Economic Research

Published by Raymond James & Associates

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Scott J. Brown, Ph.D., (727) 567-2603, Scott.J.Brown@RaymondJames.com May 8, 2014
Daily Market Commentary _____________________________________________________________________________________

Treasury Issues (ch. from prior close, yield) Dollar Equities
13-wk 26-wk 52-wk 2-yr 3-yr 5-yr 10-yr 30-yr $ / $ / / $ CD / $ DJIA SP500 Nasdaq R2K
-.00 +.00 -.00 -.03 .00 -.03 -.01 +.02 -.001 -.002 +0.23 +.000 +117.52 +10.49 -13.09 +0.54
0.03 0.05 0.10 0.40 1.65 1.65 2.59 3.40 1.391 1.695 101.90 1.090 16518.54 1878.21 4067.67 1108.55

Wednesday: In her JEC testimony, Fed Chair Janet Yellen
appeared to choose her words very carefully (lest the financial
markets take away something they shouldnt). The tapering of
asset purchases (QE3) is set to continue, ending in the fourth
quarter, but she refused to be pinned down on when the Fed
will begin raising short-term interest rates.

In her first testimony before the Joint Economic Committee of
Congress, Yellen noted that the first quarters pause in growth
mostly reflected transitory factors, including the effects of the
unusually cold and snowy winter weather. However, recent
data suggest that a rebound in spending and production is
already under way, putting the overall economy on track for
solid growth in the current quarter. She said that, while job
market conditions have improved, they are still far from
satisfactory. She noted two important risks to the outlook: 1)
adverse developments abroad, such as heightened geopolitical
tensions or an intensification of financial stresses in emerging
market economies, could undermine confidence in the global
economic recovery, and 2) the recent flattening out in housing
activity could prove more protracted than currently expected
rather than resuming its earlier pace of recovery.

Lawmakers tried to pin her down on an exact time frame for
when the Fed would begin raising short-term interest rates, but
(after being burned by her six month comment back in March)
she refused to take the bait.

In her written testimony, Yellen also addressed concerns that
the Fed may be inflating a financial bubble. The FOMC
recognizes that an extended period of low interest rates has the
potential to induce investors to reach for yield by taking on
increased leverage, duration risk, or credit risk, she said.
However, while some financial intermediaries have increased
their exposure to duration and credit risk recently, these
increases appear modest to date particularly at the largest
banks and life insurers. Moreover, valuations for the equity
market as a whole and other broad categories of assets, such as
residential real estate, remain within historical norms. For the
financial sector more broadly, leverage remains subdued and
measures of wholesale short-term funding continue to be far
below levels seen before the financial crisis.
In recent days, the Fed was reported to have been discussing
how it will tighten monetary policy when the time comes. In
Q&A, Yellen said that she expects the Fed to raise the rate it
pays on excess reserves and will likely use a number of
complimentary tools, including overnight reverse repos, term
repos, and the term deposit facility, to push up the general
level of short-term interest rates. She added that interest on
reserves will be a key tool, but cautioned that the Fed will only
be taking that step when the economy is strong enough.

Economic Releases Period Actual Previous
NF Productivity (prelim.) 1Q14 -1.7% +2.3%
year-over-year +1.4% +1.4%
Unit Labor Costs +4.2% -0.4%
year-over-year +0.9% -1.0%

No surprise, nonfarm business productivity fell in the first
quarter, partly reflecting the impact of adverse weather. Hours
rose at a 2.0% pace (+1.7% y/y), while output rose 0.3% (+3.2%
y/y). Unit Labor Costs, a measure of inflation pressure in the
labor market, rose sharply in the quarter, but the underlying
trend appears moderate. Note that the quarterly productivity
figures tend to be choppy and are subject to large revisions.
However, even the year-over-year numbers can be erratic. The
longer-term trend suggests a slowing in productivity growth in
recent years, following a technology-led strengthening into the
early part of the century. Real GDP growth is roughly equal to
the growth in labor input plus productivity growth. Hence, a
slower trend in productivity growth and a slower trend in the
labor force (as the population ages) imply a somewhat lower
pace of potential GDP growth in the years ahead.

Today: The weekly figures on unemployment insurance claims
will be subject to some seasonal adjustment noise related to the
late Easter holiday, but the underlying trend should remain low.
The European Central Bank is expected to talk about doing
something, but is unlikely to act just yet.

The weekly claims figures are adjusted for floating holidays
(such as Easter), but its hard to get it exactly right. The four-
week average should remain low, consistent with a limited pace
of job destruction (the bigger concern right now is hiring).
Today's Releases: Period Forecast Consensus Previous Comments
7:00 BOE Policy Decision no change
7:45 ECB Policy Decision more words, no action
8:30 Jobless Claims, th. 5/03 322 325 344 subject to seasonal noise, but a low trend
1:00 Treasury Bond Auction $16 billion in 30-year bonds