Today’s data: 5 stats and not one of them met its’ expectation, not one.
January is not coming in as did January of 2014 and the terrible disappointment it was, but make no mistake here please — this January was a mess and this ongoing dock worker strike will really make a big dent in our Q1 GDP growth. More on that shortly, today’s numbers were all worse than hoped. In the housing sector we had both the Housing Starts and Building Permits reports and they were over 1.00mm but not by much and each had a pretty mediocre forecast, so to not even meet those was a weak signal. Over on the production side we had Capacity Utilization and Industrial Production and here again modest growth expectations failed to appear. Please see this as part and parcel of the export engine that was giving our economy such a solid base and it is now undeniably showing the restraining impact of the stronger USD. That leaves us with PPI to discuss for January and this redone metric is being taken with greater weight in its’ new iteration; the forecast was a deflationary one at -0.4% and the report was twice that at -0.8%. Yes, it was all about lower gas prices and that was an easy link to find, the core prices however slipped a tiny bit and that is probably as good as the news today can get.
The Big Picture: “more than one trillion euros (sic) of bonds …… have negative yields.”
That was taken out of an article I came across this morning on Bloomberg, written by Eshe Nelson. The thrust of the whole article was a discussion of the hidden risks of the QE program about to be undertaken next month at the ECB. “Beware unintended consequences” was the article’s first sentence. But let’s go back to that headline as it offers up a market reality that is also mentioned in the article; about 38% of all the euro higher-rated bonds are free to trade, that is it. So as it is, it would appear that 38% is not enough to meet current demand and the ECB buying binge has yet to get going; part of the reason the QE is coming is the failure of the already tried asset-purchase program at the ECB. There too the amount of assets the central bank had hoped to acquire fell far short of its target due to a shortage of supply. We mentioned this yesterday I believe, we are coming to learn that there are many bond holders of this high-grade paper (bonds) that will not be willing sellers into the QE program — the current bond holders do not see a viable re-investment opportunity acceptable to them for whatever reason. In the midst of all this is the fact that an already liquidity starved Euro based bond market is about to go bonkers, the QE experiment seems to be fraught with the risk of seriously increasing the lack of liquidity. Ah, yes the unintended consequences now appear a bit easier to see.
Investment Portfolio: Will the developing Euro-region bond mess hit our markets?
We think it is already having an impact here; look no further than the participation rate of the indirect buyers shown by our UST auction cycles. Month after month we are seeing off shore buyers gobbling up between forty and fifty percent of each issue being sold. I don’t think it takes a rocket-scientist, or an old chemistry major such as I, to predict that this will all grow in impact once the ECB actually starts its purchasing program in March, yes that would be in a matter of just a few weeks. At the very least this might serve as a bottom on prices or a cap on yields where buyers emerge every time weakness creeps into prices; the flip-side would be an actual price surge as scarcity drives new buyers into the marketplace.
Weekly Market Data
Current Market Levels from Bloomberg daily
- Monday: 2/16
- Tuesday: 2/17
- Wednesday: 2/18
- Thursday: 2/19
Jan. Housing Starts expected at 1.070mm >>1.065mm
Jan. Building Permits expected at 1.069mm >>1.053mm
Jan. PPI expected at -0.4% >>-0.8%
Jan. Cap U expected at 79.9% >>79.4%
Jan IP expected at +0.3% >> +0.2%
- Friday: 2/20
Data is taken from sources considered to be accurate, most often that of an agent of the US Government; no guarantee of accuracy is suggested.
Past performance is not a guarantee or a reliable indicator of possible future results. Investing in the bond markets is subject to certain risks including credit (worthiness of the issuer), market (interest rate changes), inflation uncertainties over time and the possibility that investments may be worth more or less than the purchase cost when they are redeemed. U.S. Treasury Bills, Notes and Bonds are backed by the full faith and credit of the Government, certain U.S Agencies are also backed in a similar manner and certain other Agency Issuers are backed solely by the Issuing Agency itself. Portfolios that invest in those securities are not guaranteed and they will fluctuate in value with time. High-yield low rated securities involve greater risks than higher-rated securities and portfolios that invest in lower-rated issues will incur more risks than portfolios of higher-rated only securities.
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