The Economy and Bond Market Radar (June 10, 2013)
Treasury yields moved higher again this week as the employment report on Friday was good enough to keep Fed “tapering” (reducing quantitative easing and the first step on a long road toward tightening monetary policy) fears alive.
Strengths
- Nonfarm payrolls grew 175,000 in May, modestly ahead of expectations. The unemployment rate ticked higher to 7.6 percent as participation and labor force expanded.
- Retail sales results from individual companies came in a little better than expected, but we will get official government data next week.
- The nonmanufacturing ISM index improved in May, with new orders and output showing an uptick.
Weaknesses
- The average 30-year fixed-rate mortgage yield hit 4.07 percent, the highest level in over a year.
- The ISM manufacturing index unexpectedly hit a 4-year low and fell into contraction territory. This was definitely a negative surprise, particularly with recent brisk auto sales.
- April construction spending grew a modest 0.4 percent, well below expectations.
Opportunity
- The Fed continues to remain committed to an extremely accommodative policy.
- Key global central bankers, including the European Central Bank (ECG), Bank of England and the Bank of Japan, are still in easing mode. The Bank of Japan, in particular, is aggressively easing and the ECB recently cut interest rates.
- The recent sell-off in bonds may be an opportunity as growth remains weak and this wouldn’t be the first time the markets got ahead of themselves.
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.
- The recent bond market sell-off may be a “shot across the bow” as the markets reassess the changing macro dynamics.
