The Economy and Bond Market
Treasury bond yields fell this week as weak economic data fueled concerns that the economy isnât robust enough to begin tapering. While the government reopened last week, some short-term economic damage was done and confidence will likely be negatively impacted for some time longer. This all leads the market to reconsider âtaperâ timing, it now appears the Fed may not taper until March or even later and as can be seen in the chart below, bond yields have responded to this changing dynamic.
Strengths
- The bond market continued its rally that started in early September as economic expectations wane.
- The HSBC/Markit flash manufacturing PMI for China came in higher than expected at 50.9.
- The national average gasoline price fell to $3.31 per gallon this week vs. a high of $3.78 in February.
Weaknesses
- The delayed September employment report showed weaker than expected job growth with nonfarm payrolls growing just 148,000.
- Consumer confidence indicators continue to fall even as the government shutdown has ended.
- Durable goods orders ex-transportation fell 0.1 percent in September and the August number was revised lower.
Opportunity
- Despite recent conflicting commentary, the Fed 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.
- The government shutdown damage is probably done and may push QE tapering into mid-2014.
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.
