The Economy and Bond Market Radar (January 13, 2014)

The Economy and Bond Market Radar (January 13, 2014)

Treasury bond yields fell sharply this week on the back of a weak employment report released on Friday. Nonfarm payrolls grew a meager 74,000, well below the roughly 200,000 that was estimated. Nonfarm payroll growth is a key indicator of the health of the economy and will force the Fed to reconsider its recently implemented taper of quantitative easing.

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Strengths

• Factory orders rose 1.8 percent in November, validating the other strong data points in manufacturing.
• The trade deficit fell to a four-year low with declining oil imports a significant part of the story.
• Various sentiment indices in Europe continue to improve and some are at multi-year highs. These readings reinforce the idea of continued economic improvement in Europe.

Weaknesses

• Nonfarm payroll growth was very disappointing.
• Retailers reported significant discounting during the holiday season as consumers apparently needed additional motivation to be persuaded to buy.
• The ISM Non-Manufacturing Index unexpectedly weakened in December, driven lower by the new orders component.

Opportunities

• The Fed continues to remain committed to an overall accommodative policy. With this week’s data, newly confirmed Fed Chairman Janet Yellen likely will not deviate from an accommodative path.
• Key global central bankers remain in easing mode such as the European Central Bank (ECB), Bank of England and the Bank of Japan. ECB President Mario Draghi vowed to take “decisive action” if needed to combat deflation.
• 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.