The Economy and Bond Market Radar (December 30, 2013)
Treasury bond yields moved higher this week, reaching the psychologically important 3 percent yield last seen in September. Yields appear to be moving higher in response to better economic data and a positive outlook for 2014. Stocks and bond yields have both been moving higher for the past two months as they are both responding to an improving economic outlook.
Strengths
- Durable goods orders rose 3.5 percent in November which was well ahead of expectations and reinforces the strengthening economy story.
- Initial jobless claims fell back below the four-week average after spiking the prior two weeks.
- Canadian GDP rose 0.3 percent in October and 2.7 percent year-over-year.
Weaknesses
- Mortgage applications fell 6.3 percent last week, hitting a 13-year low as refinancing demand continues to slide with higher interest rates.
- Retail sales during the holiday selling season appear to have relied on heavy discounting to move goods. This is a counter point to the improving economy story.
- China’s interbank lending rate spiked as year end funding needs created a cash crunch for some financial institutions. This has become an almost regular occurrence and raises questions around the health of some of China’s financial institutions.
Opportunities
- Despite recent conflicting commentary, the Fed continues to remain committed to an overall accommodative policy and is unlikely to raise interest rates in 2014.
- Key global central bankers remain in easing mode such as the European Central Bank, Bank of England and the Bank of Japan.
- There are many moving parts to the taper decision and while the Fed began the process it is very possible that tapering could be delayed if economic data slows.
Threats
- 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.