The Economy and Bond Market Radar (May 11, 2013)
Treasury yields rose sharply higher this week even as economic data was benign. It likely reflects a sentiment shift that can also be seen in the equity markets as investors shift from relatively safe assets to riskier areas of the market.
Strengths
- The Mortgage Bankers Association activity index rose 7 percent, led by an 8.3 percent rise in refinancing applications. The Federal Reserve’s zero interest rate policy is driving this trend and spurring other housing-related activity.
- Central banks in Australia, Korea and Vietnam cut interest rates this week as the global easing cycle continues.
- Initial jobless claims fell to 323,000, which is the lowest level since January 2008, and claims have fallen for three weeks in a row.
Weaknesses
- Initial indications for April retail sales were below estimates.
- Eurozone retail sales fell 2.4 percent year-over-year in March and have declined for 19 months in a row.
- In the U.K., April retail same store sales fell 2.2 percent, which is the worst decline in a year.
Opportunity
- The Fed continues to remain committed to an extremely accommodative policy.
- Key global central bankers are still in easing mode, such as the European Central Bank (ECB), Bank of England and the Bank of Japan. The Bank of Japan in particular is aggressively easing currently and the ECB recently cut interest rates.
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.
