The Economy and Bond Market Radar (May 12, 2014)
Treasury bond yields were mixed this week as long-term issues experienced rising yields, while the short and intermediate parts of the curve saw yields fall by a few basis points. Economic data was mixed and central bankers were actively jawboning this week. Federal Reserve Chair Janet Yellen stated that we still need âa high degree of monetary accommodation.â European Central Bank (ECB) President Mario Draghi is prepared to act next month if eurozone inflation remains too low and the euro too strong.
Strengths
- Initial indications from retailers for April show some promise as same-store sales rose 4.7 percent. This was the best year-over-year performance since September 2011.
- The ISMâs non-manufacturing survey for April rose to 55.2 with particular strength seen in the new orders component. Combined with last weekâs manufacturing purchasing managersâ index (PMI), which also had a strong showing, this indicates that U.S. economic growth may be accelerating.
- Gallupâs U.S. Job Creation Index rose in April, just below the high reached in January 2008. This indicates more hires and less layoffs within firms.
Weaknesses
- The JP Morgan Global Manufacturing PMI hit a six-month low as weakness in Japan and sluggishness in China were drags on the index.
- The HSBC/Markit final Manufacturing PMI was 48 in April, indicating contraction for the fourth month in a row.
- Japanâs composite PMI, which includes both manufacturing and services, fell sharply in April and well into contraction territory.
Opportunities
- Fed Chair Janet Yellen appears to be in no rush to raise interest rates and stated that âa high degree of monetary accommodationâ is still needed.
- The President of the ECB, Mario Draghi, suggested the bank could ease monetary policy in June in response to the strong euro and low inflation.
- 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
- Long-term bonds have posted strong returns so far year-to-date, and with economic data looking supportive, a modest sell off wouldnât be surprising.
- Trade and/or currency âwarsâ 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 when China found its footing. Something similar needs to happen this time around.
