The Economy and Bond Market Radar (May 26, 2014)
Treasury bond yields were mixed this week, as the long end of the yield curve rose modestly while short-term yields fell by a few basis points. In the U.S., housing data was in line with expectations of moderate gains. The Conference Boardās index of leading indicators continues its steady ascent and bodes well for the economic recovery over the next six months.
Strengths
- The Conference Boardās index of leading indicators has been very consistent in forecasting better growth; this is especially true over the past year or so. This latest data point points toward continued improving economic expansion. This follows last weekās release of the National Federation of Independent Businessā (NFIB) optimism index, which measures small business confidence, which rose to the highest level since the financial crisis and has risen for seven months in a row
- We got some good news out of China this week as Markitās flash manufacturing index rose to a five-month high.Ā This is a key indicator to watch for global growth prospects and it is trending higher.
- Housing data here in the U.S. was generally constructive with both new home sales and existing home sales coming in better than expected.
Weaknesses
- The American Institute of Architectās billing index fell for the second month in a row. This index is viewed as a leading indicator for commercial real estate.
- Mortgage applications fell 2.8 percent during the past week and remain much weaker than a year ago.
- German business confidence as measured by the Ifo Instituteās business climate index fell in May and has stalled out so far year to date.
Opportunities
- All eyes are on the European Central Bankās (ECB) June 5 meeting, as the ECB is expected to ease monetary policy by taking the rate on reserves at the central bank into negative territory.
- With a heavy calendar of economic data out next week, key indicators to watch include durable goods orders, consumer confidence and first-quarter GDP revisions.
- 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 selloff wouldnāt be surprising.
- While the ECB is moving toward easing, U.K. policymakers at the Bank of England are considering raising interest rates as the housing market has been very strong along with retail sales.
- Housing data remains mixed and the spring selling season has disappointed so far. If activity doesnāt pick up soon, housing may not be the positive catalyst many were expecting for 2014.
