the 10-year bond jumped almost 10 basis points on Tuesday. This could be interpreted as the bond market’s reaction to the economy finally graduating to a sustained above-trend growth. After all, the outlook for the U.S. economy has steadily been diverging from what is expected elsewhere in the world, with all key regions of the world struggling to achieve growth. It is this growth divergence that is behind the monetary policy divergence between the U.S. and its trading partners and that is pushing the exchange value of the dollar.

But a one-day jump in yields is no sign of a new trend – it could very well be just noise. After all, the treasury bond market is no longer just reflective of U.S. economic fundamentals – it is a truly global asset class. Treasury bonds have been defying predictions for some time. The yield on 10-year bonds started 2014 at around 3%, with Wall Street brokers expecting it to reached 3.5% by now.

Having seen what happened to their predictions this year, the big brokers are playing it safe. According to the Wall Street Journal, J.P. Morgan (JPM) is forecasting the 10-year yield to reach 2.7% by year-end 2015, while Bank of America (BAC) and Goldman Sachs (GS) expect the 10-year yield to reach 2.75% and 3% by then.

The synchronized momentum in the stock and treasury bond markets this year has been dichotomous. But I suspect that we wouldn’t be seeing any material shift in this trend in the near term, at least.

Wishing you all a Merry Christmas.

Sheraz Mian
Director of Research

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