The Economy and Bond Market Radar (January 27, 2014)
Treasury bond yields fell again this week and are now almost 30 basis points below the highs seen in late December. Economic data in the U.S. was light this week but Chinaâs flash PMI data was negative and spooked global financial markets. The thought is that China is unexpectedly slowing which is bad for global growth prospects. Stocks sold off and bonds rallied on Thursday and Friday in response to this news. The Fed meets next week and is still expected to taper quantitative easing (QE) by another $10 billion, even in light of the poor foreign data.
Strengths
- The Conference Board Leading Economic Index rose again in December, which should bode well for immediate economic prospects.
- Mortgage applications jumped 4.7 percent last week after rising 12 percent the week before. Mortgage rates continue to fall, dropping another 9 basis points this week.
- Global oil demand rose by 135,000 barrels per day in the fourth quarter, in what is likely a sign of improving economic conditions.
Weaknesses
- Markitâs Flash PMI for China unexpectedly fell into contraction territory at 49.6, hitting a six-month low.
- Weekly retail sales data for week ending January 18 continued a worrisome trend of poor results. The weather has likely played a negative role so far this year but shoppers donât appear willing to spend freely.
- The American Institute of Architects (AIA) Billings Index was down for the second month in a row since early 2012. This is a widely watched index for commercial real estate development activity.
Opportunities
- The Fed continues to remain committed to an overall accommodative policy and newly confirmed Fed Chairman 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 âdecisive actionâ 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 policymakers 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.
