The Economy and Bond Market Radar (September 9, 2013)

The Economy and Bond Market Radar (September 9, 2013)

Treasury yields moved higher this week with the 10-year Treasury bond briefly touching the 3 percent level. Yields continue to move higher as the market prepares for “tapering” at the next Fed meeting on September 17-18. Fund flows out of fixed income funds have been very heavy in recent weeks and the market appears oversold. With little significant economic data between now and the Fed meeting, the market appears to have priced in a worst-case scenario which may allow for a rally in fixed income securities. Nonfarm payrolls were released Friday and, as can be seen in the chart below, the trend is not improving. This makes it somewhat difficult for the Fed to aggressively reduce quantitative easing later this month.

click to enlarge

Strengths

• The ISM manufacturing index rose to 55.7 continuing the recent strong showing in the manufacturing area.
• There has been a global uptick in purchasing managers indices (PMI) such as the ISM manufacturing index cited above. We saw broad-based improvement with eurozone manufacturing, U.K. manufacturing and China manufacturing indices all posting positive results.
• U.S. auto sales hit a six-year high in August and, along with housing, have been a key to maintaining economic growth.

Weaknesses

• Uninspiring nonfarm payroll data indicates the economy is just limping along and that real growth remains elusive.
• With long-term yields still rising, the housing market remains at risk of slowing.
• The early read on retail sales for August shows mixed results. Back-to-school sales appear somewhat muted.

Opportunity

• Despite recent conflicting commentary, the Fed continues to remain committed to an overall accommodative policy.
• Key global central bankers are still in easing mode such as the European Central Bank, Bank of England and the Bank of Japan.
• The recent selloff in bonds is likely an opportunity as financial markets tend to overreact in the short term.

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 selloff may be a “shot across the bow” as the markets reassess the changing macro dynamics.