Rate update: Are we seeing a market shift?

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By G. Steven Bray

The Greeks just said NO to fiscal responsibility, and investors rushed to the safety of bonds, pushing interest rates down a tad. No surprise here. This part of the script was pretty certain, but the rest of the plotline is less clear.

The talking heads are convinced Greece will leave the Eurozone, but it’s really not in the rest of Europe’s interest for Greece to go. To that end, it’s still possible they craft a solution that allows Greece to save face and just as importantly, allows the Eurozone to claim that it held the Greek feet to the fire. I really think the Eurozone is less worried about Greece leaving than it is about potential contagion. Greece is a very small economy. Italy and Spain also are struggling with reform measures, and their economies are much larger. Leftist factions in both counties are watching the Greek situation carefully. If Greece wins debt relief, you can bet these factions will demand the same.

Because of that and because markets have had ample time to anticipate this situation, I still think the effect on rates will be temporary. However, we had two other headlines this past week that may help shift market sentiment in favor of lower rates.

First, the jobs report last Thurs was surprisingly weak. The headlines, the unemployment rate dropping to 5.3% and 200k+ jobs created, sounded great, but the internals of the report were more troubling. The rate only dropped because 423k folks left the workforce, leaving workforce participation at an almost 40-year low. In addition, wage growth stagnated again, and last month’s surprising increase was revised lower. This left pundits questioning the strength of the recovery again.

Second, the Chinese stock market has been crashing. It’s bad enough that the Chinese government has initiated an equity buying program to stem the fall. If China takes a nosedive, you can bet the rest of the world economies will feel some pain.