The Bund is yielding 1.47% and the US 10-year is yielding 2.66%

Outlook

The Fed upgraded its assessment of the economy (while still complaining about unemployment), but this was widely expected, as were private sector forecasts of a far better Q2. We get two more revisions to GDP and in any case, now the worst is behind us, focus can shift to another big calendar today--personal in-come, weekly jobless claims, construction spending, vehicle sales, the final Markit manufacturing PMI and ISM. Need-less to say, tomorrow’s payrolls in the biggie, with most forecasters seeing 210,000-215,000. Market News gets a survey range of 200,000-250,000.

Everyone sees the unemployment rate falling from 6.7% to 6.6%, but when are we going to start looking at U6 instead (includes part-times who really want full-time jobs). U6 was 12.7% in March, which is better than 14.8 in May and June 2012 and vastly better than 17% in 2009, but still a more accurate picture than the official unemployment rate (U3). As the economists have been telling us for some time, it’s long-term unemployment that is the real problem.

What are we learning from recent events? First, the Fed has a steady hand as it continues to taper despite a really bad GDP number, so steady that it barely mentions the Q1 slowdown except as a weather-related blip. And yet the Fed must be churning out GDP forecasts built on the key sectors and must know that even if Q1 revisions are higher and Q2 comes in positively radiant, US GDP is creeping along, not bouncing. We will be lucky to get 2-2.5% this year, not the “usual” 3.5-5%. If so, we cannot expect the fixed income gang to get hot and bothered about yields. See the chart. Market News notes that some traders are eyeing the 2.60% floor and wondering if it will hold. “The 2.596% yield low, posted April 15, was the lowest level seen since the Feb. 3 low of 2.575%, which at the time was the lowest since Oct. 31. Ten-year yields topped out at 3.03% Dec. 31, and tested 3.0%-plus levels Jan. 3, ahead of the December non-farm payroll re-lease.”

The days of rising yields are gone. We had already deduced that the US would have to offer a fat premium over Bunds to get a positive dollar effect, and now it’s an even bigger premium. As of about 7 am today, the Bund is yielding 1.47% and the US 10-year is yielding 2.66%, or a spread of 1.19%. It’s not enough. It needs to be another 2%, probably. We won’t be getting it from the US side and it’s impossible to get it from the Bunds side, so on the yield differential basis, there is no dollar rally coming.

We didn’t get the Wednesday dollar bounce ahead of Friday payrolls this time because of an ultra-low GDP reading. This is the pattern we should probably expect going forward. We usually get a spike high on payrolls but that may get kyboshed or at least lessened tomorrow because of the new view of the US economy as fairly weak. We always warn against holding a position going into payrolls because spikes can gap over your stops and targets. This time we expect euro buying to begin later today as the intermediate bottom comes in—worst case, around 1.3850—and then just keep on going. Only a payrolls reading at the high end (250,000) would upset this scenario. Assuming yield-seekers are as avid as ever, this is also a harbinger of rises in the CAD, AUD and NZD, too.