The Economy and Bond Market Radar (June 23, 2014)
Treasury yields changed little this week. A FOMC announcement and a fair amount of potentially market-moving data were released this week. The Federal Reserve announcement came and went, and while there was a flurry of mid-week activity and volatility, we ended up not far from where we began. The Fed delivered what was expected, if not slightly dovish. Housing starts and the Consumer Price Index (CPI) were the other big data points out this week. Housing starts disappointed a little while inflation picked up, but the net effect on the market was minimal. The chart below depicts the relative calm in 10-year treasury yields over the past year, essentially range bound between 2.50-3.00 percent.
Strengths
- The Federal Reserve delivered no surprises this week: $10 billion in additional ātaperingā but slightly more accommodating in its stance toward inflation and the prospects of higher interest rates in the future.
- Industrial production rose 0.6 percent in May, beating expectations, while Aprilās data was revised higher.
- The Conference Boardās index of leading economic indicators rose 0.5 percent in May with strength seen in virtually every category.
Weaknesses
- Consumer price inflation rose 0.4 percent in May and now stands at 2.1 percent year-over-year. On a year-over-year basis, this is the highest reading since October 2012.
- Housing starts and building permits were a little weaker than expected, with single family starts falling for the first time in four months.
- Mortgage applications fell 9.2 percent for the week ending June 13. The housing market continues to flash mixed messages and cannot seem to regain the momentum from last year.
Opportunities
- More housing data is scheduled for release next week with new home sales, existing home sales and S&P/Case-Shiller Home Price Index data all scheduled for release. This is a crucial time for the housing market. If we donāt see an uptick soon, we probably wonāt see one this year. This could actually be a positive for the bond market as a weak housing environment likely keeps the Fed from shifting to a tighter policy.
- The Consumer Confidence Index (CCI) and the University of Michigan Consumer Sentiment Index are scheduled for release next week and will be key indicators of the strength of the economy.
- With key global central banks back into easy policy mode and inflation trending lower in many parts of the world, the path of least resistance for bond yields is likely down.
Threats
- If housing indicators come in weak, that does not bode well for a robust economic expansion in 2014.
- Bonds have posted strong returns so far year-to-date. With economic data looking supportive, a modest sell off wouldnāt be surprising.
- While the European Central Bank (ECB) is moving toward easing, UK policymakers at the Bank of England are considering raising interest rates as the housing market and retail sales have been very strong.
