The Economy and Bond Market Radar (April 22, 2013)
Treasury yields were little changed again this week as U.S. economic data was generally in line with expectations, while Chinese GDP data was weaker than expected. As can be seen in the chart, housing starts have breached the psychologically important 1 million units (annualized data) in March. This is one more data point to support the idea that the housing recovery is for real.
Strengths
- Housing starts hit the highest level since 2008.
- Industrial production in March rose 0.4 percent, which was ahead of expectations. Cold weather was a driver as utility output rose.
- The consumer price index in March fell 0.2 percent. Year-over-year inflation has fallen to 1.5 percent, giving the Federal Reserve plenty of room to maneuver monetary policy.
Weaknesses
- Chinese GDP slowed to 7.7 percent in the first quarter, below expectations for an 8 percent increase. This definitely was the biggest economic story of the week and it appears the government is comfortable not taking any action.
- The Conference Board’s leading index unexpectedly fell in March. Economic data has been weaker lately and this leading indicator reinforces that idea.
- Brazil raised interest rates by 25 basis points this week. Brazil was one of the first to cut rates back in 2011 and this may be an early warning signal to other emerging markets.
Opportunity
- The Fed continues to remain committed to an extremely accommodative policy.
- Key global central bankers, such as the European Central Bank (ECB), Bank of England and the Bank of Japan, are still in easing mode. The Bank of Japan in particular is aggressively easing.
Threat
- Inflation in some corners of the globe is getting the attention of policymakers 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.
