The Economy and Bond Market Radar (March 17, 2014)
Treasury bond yields virtually erased last week’s move higher, ending this week roughly the same as just two weeks ago. Macro-geopolitical events were one driver, as Treasuries likely benefitted from a flight to quality. The other driver was weak economic data out of China that threatens the global growth story.
Strengths
- Initial jobless claims fell to 315,000, which was the best reading since November and points to an improving jobs picture.
- Oil prices pulled back this week, continuing a trend that began at the beginning of the month. We should see a reaction in gasoline prices soon, which have almost gone straight up for the past month.
- Puerto Rico sold $3.5 billion in bonds, which was widely watched, providing relief to the island and allowing time for reforms to take effect.
Weaknesses
- Chinese industrial production rose 8.6 percent in January to February, down sharply from December and well short of expectations. Retail sales were also below expectations and fixed-asset investment was the slowest in 12 years.
- Confidence indicators continue to trend lower with the University of Michigan Confidence Index disappointing this week along with the NFIB Small Business Optimism Index, which measures small business sentiment.
- Business inventories and wholesale inventories both increased more than expected in January leaving the stocks-to-sales ratio at an elevated level. This could be a drag on future growth.
Opportunities
- The Federal Reserve member commentary this week more-or-less confirms that tapering would proceed as planned.
- The International Monetary Fund (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 (ECB), especially as the euro continues to strengthen as it approaches the 1.40 level versus the dollar.
- 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 “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.
