The Economy and Bond Market Radar (December 9, 2013)
Treasury bond yields rose this week as economic data continues to improve, increasing the odds the Fed begins tapering its quantitative easing program as soon as this month. The ISM manufacturing index rose to the highest level in more than two years, confirming strength in similar indicators from around the world. Nonfarm payrolls for November were also better than expected, continuing to show some modest improvement, which will likely increase the Fed’s comfort that the economy is on the mend.
Strengths
- The ISM manufacturing index rose to the highest level in more than two years. The European Union Markit PMI also hit the highest level since June 2011.
- The unemployment rate fell to 7.0 percent as nonfarm payrolls grew 203,000 in November.
- Auto sales remain strong in November as General Motors’ sales rose 14 percent, Ford’s sales rose 7 percent and Chrysler’s sales rose 16 percent. On an annualized basis, this was the best month since February 2007.
Weaknesses
- Retail sales for November have so far disappointed, with price competition intense, making for a more difficult holiday sales season than expected.
- Factory orders for October fell 0.9 percent.
- Brazil’s economy contracted 0.5 percent in the third quarter as bureaucracy, high taxes, and inflation weigh on the economy.
Opportunities
- Despite recent conflicting commentary, the Fed continues to remain committed to an overall accommodative policy and is unlikely to raise interest rates in 2014.
- Key global central bankers remain in easing mode such as the European Central Bank (ECB), Bank of England and the Bank of Japan. Japan announced a $54 billion fiscal stimulus plan aimed at revitalizing infrastructure.
- There remain many moving parts to the taper decision and it is very possible that tapering could be delayed well into 2014.
Threats
- Inflation in some corners of the globe is getting the attention of policy makers and may be an early indicator for the rest of the world.
- Trade and/or currency “wars” cannot be ruled out which may cause unintended consequences and volatility in the financial markets.
- The recent bond market sell off may be a “shot across the bow” as the markets reassess the changing macro dynamics.
