The Economy and Bond Market Radar (May 5, 2014)

The Economy and Bond Market Radar (May 5, 2014)

Treasury bond yields declined again this week, pushing the benchmark 10-year yield to established support levels near 2.60 percent. Economic data was mixed but on balance, there were more positives than negatives. Geopolitical events appear to be a driver as unrest between Russia and Ukraine intensifies and investors prefer the safety of U.S. Treasuries. The Fed met expectations this week with another round of tapering of quantitative easing (QE) and no surprises in the official press release.

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Strengths

• Nonfarm payrolls grew 288,000 in April. This was ahead of expectations and was a very strong report that should bolster investors’ confidence in a strengthening recovery.
• The ISM’s April manufacturing index rose to 54.9, indicating a healthy manufacturing sector and rebounding nicely from a weather-induced slowdown a few months ago.
• The American Institute for Economic Research’s Business-Cycle Condition report improved in April and is one more leading indicator pointing toward continued economic recovery.

Weaknesses

• The Conference Board’s consumer confidence index declined slightly in April after hitting a six-year high in March.
• The S&P/Case-Shiller 20 city home price index declined sequentially in March.
• Chinese president Xi Jinping reaffirmed China’s intent to leave fiscal and monetary policies unchanged. Investors remain concerned that China could slow in 2014, affecting the global economy.

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.