The Economy and Bond Market Radar (February 18, 2013)
Treasury bond yields rose modestly this week as economic news was more or less in line with expectations. Positive sentiment regarding the direction of the economy continued. Eurozone GDP slumped 0.6 percent in the fourth quarter which was below expectations and potentially puts pressure on the European Central Bank (ECB) to act. Over the past week or so, there has been a lot of chatter surrounding the strength of the euro and if the ECB were to act to shore up the domestic economy, a side benefit may be a weaker and more competitive global currency.
Strengths
- The National Association of Realtors reported that home prices rose 10 percent in 2012. That was the biggest increase in seven years and indicates a recovering economy.
- January retail sales rose 0.1 percent, which matched expectations but was viewed positively in light of the payroll tax increase that took effect at the beginning of the year.
- The University of Michigan Confidence Index rose more than expected in the preliminary February release.
Weaknesses
- As mentioned above, eurozone GDP contracted during the fourth quarter, extending its recession.
- Industrial production fell 0.1 percent in January in a surprisingly weak start to the year.
- Inflation data in the United Kingdom, India and Brazil are showing signs of acceleration or maintaining relatively elevated levels.
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, with Japan’s recently elected prime minister vowing to take on deflation and deflating the yen.
Threat
- The economy appears to be gaining momentum and bonds have sold off. The risk for bondholders is that this trend continues.
- Inflation in some corners of the globe is getting the attention of policy makers and may be an early indicator for the rest of the world.
