The Economy and Bond Market Radar (January 14, 2013)
Treasury bond yields fell modestly this week as market-moving economic data was light and the market digested last weekâs move to higher yields. It isnât often we have a chart of the Japanese yen relative to the U.S. dollar in the bond section, but a leadership change in Japan is pushing a much more aggressive monetary and fiscal policy, which ultimately shows up in the currency markets. The yen has fallen by more than 12 percent since the end of September versus the dollar. Japan announced a $117 billion fiscal stimulus plan this week and pressure is being exerted on the Bank of Japan to do more quantitative easing and set an inflation target above 2 percent. These actions show the global easing cycle is not over and may be accelerating.
Strengths
- Japan also announced it would buy the Eurozoneâs European Stability Mechanism (ESM) bonds with a dual purpose of weakening the currency but also helping to stabilize the economy of a key trading partner.
- U.S. oil output hit a 20-year high and was up 20 percent year-over-year last week. This increased crude production should help keep gasoline prices in check.
- European consumer and business confidence improved in December.
Weaknesses
- The U.S. trade balance unexpectedly widened to $48.7 billion as imports surged.
- The NFIB Small Business Optimism index held steady in December, but hiring plans weakened and the economic outlook remained poor.
- Consumer prices in China unexpectedly rose to 2.5 percent in December. China remains an important piece of the puzzle in regard to positive global government policy action; higher inflation threatens that positive dynamic.
Opportunity
- While some Fed members expressed concerns over continued quantitative easing, the Fed still remains committed to an extremely accommodative policy until the economy improves.
- Globally, central banks are increasing their stimulative policies, as Japanâs recently elected prime minister is vowing to take on deflation and deflate the Yen
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- The fiscal cliff is over for the time being but the debt ceiling and federal spending debate will be the next challenges for policymakers over the next few weeks.
