1-13-2014 Weekly Interest Rate Market Update

1-13-2014 Weekly

  • The arctic vortex wasn’t able to freeze market activity, but the recent data driving asset purchases has managed to cool them off from a torrid close to 2013. With all eyes focused on unemployment targets and how they interact with the Federal Reserve’s efforts to cease bond purchases, bond buyers returned in haste after the jobs report Friday unexpectedly missed consensus by more than 120k net payrolls. The unemployment rate dropped 0.3% all the way to 6.7% as laborers exited the workforce (again), one reason why the Chairman has been stepping back in recent weeks from the Fed’s 6.5% target set several years ago–the rate is not falling for the right reasons enough. With only 74,000 nonfarm payrolls for December, many economists pointed to weather related anomalies and a likelihood for positive revisions again after about 40k more jobs revised into Oct/Nov data. The work week shrunk 0.1 hours, hourly earnings only rose 0.1%, and the accuracy of the ADP report decoupled too, as that gauge of private payrolls was strong at +238k MoM. The intermediate part of the curve was bought heavily after the number, with the 10-year Treasury yield falling more than 10 bps to finish at 2.86%, now 17 bps off its high of the year. While many pension funds and sovereigns may genuinely enjoy the yield opportunities in the current range to match liabilities, the Federal Reserve also has an excuse to not lop another $10 billion off next month, which compares bullishly to the prior consensus that the ‘Taper’ would happen in a continuous, linear fashion until purchases stopped late this fall. The Fed minutes released last week acknowledged the diminishing returns of the bond purchases and highlighted concern about the pain of unwinding the portfolio as it grows beyond $4 trillion. In any event, moving the target rate up from zero seems unlikely to happen sooner than the middle of 2015 based on the current picture. In other releases, ISM services growth missed consensus and the index slipped to 53.0 thanks to a drop in new orders, while factory orders advanced 1.8% in November with foreign demand for capital goods, and the international trade report showed the deficit contracting by $5 billion MoM, which should strengthen Q4 2013 GDP.
  • The near-term trend should solidify this week thanks to traders being back from vacation, earnings season kicking into full swing, and numerous data releases to drive the action. Look for retail sales to be flat MoM tomorrow (+0.4% ex autos), inventories to build slower this month (0.3% consensus), a bit more headline inflation from CPI and PPI reports midweek, and gains for industrial production and import and export prices (0.4% and 0.1% expected, respectively). Empire State Manufacturing and Philly Fed surveys should rebound after softening last month, housing starts should slow after a November surge (985k annualized consensus), and we see the Fed’s Beige book on Wednesday.

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