The Economy and Bond Market Radar (April 8, 2013)
Treasury yields fell sharply this week on weak economic data and massive quantitative easing (QE) program out of Japan. The Bank of Japan intends to double money in circulation over the next two years in an attempt to battle deflation. U.S. nonfarm payrolls for March came in much weaker than expected, growing a modest 88,000 vs. expectations of 246,000. As can be seen in the chart below, 10 year treasury yields fell to their lowest levels this year.
Strengths
- Japan announced a massive monetary stimulus program, buying $79 billion of bonds per month. That is roughly equal to what the Fed is doing here in the U.S. except Japan’s economy is one third the size.
- The European Central Bank (ECB) left interest rates unchanged at this week’s meeting but left the door open for additional cuts if needed.
- Auto sales in the U.S. continued to be strong in March, running at a 15.22 million vehicle annualized pace.
Weaknesses
- The ISM manufacturing index unexpectedly fell to 51.3 in March. The orders subcomponent was especially weak and cause for some concern.
- Global economic data points indicate a weakening trend. Russian manufacturing slowed, South Korean exports were weak and Indian manufacturing activity also weakened.
- The eurozone’s unemployment remains elevated at 12 percent.
Opportunity
- The Fed continues to remain committed to an extremely accommodative policy.
- Key global central bankers, such as the ECB, Bank of England and the Bank of Japan, are still in easing mode. The Bank of Japan, in particular appears, willing to implement additional monetary policy easing in the near future.
Threat
- 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.
- Trade and/or currency wars cannot be ruled out which may cause unintended consequences and volatility in the financial markets.
