In recent days, there have been lots of mixed and confusing signals coming out of the eurozone, and U.S. economies and investors have acted accordingly. On Friday, May Day was a happy day for stock investors as they merrily danced around the maypole. The day before, they all seemed to run for cover. The S&P 500 fell 1.1% on Thursday and rose 1.1% on Friday to 2,108.29, just 0.4% below the record high of 2,117.60 on April 24. It’s been range-bound since the start of the year.
For bond investors, it was “Mayday! Mayday! Mayday!” every day last week. The 10-year U.S. Treasury yield rose to 2.12% on Friday from 1.93% the week before, despite a weaker-than-expected GDP report and a relatively benign Federal Open Markets Committee statement on Wednesday.
U.S. yields rose in reaction to the rise in the German government’s 10-year bond yield from this year’s record low of 0.033% on April 17 to 0.37% on Thursday, just before much of continental Europe took Friday off for May Day. Germany’s economic indicators have been showing some strength, and deflationary fears seem to be subsiding. On Thursday, we learned that the eurozone’s CPI was unchanged during April on a year-over-year basis as energy prices rebounded. It hit a recent low of -0.6% during January when oil prices were finding a bottom. No one seemed to care that the core CPI rose just 0.6% year-over-year during April, the same as the month before.
Furthermore, the euro has rebounded from the year’s low of $1.05 on March 13 to $1.12 on Friday, suggesting that eurozone investors may be losing their interest in U.S. bonds, even though U.S. bonds still yield much more than German bonds. The stronger euro caused the MSCI EMU index to sag by 2.8% last week, but rise 0.4% in dollar terms.
Source: Ed Yardeni — Ed Yardeni is the president and chief investment strategist of Yardeni Research Inc., a provider of independent investment strategy and economics research for institutional investors.