The Economy and Bond Market Radar (October 7, 2013)
Treasury yields rose modestly this week as attention was squarely focused on the government shutdown. Due to the shutdown, the highly anticipated September unemployment report was delayed, forcing the market to focus on other things. The ISM manufacturing index rose to a two-year high which bodes well for continued economic expansion, assuming the government shutdown is brief.
Strengths
- The ISM manufacturing index showed surprising strength and has typically been a good leading indicator for the overall economy.
- The Eurozone Composite purchasing managersâ index (PMI) rose to 52.2 as new orders and business confidence improved.
- In Japan, the Markitâs manufacturing gauge rose to 52.5 in September, which is the highest in more than two years.
Weaknesses
- Auto sales fell 4.2 percent in September, which was the first decline in more than two years.
- Mortgage applications fell again this week, hitting the lowest level since June.
- While the unemployment data was delayed due to the government shutdown, ADP reported that private nonfarm payrolls grew less than expected to 166,000.
Opportunity
- Despite recent conflicting commentary, the Federal Reserve continues to remain committed to an overall accommodative policy and is unlikely to raise interest rates in 2013 or 2014.
- Key global central bankers remain in easing mode such as the European Central Bank, Bank of England and the Bank of Japan.
- If the shutdown continues for much longer, the Fed may be less likely to reduce the quantitative easing (QE) program.
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 selloff may be a âshot across the bowâ as the markets reassess the changing macro dynamics.
