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If recent data is anything to go by, the economic recovery has taken a sabbatical. Weak payroll growth, a steep decline in mortgage applications and last week’s big slowdown in retail sales show an economic recovery that is flatlining.
Glass is half-full types are quick to cite this months bad weather as the culprit for the slowdown, but is that the truth? In today’s Minyanville, Vince Foster takes a look at some core data to find the answer.
“I don’t think there is any question that bad weather can impact short-term economic data, however, one must understand that the weather is a known variable and economic estimates are calculated ex post.” Foster said. “Retail sales that missed expectations had been made after many of the nation’s large retailers had already issued Q1 profit warnings based on weak January sales. These numbers weren’t just weaker due to weather; they were weaker than what were already low expectations.”
Instead of trying to prove an economic theory about winter storms and consumer behavior, Foster says its a good idea to check out the market discount for guidance.
“The bond market works, and the long end of the yield curve is perhaps the most efficient of all asset classes. The volatility in long-term interest rates is typically a function of an inflation premium predicated on the relative impact of monetary policy. When monetary policy is too loose (tight) relative to demand, the inflation premium in the curve is steep (low). Nominal growth has been remarkably stable over the past 30 years. Monetary policy and inflation risk, not so much.”
Foster finishes by saying “the next few months are critical for the bond market. If the recovery is for real, interest rates in the long end should be responding, weather slowdown or not.” If the economic bulls are right we should see pent-up demand for housing and other consumer durables to reemerge when the weather improves. If the economy doesn’t thaw along with the weather then elevated inventories are going to weigh on aggregate demand and long-term interest rates.
Check out the full article here!
Todays Other Top Stories
Nasdaq: – Do you own Puerto Rico in your Muni Fund? – In the past month, both Moody’s and S&P downgraded Puerto Rico’s general obligation debt to below investment grade. As my colleague Peter Hayes indicated in a recent Blog post , Puerto Rico debt has been trading as non-investment grade since last summer, and the new ratings really reflect current pricing and trading.
Bloomberg: – Gateway arch grounds to be renovated through bonds. – A Missouri agency plans to offer municipal bonds to fund renovations around St. Louis Gateway Arch and the courthouse that held the Dred Scott trial.
Bloomberg: – Biggest Puerto Rico owners see rally after new deal. – The largest holders of Puerto Rico bonds are betting that a planned debt sale by the commonwealth will fuel a rally in its securities by alleviating doubts the U.S. territory can raise funds in the capital markets.
Christopher Mahoney: – What are Puerto Rican bonds worth? – How should a straight unenhanced Puerto Rican GO trade? The market says it should trade above sixty cents. I think that is way off and creates a short opportunity for the brave. I say this for three reasons.
Voice of Detroit: – Wall Street attacks Detroit bankruptcy cops lawsuit. – Detroit’s attempt to invalidate $1.4 billion of pension certificates as part of its bankruptcy is a “radical” move that is unlikely to be copied by other issuers even if successful, according to Moody’s Investors Service.
Market Realist: – What is the default rate and how it relates to bond and loan prices. – The default rate is a consideration for investors in municipal, investment-grade corporate, high-yield, and emerging market bonds, but it’s not relevant for U.S. Treasuries since it would be extremely rare that the federal government would default on its debt.
BusinessWeek: – Wall Street bond dealers renounce Treasuries that lure Pimco. – The world’s biggest bond dealers are showing almost no confidence in the best annual start for Treasuries (BUSY) since 2008.
Reuters: – Foreign demand for U.S. assets wanes for 2nd month in Dec. – Foreigners sold long-dated U.S. securities for a second straight month in December, selling almost all asset classes except Treasuries, data from the U.S. Treasury showed on Tuesday.
Income Investing: – Morgan Stanley: Worst is over for corporate bonds, modest gains ahead. – Morgan Stanley Wealth Management says in a new outlook report that the worst is over for corporate bond investors, and that they year ahead will offer some modest gains.
Tradevestor: – Consider Coca-Cola at 3.20% yield. – Coca-Cola reported soft 2013 Q4 number this morning, sending shares down 4% as of this writing. This presents a great buying opportunity for long term investors, as Coca-Cola now yields close to 3%.
Morningstar: – Credit spreads return to where they started. – The impact from the emerging-markets disruption barely dented the corporate bond market.
LearnBonds: – These 2 high-yielding preferreds are worth your attention. – If you are an income-focused investor who likes to broadly diversify your holdings across various parts of the capital structure, there are two newly issued preferred stocks of which you should be aware.
IFR: – Investors remain hot on high-yield. – High-yield bonds have managed to defend their position near the top of investors’ pick lists, thanks to promising performance prospects which could offset interest rate risk over the coming months, strategists are saying.
About.com: – Low default rate remains a major plus for high yield bonds. – The good times continue to roll for high yield bond issuers. High yield bonds’ performance tends to be driven by credit conditions (the ability of issuers to pay the interest and principal on their debt) rather than movements and prevailing interest rates. As such, the asset class has enjoyed an ideal environment in the past year.
Businessweek: – Emerging markets at risk from carry trade unwinding, BofA says. – Emerging-market assets are at risk as the tapering of the Federal Reserve’s stimulus program will probably trigger a reversal of $2 trillion in carry trades, according to strategists at Bank of America Merrill Lynch.
Investment Week: – Emerging markets fixed income: A constructive view for the discriminating eye. – Following a challenging year, 2014 has started off with continued volatility. Some clients are asking their advisers about risks in emerging markets while others are wondering if the turmoil presents a buying opportunity.
Market Realist: – Fed policy: A factor that pushes the yield curve upwards. – Throughout 2013, the trend in long-term interest rates was largely driven by expectations about Federal Reserve policy. As the Chairman Janet Yellen decided that the Fed would start considering “tapering” its bond purchases starting early 2014, long-term interest rates rose steeply, sending the yield on ten-year Treasury bonds up over 120 basis points, and the yield curve steepened.
Smarter Investing: – Reducing interest-rate risk in stable high yield portfolio. – As an income-oriented portfolio, the Stable High Yield portfolio is not immune to the factors that affect the bond market.
ValueWalk: – Passive ETFs, mutual funds still have room to grow. – Thanks to low expense ratios and continued favoritism by fee-based advisors, passive investments have the potential to see higher growth, note BMO Capital Markets analysts.
Gross: Monetary policy actually tightened in past 9 months w/ mtge rates 100bps up & inflation 50bps down. Economies slow when that happens.
— PIMCO (@PIMCO) February 18, 2014
When the 10y rallied after hitting 3% in Sept, mortgage spreads tightened significantly. This time since YE they’ve widened quite a bit
— David Schawel (@DavidSchawel) February 18, 2014
— Cate Long (@cate_long) February 18, 2014
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