The Economy and Bond Market Radar (May 21, 2013)

The Economy and Bond Market Radar (May 21, 2013)

In a replay from last week, Treasury yields headed higher this week even as economic data was mixed. It likely reflects a continuation of a sentiment shift that can also be seen in the equity markets as investors shift from relatively safer assets to more riskier areas of the market.

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Strengths

• Inflation data for April was benign with both PPI and CPI falling for the month. On a year-over-year basis CPI has risen a modest 1.1 percent and gives comfort to the Federal Reserve that inflation is not currently an issue.
• Retail sales data for April were better than expected even though some high profile retailers reported disappointing results for the month. Housing data was mixed overall but building permits in April rose sharply, which is a good indicator for future activity. Homebuilder confidence also increased in April.
• Japan GDP rose 3.5 percent in the first quarter as fiscal stimulus and aggressive central bank policies combined with a weaker yen drove positive results.

Weaknesses

• Industrial production fell 0.5 percent and was worse than expected in April.
• The eurozone has yet to recover as first quarter GDP fell 0.2 percent. This marks the sixth consecutive quarter of contraction.
• Wal-Mart earnings report was a disappointment and the company’s second quarter guidance was downbeat. This is a bellwether reading of the average American and doesn’t bode well for a near-term pick up in activity.

Opportunity

• The Fed continues to remain committed to an extremely accommodative policy.
• Key global central bankers are still in easing mode such as the 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 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.