The Economy and Bond Market Radar (March 3, 2014)

The Economy and Bond Market Radar (March 3, 2014)

Treasury bond yields rallied this week on mixed U.S. economic data and weaker Chinese property data. The market is also struggling with disentangling the weather effects from the recent figures, which have generally been weaker-than-expected, adding another layer to the complexity of the analysis. New home sales were strong and hit the highest levels since 2008, creating some excitement around housing as a catalyst for the economy in 2014.

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Strengths

• New home sales were strong and hit the highest levels since 2008.
• The S&P/Case-Shiller 20-City Composite Home Price Index rose 13.42 percent year-over-year and has already had a positive impact on the economy through a wealth effect and by spurring activity.
• German GDP rose 1.4 percent on an annual basis in the fourth quarter, ahead of expectations, while the Ifo Institute’s business confidence index rose to the highest level since July 2011. This all bodes well for Europe’s largest economy.

Weaknesses

• Chinese property prices fell in January, and combined with government efforts to curb the housing market, created concerns about Chinese growth prospects.
• Consumer confidence fell modestly in February as expectations fell relative to last month.
• Durable goods orders fell 1 percent in January, which was better-than-expected, but the prior month was revised lower and continues a recent string of lackluster manufacturing reports.

Opportunities

• The Federal Reserve member commentary this week more-or-less confirmed that tapering would proceed as planned.
• The International Monetary (IMF) released a report recently 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 “wars” cannot be ruled out which may cause unintended consequences and volatility in the financial markets.
• China remains a wildcard for economic recovery and the economy has shown some cracks in recent months. This is similar to how last year started and China found its footing, something similar needs to happen this time around.