The Economy and Bond Market Radar (May 11, 2013)

Monday, May 13th, 2013

The Economy and Bond Market Radar (May 11, 2013)

Treasury yields rose sharply higher this week even as economic data was benign. It likely reflects a sentiment shift that can also be seen in the equity markets as investors shift from relatively safe assets to riskier areas of the market.

click to enlarge

Strengths

• The Mortgage Bankers Association activity index rose 7 percent, led by an 8.3 percent rise in refinancing applications. The Federal Reserve’s zero interest rate policy is driving this trend and spurring other housing-related activity.
• Central banks in Australia, Korea and Vietnam cut interest rates this week as the global easing cycle continues.
• Initial jobless claims fell to 323,000, which is the lowest level since January 2008, and claims have fallen for three weeks in a row.

Weaknesses

• Initial indications for April retail sales were below estimates.
• Eurozone retail sales fell 2.4 percent year-over-year in March and have declined for 19 months in a row.
• In the U.K., April retail same store sales fell 2.2 percent, which is the worst decline in a year.

Opportunity

• The Fed continues to remain committed to an extremely accommodative policy.
• Key global central bankers are still in easing mode, such as the European Central Bank (ECB), Bank of England and the Bank of Japan. The Bank of Japan in particular is aggressively easing currently and the ECB recently cut interest rates.

Threat

• Inflation in some corners of the globe is getting the attention of policymakers 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.

Tags: Bond Market, Economy
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The Economy and Bond Market Radar (May 6, 2013)

Saturday, May 4th, 2013

The Economy and Bond Market Radar (May 6, 2013)

Treasury yields moved higher this week as Friday’s payroll report was better than expected, leading to a significant sell off in bonds. The Fed reiterated its position while the European Central Bank (ECB) cut interest rates for the first time in 10 months, reassuring the market of its easing bias.

click to enlarge

Strengths

• Nonfarm payrolls grew 165,000 in April and February and March were revised higher by 114,000. This unexpected growth in payrolls took the market by surprise as recent data points have been weak.
• The Case-Shiller 20 city index rose 1.2 percent in February, which is the largest monthly gain since 2005. The housing market continues to strengthen, providing a much needed economic tailwind.
• Initial jobless claims fell to 324,000, which is the lowest level since January 2008. This adds credibility to the strong payroll numbers.

Weaknesses

• The ISM manufacturing index fell to 50.7, declining for a second month and approaching the break even level of 50.
• Chinese manufacturing PMI also fell and disappointed the market, but still remains above the critical 50 level.
• Japanese industrial production expanded at a slower than expected pace in March, rising a modest 0.2 percent. South Korean industrial production fell 2.6 percent, well below estimates and shows the pressure that the Japanese yen devaluation is having on the country as the countries compete for exports.

Opportunity

• The Fed continues to remain committed to an extremely accommodative policy.
• Key global central bankers are still in easing mode such as the ECB, Bank of England and the Bank of Japan. The Bank of Japan in particular is aggressively easing currently and the ECB cut rates by 25 basis points this week.

Threat

• 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.

Tags: Bond Market, Economy, yields
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The Economy and Bond Market Radar (April 29, 2013)

Monday, April 29th, 2013

The Economy and Bond Market Radar (April 29, 2013)

Treasury yields fell this week as a weaker-than-expected first quarter GDP report reinforced the view that the Federal Reserve will not scale back its quantitative easing (QE) program anytime soon. The 10-year Treasury fell to the lowest levels of the year, as seen in the chart below.

click to enlarge

Strengths

• New home sales rose 1.5 percent in March and new home prices rose 3 percent year-over-year.
• University of Michigan Confidence Index rose from the preliminary estimate earlier in April and may be an early indicator of a positive change in sentiment.
• The U.K. economy grew 0.3 percent in the first quarter, better than expectations for no growth, as the country avoided a triple-dip recession.

Weaknesses

• The HSBC Flash Manufacturing PMI for China unexpectedly fell in April. Chinese policy makers appear prepared to weather some slowdown in growth in an effort to cure imbalances in the economy.
• Durable goods orders in March fell 5.7 percent. Excluding volatile transportation, durable goods orders fell 1.4 percent. The manufacturing sector is off to a weak start for 2013.
• The German Ifo Institute business sentiment index fell for the second straight month and breaks the trend of improving sentiment in one of Europe’s key markets.

Opportunity

• The Fed continues to remain committed to an extremely accommodative policy.
• Key global central bankers are still in easing mode such as the European Central Bank (ECB), Bank of England and the Bank of Japan. The Bank of Japan in particular is aggressively easing.

Threat

• 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.

Tags: Bond Market, Economy
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Inside the Mind of Jeffrey Gundlach

Wednesday, April 24th, 2013

Guest Contribution by Eddy Elfenbein, Crossing Wall Street

Jeffrey Gundlach is a prophet, a mathematician, an art aficionado and occasional dabbler in painting, a former drummer in a failed rock band, a sometime student of philosophy, a reciter of poetry, a blowhard, a consumer of sports automobiles and crossword puzzles, and an egotist of striking dimensions.

He’s also a man with a genuinely original mind, as well as the manager of one of top-performing bond funds on the market. His firm, DoubleLine Capital LP, is the fastest-growing mutual fund startup in history. Its DoubleLine Total Return Bond Fund has yielded an annual average of 11.50% since its inception and amassed some $50 billion in assets. (For comparison, bond king Bill Gross’s $290-billion Pimco Total Return Fund netted an average of 6.96% for the same period.) Gundlach is also a man who inspires fierce loyalty in his subalterns. When he was fired from Trust Company of the West, his old employer, in December of 2009 and went off to start his own firm, 45 of his 65 team members quit their very comfortable jobs to step out into the great unknown with him.

He is, in short, an individual, in the honorific sense of the word. If his pronouncements are frequently over the top, his uncanny penetration makes him hard to write off. Blowhards are quickly forgiven if they have the chops to back up their swag.

His beginnings are ordinary enough. A Buffalo childhood in a modest, middle-class home (father an industrial chemist, mother a housewife); near-perfect SATs, back when that was a real accomplishment; four years at Dartmouth on a scholarship; summa cum laude in philosophy and mathematics. All par for the course among America’s best and brightest. After that, Gundlach enrolled in a Ph.D. program in theoretical mathematics at Yale, seemingly for lack of anything better to do.

In an alternate universe, he would have gone on to a respectable professorial career, and his weekend gigs with his new-wave band would have made him the cool prof in the eyes of his students. But there were problems. First, there was his thesis. When he told his dissertation adviser that he wanted to prove that infinity didn’t exist, he was told that his topic was outside the “mainstream interests” of Yale’s mathematics faculty. Second, his expansive side was getting restless. Yale and the academic game were too confining. So he dropped out and moved to California, where he gigged with a couple more bands and slowly went broke.

Suddenly, he decided he wanted to be rich. It was the 80s, and in the 80s if you wanted to be rich, you were an investment banker. So he called up Trust Company of the West, offered them his services as a mathematician, landed an interview, and started his first real job. He would stay at that job a quarter of a century, becoming manager of a $500-million fund at age 28 and pulling down a million dollars a year by age 30. When the financial crisis hit in 2007, his TCW Total Return fund still averaged an amazing 9.1% annually for the next three years. His team was by now managing almost all of TCW’s assets. Gundlach had made himself into that rarest of creatures in American business: someone who is irreplaceable.

Except that TCW didn’t understand that. In December of 2009, in what seems an act of incomprehensible self-sabotage, they fired him, charging he was conspiring to pilfer the company’s staff, steal its databases and client lists, and start his own firm. The charges were unjust, thus impelling Gundlach to…raid the company’s staff, reconstruct its client lists, and start his own firm. TCW filed suit; Gundlach filed a countersuit—and won, collecting $67 million in unpaid wages for himself and his associates. Meanwhile, he and they were frenetically scrambling to scrape together capital for their new mutual funds. Even with the litigation cloud hanging over them, they still succeeded in aggregating $7 billion inside their first year, largely on the strength of Gundlach’s reputation for delivering results.

How those results are obtained principally involves mortgage-backed securities, of both the guaranteed and the non-guaranteed variety. The former are insured by the government corporations Fannie Mae and Freddie Mac and yield lower returns, making them more popular when the market is bearish, while the latter are issued directly by banks and other financial institutions and thus carry more risk, causing them to yield higher returns when the market is in its bull phase. Thus far, Gundlach’s distinctive blend of the two in his bond portfolio has continuously trumped other players in the game.

But Gundlach isn’t given to boosterish optimism. Lately his thinking has taken a prophetic turn, and a gloomy one at that. He’s always been one to look at the big picture—he’s one of the analysts who correctly predicted the subprime-mortgage debacle—and in the next few years he foresees several national economies entering what he calls “Phase Three,” which entails defaulting on their national debts and receiving further government stimulus-spending as triage. This, he says, will cause inflation to spike, but also create unprecedented opportunities. Other of Gundlach’s views are equally visionary: he advocates, for example, abolishing the Fed. Not exactly received wisdom, but Gundlach’s keenness and conviction can make almost any idea interesting.

Gundlach has consciously cultivated a flamboyant style: Mondrian paintings in his office, quotations from the Great Books at meetings, unflagging self-promotion. But these mannerisms are mere epiphenomena of a mind unafraid to voice its ideas, or to call nonsense when it sees it. As such, he is a rare commodity, an American original. Ralph Waldo Emerson: “A man or a company of men, plastic and permeable to principles, by the law of nature must overpower and override all cities, nations, kings, rich men, poets, who are not.”

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Posted by Eddy Elfenbein on April 22nd, 2013 at 11:27 am

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

Copyright © Crossing Wall Street

Tags: bond, Bond Fund, Bond Market, Gundlach
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The Economy and Bond Market Radar (April 22, 2013)

Monday, April 22nd, 2013

The Economy and Bond Market Radar (April 22, 2013)

Treasury yields were little changed again this week as U.S. economic data was generally in line with expectations, while Chinese GDP data was weaker than expected. As can be seen in the chart, housing starts have breached the psychologically important 1 million units (annualized data) in March. This is one more data point to support the idea that the housing recovery is for real.

click to enlarge

Strengths

• Housing starts hit the highest level since 2008.
• Industrial production in March rose 0.4 percent, which was ahead of expectations. Cold weather was a driver as utility output rose.
• The consumer price index in March fell 0.2 percent. Year-over-year inflation has fallen to 1.5 percent, giving the Federal Reserve plenty of room to maneuver monetary policy.

Weaknesses

• Chinese GDP slowed to 7.7 percent in the first quarter, below expectations for an 8 percent increase. This definitely was the biggest economic story of the week and it appears the government is comfortable not taking any action.
• The Conference Board’s leading index unexpectedly fell in March. Economic data has been weaker lately and this leading indicator reinforces that idea.
• Brazil raised interest rates by 25 basis points this week. Brazil was one of the first to cut rates back in 2011 and this may be an early warning signal to other emerging markets.

Opportunity

• The Fed continues to remain committed to an extremely accommodative policy.
• Key global central bankers, such as the European Central Bank (ECB), Bank of England and the Bank of Japan, are still in easing mode. The Bank of Japan in particular is aggressively easing.

Threat

• Inflation in some corners of the globe is getting the attention of policymakers 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.

Tags: Bond Market, Economy
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The Economy and Bond Market Radar (April 15, 2013)

Sunday, April 14th, 2013

The Economy and Bond Market Radar (April 15, 2013)

Treasury yields were little changed this week as global economic data was mixed and stocks rallied. U.S. economic data was generally weaker than expected, while Chinese data was generally better than expected. The University of Michigan Consumer Confidence Index fell to the lowest level since July and is somewhat symptomatic of the economic data of late. As can be seen in the chart, the pattern has been very choppy and more or less moving sideways. So while financial market sentiment improves, we aren’t necessarily seeing that improvement in the data.

click to enlarge

Strengths

• Chinese imports in March rose 14.1 percent, doubling expectations and signaling an improving Chinese economy. Chinese inflation slowed in March to 2.1 percent, which reduces pressure on the central bank to tighten monetary policy.
• Minutes from the Fed’s March 19-20 meeting more or less reiterated its commitment to QE and focus on job growth.
• Inflation data remains benign with import prices and producer prices both falling in March.

Weaknesses

• Retail sales fell 0.4 percent in March which was well below estimates. Poor weather played a role as it was unseasonably cold in many parts of the country.
• In addition to the University of Michigan Confidence Index mentioned above, the National Federation of Independent Business’s Sentiment Index (small business) also fell in March and hiring plans hit the lowest level in a year.
• Chinese bank loans surged in March, raising inflation concerns and potentially spurring government action to slow growth.

Opportunity

• The Fed continues to remain committed to an extremely accommodative policy.
• Key global central bankers are still in easing mode such as the European Central Bank (ECB), Bank of England and the Bank of Japan. The Bank of Japan in particular is aggressively easing currently.

Threat

• 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.

Tags: Bond Market, Bonds, Economy
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The Economy and Bond Market Radar (March 25, 2013)

Monday, March 25th, 2013

The Economy and Bond Market Radar (March 25, 2013)

The 10-year Treasury yield fell for a second consecutive week following news out of Europe that Cyprus may enact a tax on bank deposits, fueling fund flows out of the equity market into bonds.

click to enlarge

Strengths

• The U.S. housing market appears to be recovering after stagnating for five years. Housing starts came in at a seasonally adjusted annual rate of 917,000. That’s up from 910,000 in January. And it’s the second-fastest pace since June 2008, behind December’s pace of 982,000.
• Building permits, a sign of future housing construction, increased 4.6 percent to 946,000. That was the most permits since June 2008.
• Additionally, existing home sales rose to their highest level in more than three years, while prices increased nationwide, yet another indication of a housing rebound that bodes well for the overall economy.

Weaknesses

• The Eurozone Purchasing Managers Index fell from 47.9 in February to 46.5 in March, according to the flash estimate. The decline signaled an acceleration in the rate of contraction of business activity for the second consecutive month to the steepest experienced for four months.
• U.K. inflation accelerated to the fastest pace in nine months in February and factory-gate prices increased twice as much as forecast as energy costs surged and the British pound declined.

Opportunity

• The Fed continues to remain committed to an extremely accommodative policy.
• Key global central bankers, such as the European Central Bank, the Bank of England and the Bank of Japan, are still in easing mode. The Bank of Japan in particular appears willing to implement additional monetary policy easing in the near future.

Threat

• The economy appears to be gaining momentum. The risk for bondholders is that this trend continues and bonds sell off.
• 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.

Tags: Bond Market, Economy
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The Economy and Bond Market Radar (March 18, 2013)

Monday, March 18th, 2013

The Economy and Bond Market Radar (March 18, 2013)

Treasury bond yields fell modestly this week as economic growth data out of China disappointed along with a weaker-than-expected University of Michigan Consumer Confidence reading on Friday. Inflation data was also generally viewed as benign this week with year-over-year Consumer Price Index running at 2 percent.

Strengths

• Retail sales rose 1.1 percent in February. The surprisingly strong sales were largely driven by gasoline price increases but did show that the consumer still chose to spend and didn’t cut back elsewhere.
• Initial jobless claims fell again this week as the four-week moving average hit a new 5-year low.
• Industrial production in February increased more than expected and continues a broad recovery in manufacturing.

Weaknesses

• Chinese economic data was weaker than expected and policymakers appear more inclined toward tighter monetary and fiscal policies.
• The University of Michigan Confidence Index was much weaker than expected in February, sending conflicting signals about the consumer.
• Industrial production in the United Kingdom fell 1.2 percent in January, fueling speculation that a “triple” dip recession is looming.

Opportunity

• The Fed still remains committed to an extremely accommodative policy.
• Key global central bankers such as the ECB, Bank of England and the Bank of Japan are still in easing mode. The Bank of Japan in particular appears to be willing to implement additional monetary policy easing in the near future.

Threat

• The economy appears to be gaining momentum. The risk for bondholders is that this trend would continue and bonds selloff.
• Inflation in some corners of the globe is getting the attention of policymakers and may be an early indicator for the rest of the world.

Tags: Bond Market, Economy
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The Economy and Bond Market (March 11, 2013)

Sunday, March 10th, 2013

The Economy and Bond Market (March 11, 2013)

Treasury bond yields rose sharply this week as better than expected employment on both Thursday and Friday drove yields higher. The weekly initial jobless claims continued to trend lower and the four week average hit the lowest level since March 2008. The unemployment report released on Friday showed better than expected payroll growth and the unemployment rate fell to 7.7 percent from 7.9 percent.

Strengths

• Nonfarm payrolls increased 236,000 in February, well ahead of expectations and appear to confirm the strength seen in other areas of the economy.
• The ISM’s nonmanufacturing index hit the highest level in a year in February and the new orders component also reached a new one-year high, which bodes well for the next few months.
• Household net worth in the fourth quarter of 2012 hit the highest level since the financial crisis. This is a key milestone in repairing investors’ confidence.

Weaknesses

• The European Central Bank (ECB) lowered the eurozone economic forecast for 2013. The ECB is expecting a contraction of 0.1 to 0.9 percent. Despite this forecast, the ECB did not change monetary policy at this week’s meeting.
• German industrial orders fell 1.9 percent in January.
• France’s jobless rate hit 10.6 percent, the highest level since 1999.

Opportunity

• The Fed still remains committed to an extremely accommodative policy.
• Key global central bankers are still in easing mode such as the ECB, Bank of England and the Bank of Japan.

Threat

• The economy appears to be gaining momentum, the risk for bondholders is that this trend continues and bonds selloff.
• Inflation in some corners of the globe are getting the attention of policy makers and may be an early indicator for the rest of the world.

Tags: Bond Market, Economy
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The Economy and Bond Market Radar (February 24, 2013)

Sunday, February 24th, 2013

The Economy and Bond Market Radar (February 24, 2013)

Treasury bond yields fell modestly this week as economic news was mixed and the biggest story of the week was the Fed minutes from the January 29-30 meeting which indicated concerns with the current pace and magnitude of the Fed’s QE program. While some commentators came to the conclusion that the Fed could stop or reduce its QE program as early as the March 20 meeting, the chart below argues against it. The chart depicts retail gasoline prices which have risen almost 15 percent just this year. Adding the economic drag of higher gasoline prices to the uncertainty surrounding the pending sequestration and other political risks, it appears unlikely the Fed will reverse policy so soon after implementing it. Continued low inflation and high unemployment also add to the argument against curtailing the QE program.

Strengths

• Inflation remains low with both the Producer Price Index (PPI) and Consumer Price Index (CPI) being reported this week. Year-over-year PPI rose 1.4 percent while CPI rose 1.6 percent.
• The Conference Board U.S. Leading Index rose 0.2 percent in January indicating continued economic expansion.
• Headline housing data was mixed, but under the surface the trend continues to look positive as new permits hit the highest level in more than four years.

Weaknesses

• Gasoline prices hit a four-month high and act to slowdown the economy.
• Several Fed policymakers expressed concerns about the risks of the existing QE program, causing the market to question the Fed’s resolve.
• The Philadelphia Fed Index unexpectedly declined in February and is the worst reading since June.

Opportunity

• While some Fed members expressed concerns over continued quantitative easing, the Fed still remains committed to an extremely accommodative policy until the economy improves.
• With the stock market struggling some this week, investors appetite for fixed income may return.

Threat

• The economy appears to be gaining momentum and bonds have sold off; the risk for bondholders is that this trend continues.
• Inflation in some corners of the globe is getting the attention of policymakers and may be an early indicator for the rest of the world.

Tags: Bond Market, Economy
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