The Economy and Bond Market Radar (June 3, 2013)
Treasury yields moved sharply higher this week as the bond sell off that began early this month continued. Fears of the Federal Reserve ātaperingā (reducing QE and the first step on a long road toward tightening monetary policy) continued and investors are focusing on the potential end in a multi decade bull market for bonds.
Strengths
- Consumer confidence rose to a five-year high as both current and future expectations improved. The University of Michiganās Confidence Index also rose in May.
- Existing home values rose 10.9 percent in the twelve months ending in March, the biggest gain since 2006.
- The Chicago Purchasing Manager Index rose to the highest level in a year and well into expansion territory, which bodes well for next weekās national ISM report.
Weaknesses
- The total number of mortgage applications, according to the Mortgage Bankers Association, filed in the U.S. last week fell 8.8 percent from the prior week. This was the third week in a row of large declines in mortgage activity due to rising interest rates.
- Personal income and spending in April came in below expectations as income was flat and spending was down.
- Brazil unexpectedly raised interest rates by 50 basis points this week to fight inflation even with weaker than expected economic growth.
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 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.
