The Economy and Bond Market Radar (June 17, 2013)
Treasury yields fell this week as Fed âtaperingâ (reducing quantitative easing (QE) and taking the first step on a long road toward tightening monetary policy) fears receded. The Fed meets next week and expectations are for the Fed to downplay the likelihood of an early end to QE. Mortgage rates have reacted to this tapering talk and have spiked sharply in the past month, rising to more than 4 percent, which is not likely what the Fed had intended.
Strengths
- The National Federation of Independent Business (NFIB) sentiment gauge rose in May on relatively broad-based strength. This indicator provides a good read on small business sentiment.
- In a Manpower survey, 22 percent of firms intend on hiring or adding staff in the third quarter, which is the highest level in four years.
- Retail sales rose 0.6 percent in May, driven by strong auto sales.
Weaknesses
- Industrial production for May was unchanged and below expectations for modest growth.
- The Bank of Japan disappointed the markets this week by not expanding current policies and the financial markets reacted violently, indicating the fragile psyche of investors.
- University of Michigan Confidence Index came in below expectations for June.
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 and the ECB recently cut interest rates.
- The recent sell-off in bonds may be an opportunity as growth remains weak, and this wouldnât be the first time the markets got ahead of themselves.
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 âwarsâ cannot be ruled out which may cause unintended consequences and volatility in the financial markets.
- The recent bond market sell-off may be a âshot across the bowâ as the markets reassess the changing macro dynamics.
