The Economy and Bond Market Radar (August 12, 2013)
Treasury yields moved modestly lower this week as global economic data was showing signs of improvement. Chinese economic data was better than expected this week with a slew of data showing improvements in July. Economic data out of Europe is also improving and it appears that Europe may have finally turned the corner. The market seems to have come to terms with the Fed tapering in September, and yields have been pretty stable over the past couple of weeks.
Strengths
- Chinese economic data positively surprised across the board. Industrial production, retail sales and exports were all better than expected in July.
- Economic data out of Europe is also on the mend with German industrial production and factory orders showing strong gains.
- The U.S. trade deficit was the narrowest since June 2009 as exports rose and imports fell.
Weaknesses
- Back-to-school results for retailers reported mixed, raising questions about consumers.
- The IBD/TIPP Economic Optimism Index fell for the second straight month.
- Oil and gasoline prices remain elevated which crimped consumers.
Opportunity
- Despite recent conflicting commentary, the Fed continues to remain committed to an 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 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.
