The Economy and Bond Market Radar (January 20, 2014)
Treasury bond yields fell modestly this week. Economic data was more or less in line with expectations this week and financial markets are shifting their emphasis to earnings reports which started in earnest this week. After moving higher for two months, 10-year Treasury bond yields have fallen by about 20 basis points this year, with the big catalyst being last week’s disappointing jobs report.
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Strengths
- Housing starts remained strong for the second month in a row. December housing starts registered right around 1 million units (annualized) which is a key psychological level and the highest in five years.
- Mortgage applications jumped 12 percent in the week ending January 10. Mortgage rates fell 6 basis points and that could have been a catalyst after several weeks of higher rates.
- European industrial production rose 1.8 percent in November, the strongest monthly gain since May 2010.
Weaknesses
- The University of Michigan consumer confidence index unexpectedly fell in January’s preliminary reading.
- On a related note, short-term retail sales data for the week ending January 11 indicated unexpectedly weak results. This comes on the heels of a tough holiday selling season for many retailers.
- It is early in the earnings reporting season but the initial results and reaction in the stock market has been underwhelming.
Opportunities
- The Fed continues to remain committed to an overall accommodative policy and newly confirmed Fed Chair Janet Yellen will not likely 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. Speculation is building that the ECB may cut rates to 10 basis points, essentially matching the Fed.
- 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.
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.
