The Economy and Bond Market Radar (February 18, 2014)
Treasury bond yields were higher this week with the intermediate portion of the yield curve seeing most of the lift. With economic data mixed again and equities rallying, it felt like a ârisk onâ week, as much as anything driving yields higher. Bad weather was topical again all week and it has definitely had a negative impact on the economy so far this year. While some of the data is being taken with a grain of salt, most investors are giving the economy the benefit of the doubt.
Strengths
- China exports jumped 10.6 percent in January, which created some excitement that things are improving, although there are still skeptics regarding the validity of the data.
- NFIBâs Small Business Optimism Index showed that firms were planning to hire at the highest level since 2007.
- The University of Michigan Confidence survey was unchanged in February, ahead of expectations.
Weaknesses
- January retail sales fell 0.4 percent and below expectations. Weather obviously played a role, but it is somewhat difficult to discern the impact exactly.
- Industrial production declined 0.3 percent in January in another disappointing data point.
- Industrial production in the European Union fell 0.7 percent in December. Global manufacturing appeared to have hit a rough patch in December and January.
Opportunities
- In Congressional testimony, Federal Reserve Chairman Janet Yellen reconfirmed her commitment to tapering, and is in no hurry to raise interest rates. This is consistent with the message from prior Chairman Ben Bernanke.
- 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 take action in March.
- 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 the economy stumbles.
Threats
- Several emerging market countries are raising interest rates at an aggressive pace to either deal with inflation or a weak currency. It could be the beginning of a new global interest rate cycle for higher rates.
- Trade and/or currency âwarsâ cannot be ruled out which may cause unintended consequences and volatility in the financial markets.
- Puerto Rico was recently downgraded to âjunkâ status, highlighting the fact that even six years past the financial crisis, the fallout continues.
