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Leveling the Playing Field September 8, 2014

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How long before Urban Meyer retires for health reasons, only to pop up in a year or so
when the Texas job is open? Last weeks newsletter was entitled If Ukraine, then X.
Perhaps the same could apply to Big Ten football. If Opponent Ranked, Then Loss. Or,
If Opponent from Blacksburg, Then Loss. Or, If Saturday, Then Loss.

Along those same lines, our streak of never ever being wrong continued last week when a
cease-fire in Ukraine caused 10 year Treasury yields to spike 0.11%. This trumped the
mildly disappointing job data on Friday, where August added just 142k jobs the lowest
since January.

This breaks the previous six month average of 240k jobs gained per month, but the
economy is still averaging 226k per month and August NFP has been historically volatile.
Heres why the report isnt quite as bad as the headline print may suggest:

- Long term unemployment declined from 32.9% to 31.2%
- Median duration of unemployment declined from 13.3% to 13.2%
- Involuntary part-time unemployment declined from 4.81% to 4.67%
- Average hourly earnings increased by 0.2%
- Unemployment rate declined from 6.2% to 6.1%

We dont think the job reports changes the Feds path for rates hikes; in fact, a report like
this is precisely why Yellen preaches patience. It probably keeps the likelihood of a
spring hike at bay but the Fed would need several consecutive months of weak job data
before shifting expectations for a mid-2015 hike.



Steepening Yield Curve

The effect on interest rates was a steepening curve. Front end rates, driven by
expectations for Fed rate hikes, moved lower. The market backed out the probability of a
hike in March 2015 and this is unlikely to move again until the September 17
th
FOMC
meeting. This should help make caps a bit cheaper in the near term.

The long end moved higher, unshackled from an escalation in Ukraine. We view this as a
short-term correction and not a trend, however, as that situation can deteriorate quickly.
On Friday afternoon, President Obama expressed concern over the ceasefire and a sudden
reversal on that front could bring the classic flight to safety into play and push long term
US bond yields lower. 10yr Treasurys should encounter significant resistance around




2.48%, so we dont think yields are going to run substantially higher for now with
Ukraine still unresolved and the European markets offering substantially less yield than
US bonds.

Im Irish, so I like to pick on Irelands 10yr sovereign bonds as a comparison to US
bonds. In May, Irish 10s were yielding around 2.40%, comparable to US yields. Thats
insane, but entirely attributable to the ECB backstop of eurozone debt. Investors dont
view it as buying Irish bonds, they view it as buying ECB bonds. On Friday, Irelands
10yr bonds closed at 1.65% - 0.80% below US bonds. Would you put money into Ireland
at 1.65% or US at 2.40%? Exactly. And every time US yields tick up, they become that
much more attractive relative to the alternatives and the result is a lid on US interest
rates.


Bottom Line we would expect long term interest rates to remain range bound, with the
10yr Treasury trading between 2.34% - 2.48% until we get greater clarity around Ukraine
and whether or not Michigan can score a single point.

This weeks data calendar is relatively light, so global developments will take on even
more significance for the long end of the curve. Front end rates are probably anchored
until the FOMC meeting in two weeks.






















Economic Data
Day Time Report Forecast Previous
Monday 2:00PM Consumer Credit $17.200B $17.255B
Tuesday 7:30AM NFIB Small Business Optimism 95.9 95.7
Wednesday 7:00AM MBA Mortgage Applications - 0.20%
10:00AM Wholesale Inventories MoM 0.50% 0.30%
Thursday 8:30AM Initial Jobless Claims 305K 302K
8:30AM Continuing Claims - 2464K
2:00PM Monthly Budget Statement -$132.5B -
Friday 8:30AM Retail Sales Advance MoM 0.30% 0.00%
8:30AM Retail Sales ExAuto MoM 0.20% 0.10%
8:30AM Retail Sales ExAuto and Gas MoM - 0.10%
8:30AM Import Price IndexMoM -0.90% -0.20%
8:30AM Import Price IndexYoY - 0.80%
9:55AM University of Michigan Confidence 83.0 32.5
10:00AM Business Inventories 0.50% 0.40%
Speeches and Events
Day Time Report Place
Tuesday 10:00AM Fed's Tarullo Testifies to Senate Banking Committee Washington, DC
Wednesday TBA Bernanke Speaks to Credit Union Conference Orlando, FL
Treasury Auctions

Day Time Report Size
Monday 1:00PM 3-Month Treasury Bill $26 Billion
1:00PM 6-Month Treasury Bill $23 Billion
Tuesday 1:00PM 4-Week Treasury Bill TBA
1:00PM 3-Year Treasury Note $27 Billion







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