Leveling the Playing Field April 7, 2014 _______________________________________________________________________ What’s the over/under on number of references we’ll hear

today about how tonight’s game is the combined highest seeding between two teams since seeding began? The 10yr Treasury started the week at 2.72% and ended at 2.72%, with a brief run up to 2.80% in between. Rates fell back to the bottom end of the range following Friday’s job reports. The Unemployment Rate held steady at 6.7%, driven by an increase in the participation rate. This is a positive sign. Had the participation rate held steady, the UR rate would have actually dropped to 6.5%. Non-farm payrolls showed a gain of 192k jobs last month, just slightly above the twelve month average of 187k. In Monday’s speech, Yellen spent considerable time discussing the labor market. She conceded that the “Fed is short of reaching unemployment and inflation goals.” Yellen suggested that maximum sustainable employment is between 5.2% and 5.6% and that “labor market conditions worse than suggested by unemployment rate.” Yellen focused on labor market slack and identified four main concerns that the Fed would be monitoring as part of its qualitative assessment. 1. There are seven million part time workers that would like to be full time 2. Wage growth is anemic 3. Long term unemployment is at all time highs 4. Discouraged workers as evidenced by the declining participation rate (until Friday) Friday’s reports didn’t provide much clarity around these four metrics. The first two improved, the second two did not. 1. Part time workers increased from 7.2mm to 7.4mm. 2. Year over year average hourly earnings decreased from 2.19% to 2.06%. 3. Median duration of unemployment fell from 16.4 weeks to 16.3 weeks 4. The participation rate increased from 63% to 63.2% This sort of mixed bag of results translates into more range bound rate movements. Nothing from Friday’s report can suggest a near term shift in Fed policy, so expect an accommodative FOMC stance for some time.

This week’s data is light, but there will be numerous Fed speeches that may help give the market some guidance. More importantly, minutes from the last meeting will be released on Wednesday. In particular, markets want to better understand the “dots” and the time horizon for the first hike. If tapering is likely to remain on track, QE4EVA should conclude in December of this year. Yellen indicated that the first rate hike would not come for a “considerable period” of time after QE ended. But then she went on to say a “considerable period” meant just six months. Oh boy, markets did the math and decided the first hike could come in the spring of 2015. As for the shift from quantitative measures (6.5% UR) to qualitative (see four items listed above), markets also want to know more about the FOMC statement conclusion that “the change in the Committee’s guidance does not indicate any change in the Committee’s policy intentions”. We’re not sure the minutes are going to shed any light on these questions, but in general recent “surprises” from the Fed have been hawkish and created upward pressure on rates. Stocks and the Fed We rarely touch on equities because we know even less about stocks than we do about rates, but with Friday’s selloff we were wondering why the NASDAQ had it’s biggest drop in three years? Markets are starting to realize the Fed isn’t going to rescue it any time soon. With the bar for modifying tapering high, GDP forecasts declining, lukewarm labor market reports, etc investors are recalibrating expectations. The end of QE is nigh. A rate hike soon thereafter. A recovery that is treading water more than rebounding sharply. Markets are nervous. Sell stocks. Buy bonds. Stocks down, rates down. Someone should tell the Eagles that the city of brotherly love is in no position to be making character judgements.

Economic Data Day Monday Tuesday Time 3:00PM 7:30AM 10:00AM Wednesday 7:00AM 10:00AM 2:00PM Thursday 8:30AM 8:30AM 8:30AM 8:30AM 2:00PM Friday 8:30AM 8:30AM 8:30AM 8:30AM 9:55AM Report Consumer Credit NFIB Small Business Optimism JOLTs Job Openings MBA Mortgage Applications Wholesale Inventories (MoM) 0.5% Forecast $14.150B 92.3 Previous $13.698B 91.4 3974 -1.2% 0.6%

Fed releases Minutes from March FOMC Meeting Initial Jobless Claims Continuing Claims Import Price Index (MoM) Import Price Index (YoY) Monthly Budget Statement Producer Price Index (MoM) Producer Price Index (YoY) PPI Core (MoM) PPI Core (YoY) University of Michigan Confidence -$72.0B 0.1% 1.2% 0.2% 1.1% 81.3 -0.1% 0.9% -0.2% 1.1% 80.0 330k 2840k 0.2% 326k 2836k 0.9% -1.1%

Speeches and Events Day Monday Tuesday Time 11:45AM 1:30PM 2:45PM 4:00PM Report Bullard speaks on Monetary Policy Fed's Kocherlakota speaks Fed's Plosser speaks on Bank Regulation Place Los Angeles, CA Minnesota Philadelphia, PA

Fed Board Open Meeting on Rulemakings on Leverage Ratios

Wednesday 10:00AM 2:00PM 3:30PM 7:00PM Thursday 9:00AM 11:30AM 11:30AM 2:00PM

ECB's Coeure speaks Fed releases Minutes from March FOMC Meeting Fed's Evans speaks at Conference Fed's Tarullo speaks at Conference ECB's Praet speaks India's Rajan, ECB's Constancio, Fed's Evans

Washington, DC

Washington, DC Washington, DC Washington, DC Washington, DC

Brazil Central Bank President Participates in Panel Discussion ECB's Constancio speaks Washington, DC

Treasury Auctions Day Tuesday Wednesday Thursday Time 1:00PM 1:00PM 1:00PM 3-year Treasury 10-year Treasury 30-year Treasury Report Size $30B $21B $13B

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