The Economy and Bond Market Radar (February 11, 2013)
Treasury bond yields declined modestly this week as economic news was sparse and what was released was more or less in line with expectations. There was a reactionary flight to safety into Treasuries early in the week as political rumblings in Spain and Italy caused a knee-jerk reaction. Later in the week European Central Bank (ECB) president Mario Draghi commented on the importance of exchange rates to price and growth stability. The market took that as a sign the ECB is concerned about the strength of the euro, which recently hit the highest levels in six months.
Strengths
- The January ISM nonmanufacturing index was little changed from last month but remained at a high level and indicates continued economic improvement.
- January retail sales appeared to be better than expected as same-store sales rose 4.5 percent. The U.S. Census Bureau will release official January results next week.
- Chinese economic data for January was generally better than expected with strength seen in exports and money supply.
Weaknesses
- Factory orders in December rose 1.8 percent but were well below the 2.8 percent expected.
- Fourth quarter productivity fell 2 percent as unit labor costs rose 4.5 percent and hours worked rose 2.2 percent.
- Political volatility surfaced again in Europe this week and reminds us of the still relatively fragile nature of the recovery.
Opportunity
- The debt ceiling debate appears to be pushed into May, allowing the market to focus on economic fundamentals.
- While some Federal Reserve 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 Japanās recently elected prime minister vowed to take on deflation and deflate the Yen.
Threat
- The economy appears to gaining momentum and bonds have sold off, the risk for bondholders is that this trend continues.
