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 shouldn’t). 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 quarter’s “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 it’s 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