The Economy and Bond Market Radar (July 15, 2013)
The treasury market bounced back this week after Fed Chairman Ben Bernanke indicated the Fed would “push back” if financial conditions became too tight. This signaled to the market that the expected reduction in the Fed’s QE program may be delayed. This caused treasuries to rally across the board with 5-year treasury yields falling 19 basis points and 10-year yields falling 15 basis points.
Strengths
- The biggest market mover in recent weeks has been commentary from various Fed officials and the minutes from the recent meeting. This week we saw some softening in the rhetoric regarding QE “tapering,” and the market responded.
- Initial readings for retailers June same-store sales data was better than expected, as sales rose 4.3 percent.
- The U.S. reported a $116.5 billion budget surplus in June, which is the biggest monthly budget surplus since April 2008.
Weaknesses
- Higher interest rates are already taking a toll on the housing market as home loan applications fell to a two-year low. Mortgage loan application demand has fallen 44 percent since early May.
- China’s exports unexpectedly fell 3.1 percent, while imports fell 0.7 percent.
- June’s Producer Price Index (PPI) rose by 0.8 percent, and on a year-over-year basis is up 2.5 percent. The higher-than-expected increase was driven primarily by energy prices. Crude oil and gasoline prices continue to move higher so far in July.
Opportunity
- Despite recent commentary, the Fed continues to remain committed to an 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 recent sell-off in bonds is likely an opportunity as higher yields will act as a brake on the economy and potentially become self-fulfilling, thus postponing Fed tapering.
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.
- The recent bond market sell-off may be a “shot across the bow” as the markets reassess the changing macro dynamics.
