This week brought more strong labor market data and more relief for commodity markets. Equity markets were also up on the week, while treasury and high-grade bond yields remain low. Decomposition of broad equity market growth shows that investors are still risk-off. Value stocks have climbed while riskier investments still seem reasonably priced, providing additional evidence that risk aversion persists.
February jobs data showed continued tightening of U.S. labor markets. The unemployment rate remains 4.9 percent while the labor force participation rate increased by two tenths of a percent to 62.9, a one-year high.
The S&P 500 closed on Friday at 1999.99, as if priced by a nineties consumer psychologist. The index climbed 2.7 percent during the week. A crude decomposition shows value opportunities favored over growth opportunities so far in 2016. Year-to-date, the S&P 500 Growth ETF is down 3.03 percent, while the S&P 500 Value ETF is down only 0.37 percent.
Meanwhile, treasury bond yields remain very low. The real yield curve rate on a five year U.S. treasury bond was negative on Thursday, at -0.03%, and closed Friday at 0.02%. People are willing to sacrifice returns for the relative safety of government debt. Japan issued new ten year bonds with a negative yield for the first time this week. Investors clearly do expect the markets to adjust so that these safe assets provide some future positive yield, but are willing to pay the government of Japan for short-term security.
While equity and commodity markets have become gradually less volatile over the past two weeks, foreign exchange markets continue to move in all directions, reflecting both stories–commodities relief and risk aversion. I’ve pasted below the full table from my dashboard. Over the past week, the dollar returned some of the previous week’s gains against the pound, but continued to strengthen against the euro and yen. Notably, the Brazilian real strengthened four percent against the dollar during the past week.