THE BASIS POINT

Rates Up On China Inflation Threats, Better U.S. Jobs Outlook

 

Stocks are rallying and bonds are selling off on three events today that signal improving economic conditions and inflation pressure. Rates rise when bond prices drop in a selloff. Stocks are way up (Dow +228) and bonds are way down (3.5% 30yr FNMA -72 basis points) on better than expected jobs growth numbers from payroll provider ADP, very strong Chinese manufacturing data, and European central bank president Jean Claude Trichet saying that they’d step up crisis prevention measures as needed.

Trichet’s remarks are temporarily countering negative European sentiment that was causing U.S. mortgage bonds to rally. ADP signals an improving economic picture for now: ADP data showed private sector added 93,000 jobs in November, the 10th straight monthly gain, and the biggest monthly gain in 3 years—which means Friday’s official Bureau of Labor Statistics jobs report could also be better (although ADP is not a very reliable predictor of BLS data). China’s manufacturing strength is the latest reminder of inflationary pressure and imminent rate hikes for that region, which all global bond markets are wary of.

 

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