The Economy and Bond Market Radar (January 6, 2014)

The Economy and Bond Market Radar (January 6, 2014)

Treasury bond yields were little changed, but did have a lower base this week. It was another holiday shortened week with bad weather in many parts of the country, so we should see more activity next week with market participants back at full strength. Next week will also see the Fed minutes from the December Federal Open Markets Committee (FOMC) meeting, along with nonfarm payrolls and the unemployment report.

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Strengths

• The ISM Manufacturing Index experienced a modest decline in December, but the overall level remains very strong and bodes well for economic activity as we move into 2014.
• The new orders component of the ISM Manufacturing Index hit the highest level since April 2010, which is an excellent leading indicator.
• Home prices continue to rise as the S&P/Case-Shiller Index was 13.6 percent higher than a year ago in October. Along with the stock market, rising home prices have been a key driver of consumer net worth.

Weaknesses

• Mortgage rates hit the highest level since September, rising to 4.53 percent.
• Treasury yields remain elevated, with the 10-year treasury hovering around 3 percent.
• China’s banking system is getting more scrutiny as outstanding Chinese municipal debt rose 13 percent in the six months ending in June.

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, Bank of England and the Bank of Japan.
• 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 economic data slows.

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.