The Economy and Bond Market Radar (February 24, 2014)
Treasury bond yields were little changed this week.Ā It seemed all the focus was on the Olympics as both stock and bond markets ended the holiday-shortened week little changed from the prior week. Economic data was mixed and inflation data remained benign.
Strengths
- Inflation data remains benign with producer prices up 1.2 percent and consumer prices up 1.6 percent on a year-over-year basis.
- The Conference Boardās leading index rose 0.3 percent in January, ahead of expectations and pointing to a reasonably good economic outlook.
- Japanās central bank continued to add to its monetary policy accommodation by increasing the loans available to commercial banks.
Weaknesses
- Housing data points were weak, with January housing starts falling 16 percent, existing home sales falling 5.1 percent and homebuilder sentiment dropping as weather impacted foot traffic.
- The HSBC/Markit Flash manufacturing PMI for China fell again in February to 48.3, the second month in a row indicating contraction.
- Factory data was also weak in the U.S. with the Philadelphia Fed manufacturing index falling into negative territory for the first time since May.
Opportunities
- Fed minutes released this week confirmed the marketās thinking that tapering would proceed more or less as planned.
- The International Monetary Fund (IMF) released a report this week highlighting the deflation risk in Europe. It is exactly this type of thinking that could spur additional easing policies from the European Central Bank.
- There are many moving parts to the taper decision and although 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 āwarsā cannot be ruled out which may cause unintended consequences and volatility in the financial markets.
- Puerto Rico was recently downgraded to ājunkā status and it highlights that roughly six years past the financial crisis, the fallout continues.
