The Economy and Bond Market Radar (April 20, 2014)

The Economy and Bond Market Radar (April 20, 2014)

Treasury bond yields rose sharply this week, reversing last week’s gains. The market is in a broad trading range, as can be seen in the chart below, which shows the 10-year treasury yield over the past six months. The market is gyrating from week to week, with Fed commentary, economic data and geopolitical events the drivers, but changing from week to week. We likely will stay in this trading range until economic data provides a clearer signal of the strength of the economy and the weather effects have passed.

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Strengths

• Retail sales rose 1.1 percent in March. This was the best growth in 18 months and even bad weather didn’t keep the shoppers away.
• Initial jobless claims fell to a seven-year low last week and experienced only a very slight increase this week, suggesting the job market is indeed improving. As mentioned last week, job openings hit a six-year high, showing there are positions to be filled.
• Industrial production grew 0.7 percent in March, ahead of expectations. February data was also revised higher, reinforcing the positive data point. Capacity utilization continued to grind higher, indicating that the slack in manufacturing is quickly closing.

Weaknesses

• Housing has clearly slowed, with housing starts now down more than 5 percent from a year ago. Homebuilder sentiment also declined for the third month in a row.
• Chinese economic data disappointed with March industrial production slowing to 8.8 percent year-over-year and first-quarter GDP growth of 7.4 percent on a year-over-year basis. There was some concern that sequential growth was only 5.6 percent which may make it difficult to reach the government targeted growth of 7.5 percent for the full year.
• The market sold off this week, which may just be noise, but the underlying economic data appears to be getting stronger and the risk is that the selloff continues.

Opportunities

• The Fed has reiterated its intention to not raise interest rates before economic data supports that decision, not based on a timeline.
• The President of the European Central Bank (ECB), Mario Draghi, suggested the ECB may ease monetary policy in response to the strong euro.
• 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

• In addition to the inherent difficulties in exiting the QE program and the potential for a misstep, there is also the potential for miscommunication from the Fed with the recent change in Fed leadership.
• 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.