STRONG JOBS REPORT PUSHES BOND YIELD TO 20 MONTH HIGH -- FINANCIALS, HOMEBUILDERS, AND MATERIALS FALL THE HARDEST -- DRUGS AND TOBACCO ACT AS SAFE HAVENS
YIELDS EXCEED 2003 PEAK ... Another very strong jobs report is having a predictable effect on interest rates. It's pushing them sharply higher. The weekly bars in Chart 1 shows the 10-year T-note yield breaking through the peak reached last summer and putting them at the highest level in twenty-months. The monthly bars in Chart 2 show that bond yields have already broken a four-year down trendline. The latest surge in yields started last month with a surprisingly strong March jobs report. The April figures released this morning showed 288,000 new jobs created with the unemployment rate dropping to 5.6%. That means that the March figures weren't a short-term fluke. Market reactions are not surprising. Bond prices are falling sharply as yields rise. Rising yields are boosting the dollar which is pushing gold and gold shares lower again. Weaker commodity prices are also weighing on material stocks which are the day's weakest group. Rate-sensitive financials and homebuilding stocks are also under heavy pressure today. The only pockets of relative stability are consumer staples and healthcare. An early bounce in an oversold semiconductor group is helping to support the Nasdaq market.
Chart 1
Chart 2
MATERIALS ETF TESTING 200-DAY LINE... Commodity-related material stocks have been sold hard this week. The Materials Select Sector SPDR broke support along its February/March lows and is threatening its 200-day moving average. Its relative strength line really started dropping last month as rates started to rise. Today's biggest losers are gold and paper stocks. Aluminum and steel stocks have been under pressure all week.
Chart 3
FINANCIALS WEAKEN EVEN FURTHER... Financial stocks are among those hit the hardest in a climate of rising rates. That's been the case since mid-March and again today. The Financials Select Sector SPDR is dropping to a new 2004 low and is bearing down on its 200-day moving average. Its relative strength line peaked in mid-March and fell throughout April. That's when rates starting rise after the strong March jobs report. Homebuilding stocks are also suffering from rising rates.
Chart 4
KB HOME BREAKS 200-DAY LINE... It's all part of the same story. REITs and homebuilding stocks have benefitted from historically low interest rates since the start of 2004. Not anymore. I've pointed out in the past that anything related to housing is especially vulnerable to rising rates. REITs tumbled during April. So did homebuilders, which are being sold heavily again today. KB Home peaked at the start of April and is breaking its 200-day average today. If there's any doubt about the rate-sensitive nature of REITs, take a look at Chart 6. The Morgan Stanley REIT Index tumbled throughout April and is trading under its 200-day line. It's on the verge of hitting a new low today.
Chart 5
Chart 6
DEFENSIVE HAVENS... As has been the case recently, investors continue to seek the safe haven of consumer staples and drugs. In the latter group, Johnson & Johnson is breaking through its February peak to reach a new 52-week high. In a relatively stable consumer staple group, RJR Reynolds Tobacco is a top percentage gainer. The defensive stock is trading higher today after recently hitting a new 52-week high. Notice that the relative strength lines for both stocks started jumping during April when rates started rising and the rest of the market fell.
Chart 7
Chart 8
